Banner Image

Bank of the future

Blockchain and Mortgage Lending: New Best Friends?

 
March 9, 2017

Imagine an ideal world where all parties involved in a transaction agree to a single version of truth, resulting in an immutable audit trail. Such a system shall introduce transparency in the process and reveal roadblocks, thereby helping an organization achieve transaction related goals in time. It would also work against the interests of those involved in perpetrating fraud and malicious behavior. Are we thinking blockchain? Well, yes.

How Blockchain can Do Wonders for the Mortgage Business

With blockchain technology at the core of the mortgage process, both borrowers and lenders stand to gain. Heres how.

At origination, there could be more accurate record-keeping. The fulfilment phase could see timely deliveries of loan estimates, and the use of smart contracts could speed up the settlement process. Mortgage servicing could focus on better tracking of payments made across the lifecycle. And if mortgage servicers were to transfer the servicing rights of loan portfolios to other servicers, blockchain could help in speedy and efficient transfers. Such a system would offer real-time visibility of documents to relevant entities, and eliminate document duplication in the mortgage servicing rights transfer process.

Moreover, smart contracts are a boon when we talk about conducting due diligence, especially when moving or transferring impaired loans quickly to specialty servicers, or taking them back after a workout. In addition, the Mortgage Industry Standards Maintenance Organization (MISMO) mortgage loan data can be validated using blockchain, enabling easier transfer of assets to servicers. The secondary market or the securitization phase could enjoy more transparency and liquidity, aided by the efficient creation and monitoring of securities using smart contracts for master services agreements, investor contracts, pooling, and service agreements.

Heres What Industry Players are Beginning to Do

To simplify home ownership, Bank of China (Hong Kong) and HSBC are aiming to launch mortgage services using the blockchain technology. This system allows a network of banks to access the property valuations platform quickly. Surveyors are able to record a latest valuation as new or revised listing, which can be verified and shared to mortgage applicants within seconds. This shared property valuation system helps avoid duplicate surveys or valuation efforts on the same property.

In another innovative use of the blockchain technology, ABN AMRO is working toward developing a system for buyers, sellers, brokers, and regulators, among other parties, to share and record real-estate transactions. Wells Fargo is leading a consortium with investors like JP Morgan, Goldman Sachs, F-Prime Capital, and Thomson Reuters to ideate and develop systems using the distributed ledger technology. Not surprisingly, this technology has been the basis of recent strategic investments by financial institutions like the Bank of America, the Mitsubishi UFJ Financial Group (MUFG), Citi, Santander, and Canadian Imperial Bank of Commerce (CIBC).

Industry players are also envisioning a title registry using blockchain, to record the digital movement of assets and ownership. Mortgage related transactions would receive a major fillip with the launch of unique digital ownership certificates for the properties listed in the system. Rental scams can almost become negligent as fraudsters would find it difficult to sell or advertise properties they dont actually own. Finally, speedy, transparent, and seamless transfer of mortgage ownership is set to become a reality soon.

Redefining the Mortgage Ecosystem

A tamper-proof distributed ledger system offers numerous benefits. Increased transparency of mortgages, with loan-level details shared securely, restores trust in the entire system. This can pave the path to a robust and healthy secondary market too, where all the buyers would know in detail about the loans or securities that they buy and sell. With such high levels of data security, cyber-attacks would become extremely challenging, further strengthening the fabric of the system. Apart from efficiency in broadcasting information in a speedy and secure way, and achieving complete traceability, reduced costs will be another important driver for lenders to adopt this technology. With the rising competition from fintech companies, blockchain can be banks best bet when talking about innovation and market survival. Though the blockchain technology is still evolving, and could take a few years to become an industry-level revolution, a few use cases and pilot exercises have already shown promise. Combining blockchain with other sophisticated technologies like artificial intelligence, robotics, and biometric security, could drive the industry to the next level.

Overcoming the Challenges in Blockchain Adoption

Being an emerging technology, an array of challenges and dependencies seem to cloud the road ahead. For many organizations trying to build their own chains with different standards, their departments work in silos. This could be a huge bottleneck while bringing in the much-needed coordination and standardization. Moving away from the traditional, centralized approach to a decentralized network could be unsettling for many players and can cause significant disturbance in the economy, if not well-thought, planned, and implemented. Emerging technologies usually escape regulatory oversight as regulations need to catch up with the technological advances happening in the industry. Reduced regulatory oversight may be a key challenge to work through, as a decentralized network could result in lesser resilience in absorbing the shocks of any market crisis. In all probabilities, the biggest challenge could be: How will blockchain be governed such that regulations dont stifle innovation and development? What do you think?

Kalpana Palaniappan is a Domain Consultant with TCS' Banking and Financial Services business unit. With over 15 years of experience, she provides consulting support and manages strategic account proposals for TCS key mortgage customers. Palaniappan is a certified US mortgage underwriter and has worked with a leading mortgage servicing organization prior to joining TCS.