The mortgage industry has been hearing about the promise of blockchain for several years now. Blockchain technology has the potential to streamline and possibly even revolutionize the workflows in various financial applications. Mortgage originators should understand the potential for this technology and what it can mean for the industry.
With the meteoric rise and subsequent fall in the valuations of blockchain-based cryptocurrencies like bitcoin in the past two years, critics have understandably questioned the hype around the technology. Blockchain has shifted from the high point of the hype curve to the edge of the “trough of disillusionment” phase in the product cycle, according to a 2019 report, “Hype Cycle for Emerging Technologies,” from research and advisory company Gartner.
The good news is, Gartner also predicts that as the technology continues to evolve and mature, it will likely reach the “plateau of productivity” within the next 10 years. For mortgage originators, as well as compliance departments, blockchain technology could be a game-changer when it comes to how digital payments are processed, loans are issued and assets are tracked.
Banks, brokerages, insurers, regulators and others continue to actively test ways to harness the benefits of blockchain. So, it’s no surprise that even after some recent setbacks, most large banks and financial companies have a strong interest in seeing blockchain succeed, and they have active initiatives to explore and implement it.
Sharing information
To use IBM’s definition, “Blockchain is a secure transaction-ledger database shared by all parties in a distributed network, which records and stores every transaction that occurs in the network, creating an irrevocable and auditable transaction history.”
Simply put, blockchain is really just a new way to handle information. Blockchain offers a more advanced method of sharing electronic information across multiple distributed parties.
To illustrate, blockchain applies the same “shared” concept as Google Docs (or any similar online collaboration software), but on a much wider business scale. Any business application, such as financial transactions, contracts, settlements, stock trades and regulatory filings, can be stored in a globally shared and distributed network. The information is not locked in a private or proprietary database as it is with Google’s systems.
Because blockchain’s distributed-ledger technology is decentralized, each user receives a copy of the ledger and its integrity does not need to be maintained by a central source of authority. Updates are recorded and downloaded automatically, so everyone has the same information at all times.
As a result, multiple parties can collaborate and update the data in a secure and irrevocable fashion. The possibilities (and the ramifications) of this technology are enormous, and that is the reason most financial institutions, corporations, technology vendors and regulatory agencies are paying close attention to blockchain’s evolution. It may not be too far-fetched to say that the technology has similar potential as internet connectivity or cloud computing for transforming modern-day business applications.
For mortgage lenders and originators, blockchain can help establish veracity, transparency and security, enabling critical business functions across the lending landscape. It has the ability to solve the key challenges in lending and titling, making these processes more secure and efficient. But is it still something that will eventually be adopted by the largest players?
Bitcoin impact
If it wasn’t for the advent of bitcoin, blockchain might just be another interesting concept that never came to fruition. Bitcoin helped revolutionize the concept of a global, decentralized digital currency model with no central authority or regulatory body. While bitcoin and other digital currencies will continue to evolve, they have already helped establish blockchain as one of the most important technologies to watch in the financial industry.
Traditional mortgage lenders are facing tremendous pressure. The threat from nonbank lenders poses a sizable challenge as these companies are fast, nimble, built on modern technology and are less regulated than the banking industry. Nonbank lenders are able to assess risk and make lending decisions more quickly while offering competitive rates, whereas a traditional lender can take 20 days or more to approve and fund a jumbo loan, for example.
Blockchain could change all of that for traditional lenders. Financial institutions that integrate blockchain will not only achieve cost reductions in payment processing and reconciliation, but also in treasury operations and compliance, according to a recent study from Juniper Research. The study found that when it comes to compliance tasks — such as the automation of identity and anti-money-laundering checks, as well as the capability of blockchain to verify the digital identity of an individual — the technology could create savings of up to half of the existing costs within a few years.
Appealing potential
Blockchain technology has the potential to disrupt the financial-services industry as we know it. Although there are still several hurdles to overcome before that happens, blockchain’s potential is so appealing that many major financial institutions are investing millions of dollars in resources to figure out how best to implement it. In fact, a recent survey by technology services company Accenture indicates that nine out of 10 executives are evaluating the use of blockchain in their banks.
While financial institutions initially began exploring blockchain technology for its cost savings and efficiency benefits, there are so many potential applications for the technology.
The distributed-ledger model makes it possible to have “shared visibility” without the need for a central clearinghouse. The fact that transactions are fully visible to all parties at all times provides an immediate benefit for trading, settlement networks, cross-border payments, trade finance and many other financially related uses.
Additionally, the technology provides a way to implement smart contracts so that actions can be automatically triggered at certain thresholds. This capability enables financial institutions to build business logic that can trigger actions (e.g., transfer of funds) when a condition (e.g., delivery of goods) is met.
Blockchain will help lay the groundwork for greater visibility into mortgage lending environments. The concept of “provenance,” or the ability to track an asset through its lifecycle, will greatly benefit lenders, enabling them to design their loan products so contracts can be adjusted based on near real-time information about the secured asset.
Significant savings
In addition to helping with due diligence, blockchain technology also promises to assist lenders with compliance management. As information about borrowers becomes available online in blockchain networks, lenders can leverage it across their workflows.
This information can be used to help with their own risk management, as well as complying with anti-money- laundering regulations. Any mandatory reporting also can be automated by building the tracking and alert logic within the reporting functionality. And it is likely only a matter of time until financial institutions can leverage public information — such as land or Uniform Commercial Code (UCC) records — to make faster lending decisions while also monitoring the risk to their loans through tracking services.
Blockchain can help build “smart UCCs” that automate the entire lifecycle of filings. The filing process may not require any manual action as long as the business logic can be embedded in the filing itself through blockchain’s smart-contract mechanism. This would automate any future actions for the filing, including amendments, renewals and terminations. The operational cost savings would, in theory, be quite significant.
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The mortgage industry is undergoing a tremendous amount of change. The fintech revolution has created a new sense of urgency for traditional players to respond to ongoing challenges — including regulatory uncertainties, globalization, changing demographics, evolving home- buyer behaviors and emerging technologies.
The most innovative companies are increasingly turning to technology to address these issues, as well as to gain a much-needed competitive edge. For many in the financial-services industry, blockchain has become one of the most promising inventions of the 21st century. The opportunities to leverage this technology and leapfrog the competition are significant, and it may just be the differentiator for the winners and losers of the future.
