Mortgage blockchains promise efficiency, but face steep hurdles
Blockchain technology promises to streamline how mortgages are managed at every point in their life cycle. But it will take an industrywide embrace for blockchains to reach their full potential.
A blockchain for land records is already underway in Dubai, which should have all land records on a blockchain by 2020, said Debbie Hoffman, CEO and co-founder of Symmetry Blockchain Advisors.
But Dubai doesn't have nearly as much developed land as the United States. "In our country, even if we were to start doing a blockchain at the land records, 10 years from now, we'll have a history, but you're still going to need to go back on paper and put all that in — but you can definitely use it at settlement in terms of land records," Hoffman said.
Intercontinental Exchange, parent company of the New York Stock Exchange, acquired a majority stake in Merscorp Holdings in June 2016 with the intention of investing and updating the MERS System, a private loan registry of mortgage and deed of trust lien holders. While the company is investing time in researching and understanding blockchain technology, it is not currently pointing to blockchain as an answer to modernizing the MERS System or the MERS eRegistry, the system of record that tracks the owners of electronic promissory notes.
"We're always talking with our customers about how new technologies could improve their processes and cost structure," said Brendon Weiss, chief operating officer of Merscorp.
"While the potential use of blockchain in mortgage has entered the dialogue, the clearest path, right now, to solving real problems and earning ROI in this space is the long-overdue move from paper to digital. This game-changing innovation is a practical goal that can be adopted under the current legal and market infrastructure," he said.
Harry Gardner, executive vice president of e-strategies at Docutech, expressed hesitance about a blockchain as an equivalent or alternate to the MERS eRegistry.
"The MERS eRegistry is not just the registry to check who owns the note, but also to perform all sorts of other transactions in terms of e-note management and converting them back to paper when necessary — all kinds of things like that. In my mind, that would make a blockchain equivalent more difficult," Gardner said.
Perhaps a more suitable application for blockchain technology is the foreclosure process.
"With blockchain, I think the defaults are going to be so much better," said Jeff Bode, president and CEO of Mid America Mortgage.
Multiple parties need to collaborate to service a delinquent loan. And since blockchain's distributed ledger technology offers total transparency, it can help streamline an already complicated process.
"If you think about during the foreclosure, you've got the servicer, you've got the investor, you've got the attorney, and then you have the end consumer," said Shelley Leonard, executive vice president and chief product officer at Black Knight.
Also in servicing, blockchain's ability to provide original records will help avoid inaccuracies in information when documents are transported during servicing transfers.
"Having one set of rules and requirements that are agreed to is a big part of the distributed ledger benefit or value that creates that standard rule set that all the participants on the ledger agreed to as it goes through the process," she said.
By 2024, the global blockchain market is expected to be worth $20 billion, according to Transparency Market Research. And the technology has the potential to reduce the infrastructure costs of the world's 10 largest banks by 30%— equating to $8 billion to $12 billion in annual cost savings, according to Accenture and the financial services consulting firm McLagan.
But the mortgage industry historically lags in its technology adoption. And with blockchain technology just starting to make its mark on other industries, it may be a while before it's adopted by lenders and servicers.
Today, nearly every mortgage company has introduced some form of digital mortgage component into its business practice, but this industrywide embrace of digital mortgages has taken decades and is still in its infancy.
About five years ago, it took a big industry player or two to introduce digital mortgage tools before others followed suit. And while that may be what it'll take for the industry to start utilizing blockchain technology, it may not be the most effective game plan.
A consortium-based approach, as opposed to a competitive one where companies pin themselves against each other, is what's required for blockchain to realize its maximum potential.
"It's one of those things, like building an electrical grid," explained Brian Martin, director of technology, Sapient Global Markets. "You have generators that generate, you have users who use it, but in the end, everybody benefits from the fact that you have this power infrastructure — it's like upgrading the grid," he said.
"An industry consortium tackling this problem would turn the technology from being a differentiator at each company, to being a utility for all the companies," he continued.
Thus, having companies compete against another may prevent the industry from achieving its full potential with blockchain.
"If the mortgage industry got together and built this, it would fundamentally change the technology of the entire mortgage industry. It would completely change the technology requirements as an entry barrier," said Martin.
With the Federal Housing Finance Agency directing much of the work Fannie and Freddie are doing to develop industry utilities like the common securitization platform, it may be in the perfect position to convene those in the industry and drive this change forward.
"With blockchain, I think the defaults are going to be so much better."
— Jeff Bode, president and CEO of Mid America Mortgage.
"In any application for something like blockchain, there is a great need for community coordination and agreement and standardization, so an entity like FHFA would be potentially a significant player there, the CFPB, depending on the application, or even MISMO, in terms of setting forth the data standards," said Gardner, referring to the Consumer Financial Protection Bureau and the Mortgage Industry Standards Maintenance Organization.
While building an industrywide platform may take resources, its cost would be capacity-based and scalable. Blockchain's price tag shouldn't vary much from what it costs a company to invest in any new platform.
"It squeezes margins out, and if everything's easier to do, it should be cheaper," said Bode.
"If I can have better quality in my process, I'm going to do whatever it takes to have better quality and better service for my customer," he said. "If I can do that, and it costs me less money, that's where I'm going to go."