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Why a mortgage servicing blockchain could benefit the industry – Synechron

by: Matt Shaw, senior consultant, Synechron Business Consulting
  • 17/10/2016
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Why a mortgage servicing blockchain could benefit the industry – Synechron
You may have heard of blockchain technology, but most likely not in the context of the mortgage industry. Matt Shaw of business consulting and tech service provider Synechron, explains how lenders and brokers could take advantage of this digital database.

Blockchain is a transformative technology that many believe will alter the state of the financial services industry. Much like the internet before it, blockchain is a new network infrastructure that was created to power digital transactions and so-called ‘crypto-currencies’ such as bitcoin. In short, a blockchain is a shared, global database that maintains a continuously growing list of transaction records.

Each transaction is validated by members of the network and once completed and stored on the blockchain it cannot be tampered with, building trust and visibility in transactions and their history. There are many blockchain network and infrastructure providers and many can now create ‘smart contracts’, and this is what brokers should pay close attention to.

Smart contracts use the blockchain database, plus trusted information from other external sources, to create self-updating and executing contracts – think of a mortgage contract that automatically adjusts the loan-to-value, loan amount and interest rate, based on credit qualification data from the borrower (or their bank) and valuation data submitted by a surveyor.

Once agreed, the contract confirms funding to the seller and upon completion of the sale, automatically transfers monthly payments from the borrower’s digital wallet to the lender’s.

It’s no surprise then that mortgage servicing firms – mortgage lenders, real estate companies, title agents, and so forth – have heard about blockchain. Fundamentally, this technology has the potential to bring the central banking and brokerage players together.

At the same time, they know with new technology can come disruption. This changing digital ecosystem is placing tremendous pressure on bank lenders and brokerages to rethink their business models and transform operations – or risk missing out on efficiencies, cost savings, enhanced customer experience and more.

Some of these companies are performing blockchain research and development as part of their innovation or customer experience strategies, but most are in ‘stealth mode’ making it difficult to assess progress versus other technologies.

The stakes are high for first-movers, but the rewards are too. Blockchain could have a place in areas like loan approvals and payments, potentially cutting real estate transaction times from 40 days to under 30 or better. Online brokers such as Trussle are already claiming to cut the mortgage origination process down to a matter of hours and blockchain could help lenders supply products to more automated matching services.

Projects need to be approached thoughtfully. To help banks and brokerages do so, here are some tips to make the most of the opportunity:

  • A national title registry – One important consideration is whether your country, or countries, of operation are considering a national blockchain real estate title registry. If they are, that will lend significant weight to any planned mortgage blockchain initiatives and will help businesses achieve even more cost savings and efficiencies.
  • Intermediary ecosystem – Mortgage lenders and brokers should think of their operations within an ecosystem of key suppliers and agents. Lenders should engage surveyors and insurers, both of whom need to supply information and approvals before a loan can be executed – they can provide information which automatically updates smart mortgage contracts. Brokers should think about how they aggregate products from different lenders using Application Programming Interfaces (APIs) and automating the assessment of affordability, eligibility and suitability using appropriate data sources.
  • Digital identity and reputation – Digitisation of personalised ID, income and other credit information will also help improve mortgage loan origination and approval. This may happen with, or without, blockchain due to the growing interest in digital wallets, identity and reputation applications which allow consenting consumers to share approved data with their financial brokers and providers.
  • Understandable smart contracts – In order for lenders and borrowers to trust automated and computerised smart contracts and for brokers to be able to search, assess and aggregate them; they need to be understandable by humans, as well as computers.
  • Cultural and social challenges – Blockchain technology is still in its infancy and there are a number of legal and regulatory hurdles to overcome. Also providing a ‘frictionless’ user-experience will require collaboration among many, sometimes competing, financial services providers. However, the convergence of several technology innovations; regulatory pressure for ‘open banking’ and improved services; and changing customer expectations and digital channels mean that blockchain has huge disruptive potential.

The future of mortgage servicing

Blockchain could transform mortgage servicing because it re-imagines finance from the customer’s perspective and automates legal, approval and economic value exchanges. Imagine credit qualification; loan origination, execution and servicing; title registry and transfer all occurring with as little human intervention as possible. That is all possible in the next five to 10 years.

In the end, what will separate blockchain winners and losers is their ability to focus on the end-user experience; to make smart contracts legally binding, compliant and verifiable and to create an ecosystem where suppliers and agents can deliver approved data, approvals and end-to-end customer workflows. For this to happen, broker networks, mortgage lending and servicing firms and registries will need to cooperate – those who don’t, stand to miss out.

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