The introduction of blockchain technology would, indeed, bring a change more dramatic than any we’ve seen in the mortgage industry for decades.

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Y
ou’ve probably
heard the term
“blockchain”
mentioned in the
past year or so. You
may know that it’s
related to (actually, at the
foundation of) bitcoin technology.
And you’ve probably heard, to
some degree, that blockchain
technology could be a “game
changer” throughout the
mortgage industry. But unless
you’re a student of the topic, you
may be wondering why we’re not
hearing more about this.
Most agree that the
introduction of blockchain
technology would, indeed, bring
a change more dramatic than any
we’ve seen in the mortgage
industry for decades. However,
concerns about potential security
flaws (ironic, since one of the
potential benefits of the
technology would be the inability
to alter or tamper with its data)
and the fact that blockchain, as it
is today, cannot facilitate massive
amounts of transactions faster
have derailed the possibility of it
impacting the industry soon.
Thus, the same things that make
blockchain so appealing—its
decentralized nature and the trust
garnered by the difficulty of
altering blockchain data—are
also what are holding it back
from being used for new
purposes.
But that doesn’t mean
blockchain can’t or won’t make
its mark on the mortgage world
eventually.
Setting aside the premise that
blockchain applications may not
be imminent for our industry just
yet, let’s have a look at what this
“white whale” might mean for the
mortgage and settlement services
industry, and how it could
revolutionize the way we do
business down the road.
How it works
Mortgage Finance Gazette, in an
article posted May 1, 2017,
defined blockchain technology as
follows:
“Blockchain is a new computing
architecture that was initially
created to power the
cryptocurrency application
Bitcoin. The architecture is both
a network and a database,
optimized for real-time, global
synchronization of transactions
and related data. Much like the
Internet, blockchain technology
can be used to build many
different applications utilizing its
underlying secure, flexible, and
auditable transaction and
‘settlement’ infrastructure, not
just to power virtual currency.”
Blockchain: Mortgage and Settlement Industry
Stands on the Edge of Tomorrow
By Derrick Jones
A S P E C I A L F O C U S O N
Mortgage
Technology

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Mike Sorohan of MBA
NewsLink describe the process in
this way in his article, “Mortgage
Industry Eyes ‘Blockchain’
Technology,” from MBA
NewsLink, Feb. 2, 2017:
“How does blockchain work? It
starts when someone requests a
transaction. The request is
broadcast to a P2P network,
consisting of computers. The
network validates the transaction
and the user’s status using
known algorithms (the verified
transaction can involve
cryptocurrency such as Bitcoin,
contracts, records or other
information.
“Once verified, the transaction
is combined with other
transactions to create a new
block of data for the ledger. The
new block is then added to the
existing blockchain in a way that
is permanent and unalterable,
completing the transaction.”
In the same article, Sorohan
quoted BlockGeek to describe
the unique value of the
technology:
“The blockchain is an
incorruptible digital ledger of
economic transactions that can
be programmed to record not
just financial transactions but
virtually everything of value,”
wrote Don and Alex Tapscott in
their book Blockchain Revolution.
“And BlockGeek says by
allowing digital information to be
distributed but not copied,
“blockchain technology created
the backbone of a new type of
Internet. Originally devised for the
digital currency, Bitcoin, the tech
community is now finding other
potential uses for the
technology.”
The potential uses for
blockchain, once it has evolved
to a point at which it can
facilitate large numbers of
transactions securely, are
powerful …
How would it improve
the industry?
At the heart of the blockchain
value proposition is the accuracy
and security of the data entered
into the system. This from a PwC
white paper, “What Might
Blockchain Mean for the
Mortgage Industry?” from June
2016:
“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.
“At origination, blockchain
might help establish more
accurate record-keeping. At
fulfillment, it could provide
immutable proof that loan
estimates were sent within three
business days. Smart contracts
would speed up settlement
flows. In the mortgage servicing
process, blockchain could track
the movement of payments.
And in the secondary markets, it
might provide transparency
about the ownership of
underlying assets. We think
blockchain could be relevant at
every stage.
“In the secondary market,
smart contracts could help the
securitization process. They
could streamline how master
services agreements, investor
contracts, and pooling and
service agreements inform
these securities, too. And when
mortgage-backed securities are
created more efficiently, or
when MSRs are traded more
quickly, this adds liquidity back
into the market. That’s good for
everyone.”
In terms of practical
applications, we could see any
number of practical benefits
from a blockchain solution
upgraded for security:
l Reduced counterparty risks
because transactions are
settled near instantly.
l Better transparency and
more trustworthy

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documentation, leading to
improved compliance through
better reporting and
monitoring.
l Dramatic acceleration of the
settlement process, allowing
transactions to complete in
minutes or perhaps even
seconds.
l Significant reduction in the
need for and speed of error
handling and reconciliation
due to real time tracking.
Let’s have a better look at the
final two benefits, especially.
Most would agree that, today,
one of the most dramatic
bottlenecks to the mortgage
process—especially from a
consumer standpoint—is the
segment of the transaction that
transpires between the
conclusion of the sales
agreement between buyer and
seller, and the closing. It’s during
that time that two distinctive
processes take center stage: The
lender’s underwriting approval
and the settlement process—
comprised primarily of appraisal
and title insurance (but including
other functions as well).
In many ways, underwriting
remains an internal process for
lenders. But settlement services
are much different—a fine mosaic
(or chaotic cacophony) of
multiple firms using multiple
technologies to come to one
result. There’s obviously a great
deal of rekeying, ineffective
communication and problem
solving (usually “work arounds”
for disparate systems) that seem
inherent to the process.
In all likelihood, blockchain
could eliminate that. The average
time to close today is in the mid-
40s (days). Imagine how much
faster the transaction could be
where most of the inefficiencies
in production and auditing could
be eliminated!
Similarly, a good deal of the
settlement process involves
record keeping, documentation
and quality control. With a
trustworthy single source of the
relevant data, provided by
blockchain systems, even more
time, inefficiency and inaccuracy
could be stripped from the
process.
It seems likely that those
service providers which are
already outsourcing or relying on
trusted partners or technology
will have a leg up when block
chain engulfs the settlement side
of the transaction. It has been
shown again and again that
most providers using
proprietary solutions or “do it
yourself” methods are the
latest adopters and the last to
adapt when industry
disruptions occur.
In short, the potential of
blockchain technology is
enormous. Even if we disregard
the clear benefits it could bring
to securitization and
origination, its likely impact on
one of the most convoluted
stages of the transaction (the
settlement) cannot be ignored.
Although the technology is not
yet there to implement to our
system, it will be eventually.
The benefit to the consumer
and the originator alike will
likely steamroll any objections
based upon anything other than
data security. Thus, it may be
time for all participants in the
mortgage process to consider
where this evolution will take
them, and how to adapt.
Derrick Jones is vice president at SLK Global Solutions
America Inc., which provides technology based
solutions for the real estate lending and settlement
services industry. He can be reached by e-mail at
Derrick.Jones@SLKGroup.com.