Comment: Blockchain and the mortgage industry

The blockchain concept was originally developed as an efficient and secure way to manage and register transactions made with cryptocurrencies – for example Bitcoin, but now it is emerging as a truly transformative technology in the financial sector as a whole.

Blockchain offers transparency around transactions and provides safety and security for not only people’s money but also their data; this is due to the properties of distributed ledger technology.

The DLT component of blockchain allows each counterparty to have its own copy of the same ledger, similar to the way a Google doc allows multiple parties to view the same information at the same time. The database is built to be immutable, which means there is inherent security because information on the ledger itself cannot be changed.

This fixed data and the fact that it is distributed/replicated across all blocks on the network removes the need for reconciliation, and creates a golden source of data on the network where you can have confidence in the data being tamperproof: greater than 50 per cent of the network would need to be compromised for the data to be suspect.

As a result, a digital, decentralised ledger, blockchain optimises accuracy, accountability, speed and transparency.

How can blockchain be used in the mortgage industry?

The mortgage value chain is highly fragmented, with various organisations and intermediaries involved at all steps. Despite advancements in technology, it is still predominantly paper-based, manual and prone to processing errors. This means that financial institutions stand to gain from reduced costs made throughout the mortgage value chain and more efficient interactions with suppliers, agents and customers.

As a decentralised, contract-based transaction management system where loans and related payments and approvals are linked together, mortgage origination, initiation and execution is ideal for blockchain. A permissioned mortgage lending blockchain can dramatically reduce costs, fees and fraud and improve efficiency, transparency and certainty along the whole transaction for all parties.

What next for the mortgage industry?

While the benefits are clear, there are several hurdles that still need to be overcome to make the technology more fsuitable for the mortgage industry:

Re-engineering– the cost/benefit trade-off needs to be more attractive than enhancing existing legacy systems, since reengineering costs could be large.

Evolving the right standard – ecosystem participants must agree on standards. Interoperability is also required

Scalability of solutions – the chosen solution needs to scale up, potentially to high frequency trade volumes.

Governance– who validates transactions, screens participants, maintains the blockchain and arbitrates security and rule changes must be decided.

Regulation– global regulators need to become involved. Tools such as the FCA Sandbox could help.

Security–What happens if somebody loses their key? This stores a user’s identity and assets.

Reimagining the ecosystem

While there is an opportunity to improve speed, transparency and efficiency, the power of blockchain and digital technology will not only enable the industry to create new business models, but will improve the whole housing journey for customers across buying, living, selling and renting.

Digital technology will allow all ecosystem players, such as mortgage firms, banks and insurance companies, to create constant engagement with the customer with an end-to-end approach that embraces many more aspects of home ownership. Moving away from transactional operations, the whole ecosystem will look to create sustainable value and tangible outcomes from the homeowner.

In order to achieve this, there is a need to create an open ecosystem with a shared infrastructure where the customer is at the center. By having an open ecosystem, partners can collaborate and utilise data, which will result in reduced costs and create outcome-based services. Banks have been at the forefront of this, with many creating distributed applications to move beyond a digital platform model. Blockchain is a technical way to achieve this for cases that require data validation and reconciliation.

We now need broker networks, mortgage lenders, insurance and servicing firms, intermediaries and title registries to cooperate. Those who don’t stand to miss out on this opportunity.

Matt Shaw, director, Synechron

 

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