Removing Fraud from Mortgages using Blockchain
Last week, I was trying to explain the concept of money to my five-year old niece. She received $20 as a holiday gift, and I wanted to talk her through the different options for her money. Using it to buy candy or toys seemed like a good idea. Putting it in the bank to earn interest mystified her (“how does money grow?” she asked). But far and away, she was most excited about putting it in her piggy bank so she could pull it out and look at the bill every morning before school — she finally understood its importance.
Her combination of excitement and confusion reminded me of how I felt when I first learned about Bitcoin. Last week saw Bitcoin’s value climb to over $17,000, an all-time high. Most people already know that Bitcoin is an electronic store of value, which can be bought and sold, and is increasingly accepted as a form of payment by mainstream businesses. Please read this article for a deeper understanding of Bitcoin and blockchain mechanics. The technology behind Bitcoin and blockchain is nothing short of a FinTech revolution, and the business use cases that this tech makes possible are truly fascinating.
The true genius of blockchain is that it enables transfer of money between two parties with no intermediaries, while still ensuring the transaction to be completely immutable and transparent to both parties — blockchain transforms how banking will be done forever. In my domain of expertise in home financing, a lot of the current pains in today’s process can be eliminated once a blockchain-enabled alternative emerges.
An automated, paper-free process
Think about the last home transaction you or a loved one went through. I remember the endless back and forth, the re-sending of documents which I had long ago provided, and the mountains of signed papers that still crowd the shelves surrounding my home office. Now imagine an automated process that operates completely paper-free, where you easily access, authorize, and share sensitive documents, and receive automated progress notifications, all via a secure portal. None of this seems like too much to ask as we approach 2018, but for the home mortgage industry this kind of automated workflow would be a revelation. Smart contracts (enabled by blockchain) manage the entire transaction workflow, with ease of access and automation replacing the paper-driven pain of the current process.
Transparency for all during the process
As with Bitcoin ownership, blockchain technology enables an immutable record for a home mortgage process. All parties have the same transparency into the transaction status, and clarity of any outstanding next steps. If you’re buying a house, you no longer need to chase down your loan officer via phone or email to verify if you’ve submitted all necessary documentation, or if additional information is required. Instead, you simply monitor the transaction status via your laptop or phone. A smart contract serves as a single platform that integrates all contractual due diligence with the flow of money, and is structured in a way to ensure the transaction does not move forward until all contingencies are met.
Ease goes up, costs come down
Blockchain enables an automated transaction process, with full transparency to all parties, and entirely freed from the paper shuffle plaguing the current process. What this ultimately means is that the costly middlemen administering home transactions today won’t be needed at all, and the costs related to each transaction will be dramatically reduced. Closing costs come down, and buyers get lower interest rates.
One more thing…transparency beyond the transaction
There’s one last benefit that blockchain provides — it brings transparency to mortgage-backed securities (MBS) — a market almost defined by a lack of it. In the lead-up to the Great Recession of 2007–09, MBS investment reached unprecedented levels, and with paper-driven processes complicating the many layers of derivatives and complex tranche’ing, clarity of mortgage-ownership revealed itself as a serious source of systemic risk. Even worse, this lack of clarity or poor book-keeping opened the door to fraudulent behavior, which makes the issue magnitudes more insidious and troubling. Blockchain enables a digital mortgage product with full transparency and an indisputable, immutable chain of ownership. With that accountability, individual mortgages can neither be anonymously repackaged and sold off, nor tampered with by fake paperwork breaking the chain of title. Big banks and institutions will not be able to get away with falsifying documents and take advantage of their customers. Furthermore, investors know precisely the asset quality ratings of the mortgages they purchase. This transparency allows investors to cherry-pick their investments.
Blockchain disrupts the home transaction market as Bitcoin has already done to gold (store of value). The financial industry has been glacial in evolving the current model — the good news is that with a need this clear, startups (like yours truly) fill the void that the banks cannot address. I will address in a future articles how blockchain changes democratizes the industry and how you finance and transact on your next home. The benefits on both the individual and the macro level are so clear, I think even my five-year old niece will understand them.
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I founded Reasi, a home lending startup that brings convenience and cost-efficiency to the home transaction process. If you are buying or selling a home, and want to save money while doing business outside the traditional financial system, Reasi is for you.
Have a question on how blockchain will change the way we fund home purchases, or want to make a suggestion on a future article topic? Please write me at john@reasi.com and I’d be happy to start a conversation. Alternatively, you can follow me on Twitter and LinkedIn.
