How Blockchain is Changing the Mortgage Game
February 13, 2020
The technology that blockchain brings to the table has the potential to affect a wide swath of homeowners, including two-thirds of Americans, many of whom are considering refinancing after the Fed lowered rates for the first time in nearly a decade.
Not only can blockchain better secure transactions, but it can also drive efficiency within the mortgage process. Here’s how.
How does blockchain cut costs and save time?
Since blockchain consists of a series of time-stamped transactions, it creates a complete history of all related activities. According to a study by Moody’s, it also holds the power to simplify major mortgage processes while cutting redundancy and cost between 10-20 percent. That translates to a yearly savings anywhere between $840 million and $1.7 billion.
This has real-world potential for anyone applying for a mortgage. Whether you are talking about incomplete document collection or snail’s-pace data entry, any number of human-scale delays can slow down your mortgage process. However, blockchain is well suited to dealing with such delays: tools like distributed ledgers and smart contracts are meant to reduce third-party involvement, which in turn cuts costs and time.
With a typical mortgage, there may be intermediaries involved who can slow down the process. These services cost anywhere from 2-5 percent of a property’s price, including origination, broker, legal, underwriting and title fees. For example, if a buyer is paying $250,000 for a property, he or she might spend upwards of $12,000 on fees to secure a home loan.
However, via blockchain’s peer-to-peer exchange, a third-party need not offer separate access to a transaction. Instead, data can be validated and transferred from the source to the recipient, without any third-party interference.
How can blockchain lend transparency to the mortgage process?
Human error can be unavoidable along the path to getting a mortgage, particularly when talking about the shift into the digital world. By saving loan transaction details onto distributed ledgers, blockchain enables immediate record updates and scheduling of transactions in line with the timetable for an individual loan. Also, blockchain’s smart contracts can be written to speed up the process, while its unchangeable data element provides incontrovertible evidence in the form of time stamps.
As mentioned, the secondary market particularly benefits from the presence of blockchain because its smart contracts offer single-transaction validation of mortgage data, confirmation of pool requirements, and notification of each associated person. With money then coming back into the lending pool, the industry as a whole benefits, as do borrowers who see faster fulfillment of their mortgage loans.
Blockchain integration provides enhanced security, convenience measure
From a mortgage perspective, blockchain provides additional security in the form of a digital tamper-proof envelope of all the information that could be relevant to a mortgage loan. The opportunity to bundle complicated transactions with pertinent documents in an easily accessed package offers a mix of modern convenience and cutting-edge security. This allows auditors who wish to review the history of transactions or the transfer of ownership of a collection of loans easily, ensuring no unauthorized changes were made along the way.
“It gives an extra level of modern security and sophistication to the automation of processes,” said Jarad Bernotavicz, Director Product Management at Equator.
Lenders must educate consumers on emergent technology
Blockchain is not necessarily a simple concept. Lenders must make its ramifications and benefits clear to the borrower. However, the good news is that despite the complexity of this fairly new technology, it’s still simpler and easier to manage than mortgage lending of yesteryear. With intermediaries brought down to a minimum – if not eliminated entirely – each step of the loan process becomes faster and more efficient.
By slashing the incidence of human error and the disruption of third parties, blockchain makes the mortgage process more efficient with a higher element of trust. While paper may not yet be entirely out of the picture, it is rapidly becoming an element of mortgages past.