Blockchain technology is transforming the mortgage industry by providing a decentralized, secure, and transparent foundation for the mortgage process. This approach allows for safe storage of all relevant mortgage data, including borrower information, property details, and payment history in a tamper-resistant ledger. Blockchain also facilitates contract execution and may offer an alternative to third-party title and escrow services.
While these developments come with many benefits, mortgage loan originators may also encounter challenges when adopting this technology. Let’s explore blockchain and how it is used in the mortgage industry.
What Is Blockchain?
Blockchain is a decentralized and distributed ledger system that facilitates more secure record-keeping of data. It was initially developed for Bitcoin, a popular cryptocurrency, but its use has begun to branch out into other industries. Blockchain platforms, such as Ethereum, have unique features and are crafted to be used specific to each case.
How Blockchain Works in a Mortgage
Blockchain is versatile enough to be integrated into the mortgage industry. Its data security capability and automation are the most compelling reason that the industry would integrate it into its day-to-day operations. Here’s how blockchain achieves these requirements:
1. Contracts. Smart contracts can be drafted on blockchain. Various facets of the mortgage process can be encoded into smart contracts and once the predefined conditions of the contract are met, it will automatically be executed.
2. Ownership. Property ownership records can be secured on blockchain. This may help reduce property title disputes and fraud.
3. Verifications. Blockchain can be used to authenticate documents related to mortgages, such as income statements, credit reports, and property titles.
4. Tokenization. Tokenization is a process where data is shrouded by other data for security reasons. For mortgages, this could be used for multiple-party investment in a property.
The Benefits of Blockchain For Mortgages
Applying blockchain technology to the mortgage industry offers several benefits that could positively change the traditional mortgage process, including streamlining processes and enhancing security and transparency.
Streamlining the Mortgage Process With Blockchain
Blockchain offers:
1. Fixed Record-Keeping. Blockchain can be used as a ledger for all relevant details of the mortgage process. Documents can also be stored there, eliminating the need for outside records storage.
2. Smart Contracts. Self-executing contracts with predefined terms and conditions can automate the mortgage process from approval through repayment.
3. Document Management. Blockchain reduces the need for physical paperwork. By having a singular storage location, authorized parties can access documents more easily and reduce the risk of misplacement.
4. Cost Savings. Blockchain can eliminate the need for title companies, escrow services, and other intermediaries. Thus, the operational costs involved in employing human employees may be greatly reduced.
Enhancing Security and Transparency in Transactions
Blockchain can enhance both security and transparency in mortgage transactions through:
1. Fraud Reduction. Blockchain is tamper-resistant making it difficult for hackers and other bad actors to access records. This can significantly reduce incidents of fraud, identity theft, and other common malicious activities.
2. Data Encryption. Blockchain uses cryptography to secure information, so all facets of the mortgage process can be shielded from unauthorized parties.
3. Accessibility. Blockchain technology is also decentralized. That means mortgage transactions taking place across state lines or across borders can be managed more seamlessly from a single database.
4. Compliance. Regulatory authorities can access transaction data in real-time, which could significantly reduce non-compliance, or catch it in a timely manner.
5. Data Quality. Blockchain’s transparency allows for better data accuracy. Since multiple authorized stakeholders can view the data in the same place, the discrepancies that are common in a multiple-database system can be abated.
Notable Companies Using Blockchain For Mortgages
Although most mortgage companies and banks still use the traditional mortgage process, there are a few independent mortgage companies that use blockchain technology in their operations, a trend that is gaining popularity.
Figure
Figure allows borrowers to use their Bitcoin or Ethereum cryptocurrency to secure a zero-cash-out mortgage for 30 years at a fixed rate. Their Crypto Mortgage PLUS product allows borrowers to keep their currency and get up to $3M in financing. This service is limited to a few states thus far.
Liquid Mortgage
Liquid Mortgage connects lenders and borrowers through a blockchain platform that protects their data and can be used for tracking and managing payments. Lenders have access to smart contracts and real-time data.
Implications For Mortgage Loan Originators
Before adopting blockchain technology, mortgage loan originators should examine the pros and cons of integration. MLOs will also need to enhance their skills to offer good service and remain compliant. Here are some tips to do so.
1. Education and Training. Learning how blockchain technology works will require an educational investment for MLOs. Being knowledgeable will equip them with the tools to navigate the changing industry landscape and offer better client service.
2. Keep Abreast of Industry Regulations. With the transformation of the mortgage process, regulations will likely continue to change. MLOs must stay abreast of the regulatory framework regarding blockchain technology.
3. Client Communication. MLOs should communicate the benefits of using blockchain to their clients. Security and efficiency are two of the main selling points that can engender confidence in borrowers.
4. Collaborate With Developers. Sitting with blockchain developers can help MLOs get a better grasp on how blockchain can be integrated into the mortgage origination process.
5. Stay Informed. There are constant developments and emerging blockchain platforms. MLOs should stay aware of new technologies so they can make informed decisions about their adoption.
Adapting to any new technology requires MLOs to be proactive and embrace a continuous learning mindset. By leveraging blockchain technology, MLOs may find that their business will run more efficiently.
Staying Ahead in a Changing Industry
Continuous learning is important for MLOs where blockchain technology is concerned. Becoming knowledgeable ensures that MLOs not only understand the mechanical aspects of blockchain, but also helps them remain competitive in an industry that undergoes constant change. They’ll also be able to foster the most important aspect of the business, customer relationships, by being able to clearly and effectively communicate to their clients how blockchain can enhance their mortgage experience.
Although new technology can seem intimidating, the security, efficiency, and transparency that is fostered by blockchain is a boon for the mortgage industry.
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