Are We There Yet? ?The Blockchain-Enabled Mortgage

Todd Miller is VP, US Business Development of ChromaWay, the company behind Postchain which utilizes blockchain protocols to synchronize commercial databases across multiple enterprises. Previous to ChromaWay, Mr. Miller worked on digital mortgage initiatives with Fannie Mae.

2017 was a year when Bitcoin and other cryptocurrencies reach unimagined heights and initial coin offerings raised more than $3.5 billion in capital, yet traditional mortgage lending remained relatively unaffected by the blockchain craze. 

Mortgage lending appears to be a perfect use case for the application of blockchain technology, with its smart contracts and a distributed ledger to connect marketplace participants throughout loan origination, servicing, and securitization processes.  In an industry plagued by high costs, junk fees, lengthy processing delays, and a blizzard of paperwork, mortgage lending is ripe for decentralization. The only problem is that the mortgage industry is already highly decentralized. We need blockchain solutions to help put it back together.

Today, JP Morgan Chase, Wells Fargo, and Bank of America fund less than a quarter of all mortgages; most loans are originated by non-banks and smaller lenders. Closing a mortgage loan involves a highly complex ecosystem of providers, including realtors, title agents, mortgage insurance agents, and appraisers. The cost to lenders of manufacturing a loan now exceeds $7,000. 

Though the cost-saving benefits of exchanging data on a distributed ledger would be enormous, building an industry-wide blockchain network is daunting. Fannie Mae and Freddie Mac together with MISMO, the Mortgage Industry Standards Maintenance Organization, have played an important role in standardizing data and processes, but large components of mortgage processing have yet to be addressed.

In 2017, there was a lot of talk about the arrival of the digital mortgage by fintech firms and several of the leading edge non-bank originators. While these firms have made some progress, there is still a long way to go beyond permitting consumers to upload disclosures, tax returns, and pay stubs to a personalized web portal.  As Craig Focardi, a mortgage technology analyst wrote, “It’s still a fragmented supply chain of millions of customers, tens of thousands of brokers, thousands of lenders, thousands of data points, and hundreds of pieces of paper.”

Given the challenges of the mortgage industry, can the blockchain play a role in providing a fix through data re-aggregation? The short answer is yes. A distributed ledger can expand the trust boundaries among technology, service provider, and lending partners by significantly reducing the friction of data exchange. The long answer involves identifying areas of opportunity where success can be achieved within the framework of this quirky and highly regulated industry. ChromaWay spent 2017 working with fintech companies, government land registries, lenders, investors, servicers, and vendors. Here are some of the key lessons learned. 

Focus on manageable parts of the ecosystem. As highlighted above, the mortgage system is large, complex, and disconnected. The mortgage “industry” is actually several industries, encompassing real estate, mortgage lending, property registration, mortgage servicing, and mortgage securitization. The blockchain can significantly drive down costs and de-risk the process by facilitating re-use of borrower, property, and process information (e.g., the specific signature, time and date stamp of a disclosure documents) across the supply chain.

In Sweden, ChromaWay initially focused exclusively on the property transfer process among realtors, lenders, and the Swedish Land Registry. We modeled the process on paper (see the White Paper here), then created a digital workflow leveraging our smart contract and secure workflow tools to enable mortgage participants to use multi-signature sign-offs to submit the property to the land registry for initial registration or transfer of ownership.  

Use practical technologies for a practical industry. Home ownership is a foundational aspect of communal and economic life throughout the world. For this reason, consumers and businesses involved in home lending are risk averse, uncomfortable with a high degree of experimentation. Complex schemes involving transfer of ownership or mortgage payments involving untested cryptocurrency platforms are unlikely to succeed.

Conversely, proven permissioned ledger solutions are much more likely to be adopted by a naturally skeptical mortgage industry. For example, ChromaWay technology enables a mortgage industry consortium to share data out of its native databases (i.e., SQL or NoSql databases) using blockchain protocols. In India, the State of Andhra Pradesh used our Postchain technology to test a new distributed ledger-based land registration system.

Don’t get hung up on the hardest–to-solve problems.  For most mortgage industry participants blockchain is a new, hard-to-grasp concept. The industry is getting better at simpler explanations of blockchain and providing mortgage-specific use cases, Still, challenges remain (not a meeting goes by where I don’t have to clarify that there are no Bitcoin-type mining costs for a permissioned ledger!). For example, a common objection to the blockchain is that the industry lacks a global identity solution that all mortgage participants can use. 

While some type of global solution may be ideal, near term, practical steps are feasible. In Sweden, the blockchain consortium asked ChromaWay to work with Scandinavian telecom provider Telia, to develop a public/private key solution issued via smartphones.

Will the fully digital, blockchain-enabled mortgage be realized in 2018? It’s unlikely. The range of regulatory, technical, and structural barriers to blockchain’s full potential won’t fall away in one year. After all, the GSEs (Government Sponsored Enterprises) didn’t move automated underwriting applications to the internet until the early 2000s, six years or so after web browsers came on the scene. 

We do expect to see many more mortgage pilots and targeted production uses over the next 12-18 months, such as blockchain for e-notarization of documents during the loan origination process, which would provide powerful data provenance advantages to downstream users and investors. A distributed ledger to facilitate the sale of mortgage servicing rights (MSRs) and data sharing among servicers, sub-servicers, and mortgage bond investors is another likely near term use of blockchain technology. 

These and other blockchain initiatives will help the mortgage industry move from loosely connected parts towards a data-connected whole in 2018.