Talk about polar opposites: the excitement of purchasing a new home vs. the drudgery of the mortgage process. Borrowers are saddled with gathering documents and providing clarification/validation. Lenders struggle to obtain information from borrowers and numerous third parties, collate data in a compliant fashion and ensure information is validated and audit-proof. And then, of course, there are the countless hours spent on follow-ups.
Now imagine a world with real-time borrower and property data that was guaranteed to be accurate. Pipe dream you say? I say near-future achievable. Throughout the mortgage lifecycle – from origination to servicing to secondary markets – the use of blockchain would help resolve many of the longstanding issues that make the mortgage process inefficient, time-consuming and stressful for all involved.
The Burden of Information Gathering
At a macro level, much of what bogs down the mortgage process revolves around the need to gather information across three broad categories:
- Know the borrower.
- Know the property.
- Know the transaction.
For all three categories, the multiple points of inefficiency arise from:
- Dependency on documents (either hard or soft copy).
- Verification, versioning and audit of documents.
- Dependency on information from third parties (title, insurance, etc.).
Lenders rely on borrowers and third-party vendors to provide documents verifying information like employment, title ownership and insurance. Each document contains unique elements of information that are required but also plenty of “white noise” – additional data points that aren’t pertinent or that the borrower might be reluctant to share. For example, the buyer’s income statement would include his or her base salary (which lenders require) but also what the individual pays for health insurance, which lenders don’t require. As it stands now, there’s no other way for the lender to determine the buyer’s income.
Imagine if buyers or third-parties could allow access to just enough information. This concept of elemental information is particularly important for financial institutions, given consumer data privacy regulations and the spirit of maintaining the integrity of customer information. Consortia like Enterprise Ethereum Alliance are exploring options of private blockchain networks within which elemental information could be shared among members. Here’s how this could be implemented for lending.
Know the Borrower
Using a blockchain concept called “zero knowledge proofs,” individuals could provide institutions with access to the elemental information required to qualify for a loan by linking back to a verifying person or institution, without conveying any unnecessary information that doesn’t pertain to the request. This is what blockchain promises: tamper-proof, digital, elemental information in nanoseconds, authorized by the owner of the information.
Zero knowledge proofs could enable real-time verification of income, assets and employment, thereby guaranteeing real-time qualification of borrowers. This would eliminate the dependency on paper or electronic documents to “know the borrower.”
Currently, the verification process requires not just the acceptance of documents but also multiple levels of verification. Not all these documents are structured or standardized, which is a huge deterrent to effective document automation. This is not only time-consuming but also error-prone, which can increase costs for lenders.
Shinhan, one of the oldest and largest banks in South Korea, is using blockchain technology to speed up the loan approval process. Specifically, the bank will use a blockchain platform to verify the items of proof required for credit lending, such as qualification or certification documents.
Know the Property
Authentication and verification of property-related information is the mainstay of title companies and is also supported by insurance companies and agencies like MERS that record transactions. These third parties add to the overhead in both cost and time for lenders to close a loan.
Now imagine instead that there was a single, immutable record for properties, with the transparency to show ownership and other required information (hazard details for insurance, flood zoning, etc.). This record would be hosted on a distributed ledger that was available instantaneously to all parties that required the information, and the elements of information within it could be permissioned as required. A governing agency and/or the property owner could update access on an as-needed basis.
Historically, the volume of paper-based information and the reluctance of title companies to invest in diluting their control over the market have blocked improvements in this space. Making progress will depend on the willingness of large industry players to collaborate for the greater good of the customer.
For example, working with blockchain startup Propy, the state of Vermont has passed legislation to use blockchain technology to effectively manage its public records. In this pilot project, all documents involving the transfer of rights, ownership and interests from one entity to another will be stored in contiguous blocks with blockchain technology.
This is a great first step toward eliminating the inefficiencies of working with multiple third parties and their timelines to “know a property.”
Know the Transaction
By combining elemental information on borrowers and properties, the industry could build the foundation for real-time loan approval and funding. Each transaction would be recorded on a blockchain asset (like smart contracts that contain business rules) that contain:
- Data needed for origination.
- This is static data and would contain all the information gathered during the “know the customer” and “know the property” phases.
- Data needed for servicing.
- This data would be constantly updated as the borrower makes payments and changes take place in land taxes, insurance rates, etc.
- Elements of these two data groups could be made available through smart contracts to secondary market players.
If these assets were hosted on a private, permissioned blockchain network for a consortium of industry players, including mortgage providers, servicers and third parties like title and insurance companies, then each player would be able to view and share the elemental information required. There wouldn’t be a need for redundant verification because all the data is stored in a transparent and immutable way.
Realizing ROI from Blockchain
As with most technology breakthroughs, the use of blockchain in the mortgage process would upset current industry dynamics and require greater trust between parties. But as noted, many of these concepts are already being explored in the lab or as a proof of concept.
As the cost of participating in a blockchain network declines and more information becomes available digitally, use cases like this will mature rapidly into full-blown solutions. As blockchain and other advanced technologies like artificial intelligence infiltrate the mortgage lending space, financial services organizations must plan for the inevitable changes ahead, or be left on the outside looking in.
Also see Part 1, which explores the use of AI and cognitive assistants in mortgage lending.
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