Blockchain in the Mortgage Industry: Hype or Promise?
It's time to talk about the blockchain mortgage. Today, we trust banks, governments and other institutions as central authorities to arbitrate transactions. Blockchain is one of the more exciting emerging technologies that challenges this model because it promises to digitally create, store and transfer transactions without centralized control. Despite all the hype around blockchain, industry analysts see real promise. A 2018 Gartner report forecasts that the business value from blockchain will reach $3.1 trillion by 2030 through cost reduction and revenue growth.
Blockchain is a threat to traditional financial services business models because it eliminates the need for trusted intermediaries. In the mortgage industry, the complexity of lending is often attributed to a heavy reliance on paper and intermediaries that slow down the process. In the U.S. for example, banks, lenders, housing GSEs (government-sponsored enterprises), notaries, closing agents, document custodians and servicers are all involved in the mortgage application and closing process. Each step includes fees and adds days (and sometimes weeks) to an already lengthy process. That’s why the mortgage industry is the perfect target for disruption.
Blockchain Adds Transparency to the Mortgage Value Chain
So what can blockchain bring to the table? One word: transparency. As a distributed ledger technology (DLT), blockchain decentralizes the storage of information, including electronic evidence pertaining to what the borrower and lender did and saw during the mortgage process. As a result, this information is made available across all “nodes” of the chain, inhibiting its manipulation and strengthening legal enforceability and compliance. This is extremely important in the mortgage industry because the value of the mortgage loan is tied to the electronic mortgage note (eNote), which is in turn transferred to different entities multiple times during the closing process. If the eNote document (which represents hundreds of thousands or millions of dollars in digital currency) is destroyed or lost, its value is completely lost.
Blockchain-based solutions have the potential to preserve the chain-of-custody of the mortgage note throughout its lifecycle. This enables lenders to achieve complete transparency and auditability in the process, and as a result, significantly reduce costs associated with compliance.
In the 7-minute video below, OneSpan demonstrates how electronic signature and closing services paired with blockchain technology can help banks and lenders manage and protect the chain-of-custody of the mortgage note throughout the lifecycle of the loan. We collaborated with BlocLedger, an IBM and OneSpan partner, to record transactions associated with a mortgage closing in a permissioned Hyperledger blockchain.
Figure 1. OneSpan Sign Blockchain-based Demonstration at National Mortgage News’ Digital Mortgage event in Las Vegas on September 17, 2018.
The mortgage value chain is complex because it is heavily paper-based and involves many players – making the overall process slow and complicated. This not only has negative implications on the borrower’s experience, but also makes this is a tedious process for other parties involved.
Blockchain-based solutions have the potential to eliminate many of the complexities that the mortgage industry faces and create a more efficient, transparent and real-time model for home lending and buying. Many financial institutions are already testing potential applications for their businesses. However, technology issues are still being addressed and according to industry analysts like Aragon Research, blockchain applications will take another 5-10 years to reach maturity and mainstream adoption.
Good News for the Blockchain Mortgage
The good news is that governments are beginning to see the value of blockchain and paving the way for the eventual use of technology out of the labs. For example, Bill H.R. 7002, dubbed the “Blockchain Records and Transactions Act of 2018”, was introduced in the U.S. House of Representatives in September 2018 to amend the ESIGN Act of 2000 to clarify the applicability of blockchain as it pertains to electronic records and electronic signatures.
At OneSpan, we have been working with banks and lenders for over 15 years and we know the transfer of "value" has always been a slow and expensive process – especially in the paper world. The future of emerging technologies like blockchain have the potential to change the game in the mortgage industry and not only speed up and simplify processes, but also reduce costs significantly. Talented researchers at the OneSpan Innovation Center in Cambridge, UK are testing DLT across our portfolio of identity, authentication, e-signature and e-closing solutions to support the advancement of real-life blockchain use cases in the financial services industry.