Blockchain technology is no longer breaking news. The financial services industry has been quick to adopt it in various areas. But mortgage lenders and servicers have been slower to implement this technology to solve lending challenges.
Skepticism about the value of blockchain may be rooted in unease about its connection to bitcoin and other virtual currencies known as cryptocurrencies. The tools in blockchain — its highly advanced security and distributed ledger — are tools that exist today and can be employed to address problems in lending. And it all can be done in traditional U.S. currency.
It should also be stated that blockchain is neither a software package nor a platform that can be bought. It is the application of existing technologies in a way that ensures better transparency and improved security. It also boosts the bottom line by reducing necessary manpower and man-hours.
We, in the lending industry, have seen the benefits that can be brought about by automation and standardization of data. We also understand the need for improved transparency and accountability to better adhere to regulatory requirements. Any innovations in lending must also consider the overall cost — both direct and indirect — to all parties involved.
With this in mind, there is a case for mortgage lenders to adopt blockchain tools. The first step begins with looking at problems with some basic understanding of the tools involved. Let's examine some elements of blockchain and how they can be applied to the mortgage industry.
Blockchains provide improved safety and security. Data that may be stored on a loan origination or servicing platform is tagged to a highly secure shared data framework where the records are represented by unique metadata that is algorithmically defined. Loan balance information is represented by a string of 64 calculated characters called a "hash." The hash contains not just the loan balance but other data, such as its source.
The cryptographic approach to hashes creates a verifiable "single source of the truth," meaning an unchangeable digital record is created for every transaction. No sensitive information is ever transmitted in the clear (the data doesn't move) and blockchain ledgers can be full, limited, or private in scope. This means users can share this data with no one, only certain parties with whom a private key is shared or with the public at large.
It's hard to argue against the concepts that support blockchain and all it brings to the table for both lenders and borrowers. Blockchain technology could reduce data security risks by improving the data encryption used to trade information. By using a private or hybrid ledger, it could also reduce all the costs associated with trading data and subsequent checking of that data — and the audit of those checkers would be far easier to manage, too.
What's more, with the right ledger security, users could also address compliance concerns. Even if someone only trades information within their own company, a distributed ledger can streamline operations, increasing productivity by reducing duplication of multistep data transfer processes.
Nearly every lender and servicer has embraced automation to keep costs down, freeing up manpower for tasks that require a human touch. Further cost reduction means that more resources can be devoted to serving the borrower: The savings generated from reducing overall costs to originate and service loans can be passed on to the borrower. From origination to payoff, blockchain can enhance and improve the mortgage lending process.
The benefits are bold, but what are the use cases?
The transfer of mortgage portfolios is a process in which loan servicers could benefit from better technology like blockchain. As loan servicers know, the transfer of these portfolios is a complex process that entails many moving parts and a lot of scrutiny. During the buy/sell transaction, the underlying loan details can change sufficiently, which then requires periodic updates to be disclosed from the buyer to the seller.
To reconcile these changes, sellers spend a great deal of resources, in a multistep effort, to transfer the new data and to "true up" the information between the initial bid and subsequent updates to the loan portfolio. Not only does this process dampen productivity, it also introduces additional risk into the portfolio transaction due to the possibility of poor data management or the inadvertent transfer of invalid loans.
And where there is risk, there is heightened attention from investors and regulators — such as the Consumer Financial Protection Bureau and the Federal Housing Finance Agency, in the case of larger portfolio transfers.
Instead of the laborious, highly manual method used today, an approach using distributed ledger elements of blockchain and a secure contract could eliminate reporting and reconciling issues when providing updates during the purchase transaction. The ledger would eliminate the back and forth data transfers that occur during the process.
For example, when balances change and individual loans no longer qualify for a deal due to pay off or advanced default actions, the ledger provides an immutable filing cabinet of the data. And all participating parties can access this record. A secure contract, facilitated through blockchain, can improve the confidence in the deal terms and the portfolio content by controlling characteristics of the chain composition, with the total principal balance of the transfer chief among those characteristics.
In addition to streamlining the process by reducing the number of hand-offs and checks involved, adoption of this technology also shrinks risk by increasing the clarity of the loans comprising the portfolio.
The security elements of blockchain can be used to structure transparency and effect fast approvals without sacrificing security and privacy. As a result, mortgage servicers can more easily leverage portfolio sales and acquisition to achieve growth and product profitability. They can also improve demographic, as well as geographic, footprint goals.
Blockchain is a win for lenders and the consumer. Isn't it about time you let blockchain do the heavy lifting?