The next time you apply for a mortgage, or your lender services that loan or sells it on the secondary market, you might be helping to disrupt an industry. That’s because the entire transaction, or at least parts of it, may be powered by blockchain in the not-too-distant future.
Blockchain – most simply defined as a decentralized, immutable digital ledger – is perhaps best known as the technology underlying digital currency. But blockchain is also being increasingly adopted by tech companies in the mortgage space seeking to revolutionize and disrupt the industry.
“There are a lot of different use cases – everything from information sharing in the origination ecosystem to servicing to title and capital markets,” said Debbie Hoffman, CEO and founder of Symmetry Blockchain Advisors in Orlando, Fla. “Mortgage has a very long supply chain, from the initial marketing and purchase of a home to the origination of a loan, servicing a loan, selling a loan and the secondary market, and within each one of those sectors there are areas where you could have a blockchain.”
The advantages of blockchain are encouraging disruptive companies to integrate it into their operations. Hoffman said that blockchain makes the process of originating a mortgage simpler, easier and cheaper because blockchain allows information sharing so the cost of producing the loan is less – a savings that players say will be passed along to the consumer. For investors, the advantage of blockchain is accuracy – the odds of having defects in the loan are lower, Hoffman said, because there are fewer inputs along the way and transparency in the process. “Those are the two areas where I see tremendous value,” she added.
Although change is taking place slowly – “there has not been much progress, sadly,” Hoffman said – some companies are already utilizing blockchain or about to launch new technology incorporating it in 2021. These include:
Bee Mortgage App. If you check out the Bee Mortgage App in the iPhone’s App Store today, you’ll find a home affordability calculator to help homebuyers discover their home-buying power. That will all change in late 2021, when Bee Mortgage App founder and CEO Curtis Wood said the app will go live as a mortgage originator utilizing blockchain that will allow applicants to submit a mortgage application and receive an approval without having to interact with a human.
“You’re not going to be waiting on a loan officer to process your loan application data,” he said. “We will be using AccountChek and The Work Number for income and asset verification, but what we do with that data is different. We have an AI program scrape it. It performs simple LTV and DTI calculations and then it’s run through a smart contract, which has the minimum qualifying standards pre-coded. If you meet those standards, we push out a preapproval notification.”
The advantages? Speed is one. Wood said the application process for a single applicant would take about three minutes. Accuracy is another advantage, since you’re eliminating the risk of human error. Cost is an advantage as well. Wood said the automation due to blockchain allows loan officers to triple their production “because they’re not going to be touching up to 70% of their production pipeline.” Those savings will be passed along to the consumer, he said.
Wood expects to launch in the fourth quarter of 2021, and he hopes to disrupt the mortgage industry in 2022 and beyond in the same way that TurboTax disrupted tax preparation.
Figure. San Francisco-based Figure Technologies has been incorporating blockchain technology since 2018 and is the creator of Provenance, a blockchain used for financial services. Using Provenance, Figure has successfully completed loan origination and securitization transactions. The company is currently incorporating blockchain in the origination process for home equity lines of credit, according to co-founder and CEO Mike Cagney.
“We were the first to originate, trade, finance and securitize loans on blockchain,” he said.
The company uses smart contracts to validate loans and create real-time exception reporting. It also uses omnibus banks and digital wallets to fund loans, as well as blockchain for HELOC and non-GSE mortgages for loan sales, financing and securitization, Cagney said.
There are four advantages of blockchain over traditional methods of financing, Cagney said. Blockchain reduces the audit and quality control costs in originating a loan. It allows for bilateral trading of loans. It reduces many of the expenses of securitization. And the real-time nature of blockchain allows for transparency to asset performance, supporting better liquidity.
Cagney said he expects his technology to ultimately extend to banking, payments and asset management. “Basically, any financial services vertical that historically has required intermediation is a candidate for blockchain disruption,” he said. “We also believe the technology will drive new product innovation, such as fractional home sales.”
Next year, Cagney is hoping to get one of the GSEs to agree to take receipt of loans on blockchain. “That has massive benefit to originators, selling loans the day they are funded, reducing cost and risk, and to the agencies, creating one-day MBS pass-throughs versus 55-day securities,” he said.
Symbiont. New York-based Symbiont has partnered with Lewis Ranieri, who is considered to be “the father of mortgage-backed securities,” to create a blockchain solution for the mortgage market – a decentralized mortgage record that securely shares data among servicers, investors and other key parties. The goal is to convert legacy mortgages into auditable, immutable and verifiable “Symbiont Smart Securities.”
“The mortgage industry is a great poster child for the virtues of blockchain,” said Michael Manning, a business development executive at Symbiont.
Manning said it’s not uncommon under the present system for “bad loans” to be written – loans that don’t conform to the representations and warranties originators make to their investors. Through the use of smart contracts applied to the underlying mortgages, loans in noncompliance can be flagged. “In essence, you eliminate reps and warranties claims because they are a function of trust,” Manning said. “I no longer need to trust that you as an originator are giving me a valid loan. I can verify it for myself because I can see all the data.”
Another advantage of using blockchain is the elimination of data loss. “Mortgages transfer across different servicers throughout their lifetime,” Manning said. “Every one of those transfers is a nightmare event, with data getting lost at every stage. By allowing everybody to share a common record, when a loan moves servicers, there is absolutely no data loss.”
Of course, blockchain doesn’t eliminate the potential for bad data, Manning admitted. “But it greatly limits it and leaves an audit trail that is unprecedented,” he said.
The company plans to roll out its system in early 2021. “It will be a mortgage servicing system – the ability to handle both performing and non-performing loans,” Manning said.
In the short term, Manning said the Symbiont system will make it more efficient to service mortgages by eliminating errors and compliance violations and by providing greater transparency to all parties. In the longer term, he said it will dramatically lower the costs and risk and therefore improve the profitability of the entire lending and securitization system.
“The benefits that originate in servicing will flow down to the end-investors, who will have better transparency into the quality of the loans they’re getting, into the performance of the loans they’re buying and a far better ability to enforce their rights in a circumstance where the need arises,” he said.