Could The Centralized Nature of Getting a Mortgage Benefit From The Use of Blockchain?
The mortgage market, from a global perspective, is worth around $31 trillion. Of the residents in the United States alone, mortgages on houses are owed by 66% of citizens. In the United Kingdom and China, that number reaches into 70% and up. The entire world has some type of connection to the financial market through a mortgage, and there are many components that go into acquiring one.
Closing costs account for about 5% of the price of the property that the individual chooses to buy, which means that a $250,000 home will have another $12,500 tacked on, on average. Those costs include a wide range of fees, including broker fee, underwriting fees, surveyor fees, title fees, legal fees, and loan origination fees.
The market for establishing a mortgage is primarily centralized, and it is littered with brokers and lenders that all contribute their own costs to the process. However, blockchain could be a perfect solution for this industry, since everything will be organized in an easily comprehensible ledger.
Based on a report from PWC Financial Services, “Blockchain technology may radically alter the process through which consumers buy a home, as well as the way financial institutions handle mortgages. Specifically, the technology could remove cost and friction from the process, create transaction records that are infallible and incorruptible, and facilitate near instantaneous settlement. It could also dramatically change the way mortgages are serviced and sold on the secondary market.”
Moody’s Investors Service suggests that blockchain technology in the mortgage industry could save up to $1.7 billion a year. Antony Jenkins, a former Barclays executive, believes that the time expenditure for the process could benefit too. He said, “Over time what you could see, for example, is a mortgage being granted in 10 minutes, you could see a letter of credit being granted in two minutes, those types of things.”
Traditional Processes In Mortgage Application And Processing
So, the question arises – how realistic would it be to integrate blockchain technology to the mortgage process, and what would the impact be? The current process is primarily from physical documents and requires an excessive amount of time and labor to get the job done. The main reason for all of these delays is due the many third parties that are put into the process, from surveyors to credit agencies to title deed offices.
When the agreement is finally established that the buyer and the seller want to transact, the buyer has to start by applying for a mortgage at the bank, which requires a variety of different types of documents. Bank statements, proof of income, and any current loan information are just a few of the needs that will be required. The bank has to then take on a surveyor to have the potential property evaluated, and it is only after this step that the credit approval process can begin.
The bank has other factors to validate in this time as well, like the current ownership and a final property valuation, confirming that the credit that they approve all cover the cost. Once the decision is reached, the buyer will be notified, and signatures can finally be put on the loan agreement and mortgage deed. The process in the United States can take up to 60 days, on average, before the new owners are officially established.
The problem with this traditional process is that there are still issues that could be improved upon, like the cost, the amount of time in processing, and the overall lack of transparency involved. Third party credit agencies, underwriters, surveyors, lawyers, and title offices all contribute to the information that will push along the mortgage, and they need an administrative team to handle all of the paperwork involved. In 2015, PWC said that “the average mortgage application includes 500 pages, a number that has trended up rather than down in recent years.” However, other research has suggested that the actual number of pages involved in the process could be over four times that amount.
Every time that there’s another change in the process, there’s another fee assessed, and more time spent on getting to the final closing date. Worse off, there’s no real transparency in the process. Every document is held by a separate entity, but the person applying for their mortgage will need to provide access to each third party with this documentation. Everything is scattered, and the documents have to be accessed manually.
After approval, every time the information is updated, every single agency that has touched the property purchase in some way will need updating as well. The only piece that the bank holds onto is the record of the mortgage, which is placed on the buyer’s credit history. The information keeps moving on independent ledgers, which means that it is subjected to the potential for human error.
Integration Of Blockchain Technology
It’s easy to see where blockchain would fit into the whole process. If everything is found on a single network that each agent can update during their role, it is easy for any bank to gain access to the details that are necessary for the purchase. There are no wait times or chances for error, unlike with the paper communications from each entity. Furthermore, the digitized copies of the original documents are readily available for review.
Ideally, the blockchain technology would make it possible for every property to be labeled with a digital ID, making it trackable on a network. From the mortgage perspective alone, the ID would be linked with the chain of ownership and current market value, so banked could easily validate the current ownership status or the current market price without sending requests and enduring the delays of third parties.
DLT could even go a step further in the process and eliminate the need for certain agents, using smart contract applications. These contracts can be pre-programmed to only be used after certain actions are taken. As a result of using blockchain, the mortgage process could eliminate the need for intermediaries and improve savings.
Synechron, which is a provider of both digital business consulting and technology services, said, “By automating and securing the mortgage lending processes, a blockchain-based system coordinates and identifies the agents and intermediaries and could reduce operational costs, fees, and fraud for financial institutions. We estimate savings of $177 million on a loan book of $97.7 billion for a typical mortgage lender.” They added, “Blockchain technology is expected to reduce total transaction time throughout the mortgage value chain by 25 percent, to 30 days from 40. If national governments establish a blockchain-based title registry, this is expected to fall a further 25 percent, to 20 days.”
Blockchain Mortgage Ledgers In Other Countries
Some countries are already working to adapt blockchain to real estate. The Bank of Communications, the state bank of China, uses blockchain for the issuance of $1.3 billion worth of digital mortgages last month alone. A subsidiary of the Raiffeisen Bank International in Russia used blockchain platform Masterchain to issue a completely digital mortgage. In Hong Kong, the banks used blockchain technology as a way to processes 85% of the property valuations for mortgages. General manager of information technology, Rocky Cheng Chung-Ngam said, “Blockchain technology is expected to reduce total transaction time throughout the mortgage value chain by 25 percent, to 30 days from 40. If national governments establish a blockchain-based title registry, this is expected to fall a further 25 percent, to 20 days.”
Apart from government-run banks and institutions, there are also a few startups that are using blockchain to their advantage as well. Moneycatcha, for example, applies blockchain to loan applications using two solutions – Homechain and Regchain. Homechain uses blockchain technology to collect information from land offices and government agencies, while Regchain monitors loan applications for risks. Founder Ruth Hatherley said, “The application programming interface we have delivers a superior set of data and also regularly updates it, so we can give any institution an up-to-date, accurate view of their home-loan portfolio within 30 seconds.”
Block 66 is another great example of this type of startup, but they are focusing on transparency, along with other benefits. They would like to establish pre-vetted borrowers in a marketplace-style pool, which lenders can use for their resources. The CEO, Joe Markham, said, “Our Blockchain platform will store government regulations, internal guidelines provided by lenders, and information on applicants and their property obtained directly from the source.”
Potential Challenges To The Use Of Blockchain
The biggest challenge the industry could face with the use of blockchain is the fact that the networks would hold a substantial amount of personal data. As secure as blockchain is, all of the third parties that would have access could make it weaker. For that reason, a blockchain of this nature should place special importance on establishing the right security measures to protect customer data.
The other issue that arises is the fact that regulators will need to be involved to establish the legal framework for this type of purchase. SEC Chairman Jay Clayton said, “Replacing a traditional corporate interest recorded in a central ledger with an enterprise interest recorded through a blockchain entry on a distributed ledger may change the form of the transaction, but it does not change the substance.”
Ultimately, this endeavor isn’t looking to eliminate banks from the process at all. Instead, this is more of an upgrade, which should make it more appetizing to the mortgage industry. However, it is up to regulators of the space as well to determine the best way to protect all parties, if blockchain technology is going to be more of a relief of a nuisance in this industry.