Distributed Ledgers vs. Centralized Databases and Why Decentralization is the Next Big Step for the Mortgage Market
If there’s one industry that begs for the improvements that modern technology brings to the table, it’s undoubtedly the mortgage business. Why? Well, for starters, it is currently one of the biggest sectors in the world. The Federal Reserve estimates the amount of outstanding residential mortgages to be worth a whopping $15 trillion in the U.S. alone, with the last five years seeing an average loan origination of $2 trillion.
Then there’s the vast amount of data, most of it sensitive, that borrowers share with their lenders to facilitate loan applications. Mortgage providers require that applicants provide numerous types of documents, from identification and asset proof-of-ownership to income declarations, bank statements and W-2 forms, all of which change hands more than once, over a variety of channels, before a loan is ultimately granted. It’s therefore not surprising that borrowers wait for weeks, sometimes months, before they can get the financing they need.
Thankfully, technological advancements seem to be finally making their way into the highly inefficient mortgage industry. New companies have been increasingly tapping into portable devices and mobile apps for better ways to connect with borrowers and hasten the application process. And now, with blockchain innovation in high gear, the mortgage space is about to get even more interesting.
Why Blockchain?
The blockchain is a digital ledger containing encrypted records that are linked together across a decentralized network. Unlike with centralized databases, the information held on the ledger is publicly shared and continually updated. All members of the chain are individual administrators of the network, and all transactions within the ledger must be consensually verified and approved by a majority of the nodes to take effect. There’s, therefore, no single entity holding all the cards.
Because every participant has a copy of the same ledger, no centralized version of the information exists for cybercriminals to corrupt. Blockchain technology makes data public and readily accessible to all parties at all times while eliminating the security risks that come with centralized databases.
Redefining the Mortgage Industry with Distributed Ledgers
Blockchain may have started off as the technology behind the Bitcoin, but thanks to its apparent advantages, it’s now finding its way into a host of different industries. Although it has taken the mortgage business more time than most others to embrace decentralization, companies and stakeholders are gradually starting to see it as the much-awaited solution to the sector’s many problems.
Efficiency and Transparency
Existing non-blockchain solutions do not offer a true trusted source for global mortgage asset data. The result of this is an ecosystem where a common global mortgage trade could take weeks, and different aggregators/traders potentially receiving asymmetric data due to the need to re-underwrite these loans based on scanned documents.
But now, the decentralized nature of the blockchain-based ledger will present a convenient opportunity for synchronizing mortgage processes like identity verification, underwriting, approval, the custody and release of funds, and insurance, all under one flexible structure that can be shared among all parties involved.
The ledger can store documentation in a way that eliminates secondary custodians, freeing borrowers from the clasps of slow, incompetent intermediaries. For instance, a mortgage provider wouldn’t need to wait until a borrower’s lawyer sends the necessary documentation to release funds. All the information that the lender would need would be readily accessible in the public ledger.
In addition to eliminating the unnecessary nodes between mortgage companies and their clients, decentralization would also enhance transparency in the industry. Using centralized databases to store data means that borrowers hardly ever get enough access to information about their loan status, and there’s therefore little assurance, if any, that the process is going on as they would expect. Unsurprisingly, the typical workday of an operator in a mortgage company today involves hours of responding to questions from anxious, blind-sided customers.
Because all the nodes on the blockchain, be they borrowers or lenders, would have access to the same live blockchain ledger, customers would be able to keep track of their applications in real time.
The shared, consensual nature of the ledger also makes it impossible for one party to manipulate data without alerting the other members of the network. Therefore, borrowers can trust that the information they see is indisputably valid. Eliminating intermediaries through decentralization will make the mortgage industry quicker and more efficient, and most importantly, more trustworthy and accountable.
Convenience and Savings
Aggregating services under the blockchain ledger can streamline the execution of mortgage transactions a great deal. Moreover, because decentralization would lower the cost of dealing with third-parties like lawyers, realtors, and appraisers, the loan origination process would be much cheaper, and some of those savings would be passed on to customers.
Rather than visiting mortgage brokers one by one, prospective borrowers would only need to sign up to one blockchain-powered platform to access loans from many providers. Then, once a customer chooses the service that best matches their needs, the same platform would connect them directly to the lender, and a smart contract would be tasked with holding the funds until the relevant documents have been digitally signed and the mortgage approved.
After the property has been bought, the monthly payments to the lender would begin automatically, under the management of the same smart contract that handled the custody and dispersal of the borrowed funds.
At the core of this platform would be the ability to store verified, immutable digital information about borrowers, which can be shared across all stakeholders in real time. Mortgage providers spend a lot of time and energy assessing the creditworthiness of borrowers, and that means such a system can significantly reduce costs.
Security
Blockchain technology moves home loan transactions from the hands of central institutions to a network of computers that are owned by the borrowers and lenders themselves. It may sound a bit scary, but if you consider the fact that numerous parties hold data in the blockchain instead of just one, the security benefits become more apparent.
The blockchain ledger cannot have records that are different from one node to the next, which means that if one computer is compromised, its copy would automatically be flagged as invalid. It would require a virtually impossible amount of computing power to access all copies (or at least the majority) and alter them all at the same time.
Additionally, the blockchain implements cryptographic techniques to encrypt records and grant access to network members. Participants have private keys that act as personal digital signatures to validate all transactions they make. Distributed ledgers clearly offer a more secure management option for mortgage data than the current centralized infrastructure.
Distributed Ledgers- Providing a Supportive Ecosystem for the Mortgage Sector
Despite the clear benefits of blockchain to the industry, progress is still not as fast as one would expect. However, recent indications seem to point out that the much-needed change could soon be picking up the pace. More and more developers are joining the fold, and there’s now a good number of solutions that leverage the blockchain technology to refine mortgage-related processes.
MorLabs, for example, is currently developing a distributed mortgage trading platform bringing together the global mortgage loan markets’ ecosystem on the blockchain technology. MorLabs will incorporate blockchain in the distributed application software platform with the purpose of addressing transparency and validation issues that plagues the current global mortgage origination and trading process. This will, as a result, enhance efficiency at every stage of the entire lifecycle of the mortgage process.
It’s therefore evident that distributed technology is gaining a firm grip on the mortgage industry. Although bureaucracies and vested interests among governments, trade bodies and other influencers have been significantly holding back progress, it won’t be long before they too embrace change and start championing for more efficient business practices.
Blockchain paints the picture of a more streamlined, transparent, convenient, cost-effective and secure mortgage sector, and that means it’s bound to become a notable force in the industry sooner rather than later. Any player that chooses to stand still risk being left behind.
