Here's how blockchain could help the mortgage industry
Since the financial crisis of 2008, there has been a certain level of distrust with respect to residential mortgages.
This distrust is rooted in the secondary mortgage market, in which thousands of residential mortgage loans were originated and then sold and assigned to successor lenders and/or trustees, sometimes multiple times. The documentation for many of these assignments was sloppy or nonexistent — giving rise to numerous robo-signing scandals and judges across the country who took it upon themselves to crusade against banks within the foreclosure process.
All of this resulted in a much slower and more expensive mortgage foreclosure process — and raised mortgage costs more generally. The current practice of requiring title insurance for all mortgage loans also adds complexity and cost to the mortgage lending process.
But it’s possible that blockchain technology could provide an answer to all of these problems.
There is currently a heightened focus on the use of blockchain technology for various types of transactions, including by the public sector. The Deloitte Center for Government Insights found last March that land registration was the second most popular area of focus for public-sector experiments being conducted with blockchain, behind digital payments and currency.
Countries including Sweden, Georgia and Honduras have studied potential applications to land registries, and Burlington, Vermont, is currently running a small pilot program testing the idea.
Taking a step back, the basic premise of blockchain is that it is a data management structure, often referred to as a distributed ledger, which can be read by all users and also accessed by all users through the use of individualized keys, which are essentially passwords. When users transact, they create a package of information referred to as a “block” that is chained together to the prior transaction blocks through digital fingerprints called “hashes.” The shared ledger, which does not rely on a single central database, is updated periodically.
A blockchain can be public or private — in the case of public land records, it would be public and therefore provide universal access to title information.
There are a number of potential benefits in using blockchain for land administration and mortgage collateral. By putting property records on a blockchain, government officials could combine the act of conveyance (transferring ownership from one party to another) and the act of providing notice through recording, which would eliminate risks relating to the gap in time between execution and recording and also address documents being lost in the recording process.
The process could also decrease reliance on title insurance by offering a more easily accessible title record that combines information from multiple government offices — and it would allow for less localized record keeping. If you don’t have to access the title record through local services/title companies/attorneys, it should decrease the cost of the overall process. Because the record is immutable, it cannot be changed or tampered with, reducing opportunities for fraud. Use of blockchain could also improve the accuracy of these records by eliminating human input error.
The application of blockchain to land records could be particularly valuable in other countries where the land registration system is less reliable and land is not formally registered. Studies have estimated that 70-80% of parcels worldwide are not formally registered in any national system. Adoption of a trustworthy, comprehensive system of land administration would do a lot of good in many locations. It would also unlock new markets to mortgage lending.
Elements of blockchain technology appear to be the next step in what has been an evolution from a wet ink, paper-based system to an online, paperless (or at least paper-light) system that has already been moving toward e-filing, electronic signatures and electronic access to scanned documents.
The approach should be to responsibly implement new technology as it evolves, so that you are not playing catch-up down the road.