Mortgage Industry Eyes ‘Blockchain’ Technology
PALM SPRINGS, CALIF.–The first Bitcoin-financed mortgage has yet to take place. But thanks to a new software called “blockchain,” it might not be too far away.
“Blockchain,” or distributed ledger technology, is one of the most reported-on innovations to be applied in the financial services space–and its growth and development have prompted substantial investment and no shortage of ideas about how it might radically change the financial landscape.
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value,” wrote Don and Alex Tapscott in their book Blockchain Revolution.
And BlockGeek says by allowing digital information to be distributed but not copied, “blockchain technology created the backbone of a new type of internet. Originally devised for the digital currency, Bitcoin, the tech community is now finding other potential uses for the technology.”
Many analysts predict blockchain will disrupt the mortgage industry across several frontiers–particularly loan servicing, title registration and insurance–but real-world mortgage applications remain hard to find.
“For the mortgage industry, blockchain is still a little further down the road,” said Elizabeth Kemp, assistant regulatory counsel with MBA, speaking here at the recent MBA Independent Mortgage Bankers Conference.
But Adi Ghosh, director of Sapient Global Markets, Boston, predicted blockchain technology will become an essential part of the mortgage business. “The overall complexity of the mortgage industry has gone up exponentially,” he said. “Blockchain provides a simple, chronological order for ensuring security.”
How does blockchain work? It starts when someone requests a transaction. The request is broadcast to a P2P network, consisting of computers. The network validates the transaction and the user’s status using known algorithms (the verified transaction can involve cryptocurrency such as Bitcoin, contracts, records or other information.
Once verified, the transaction is combined with other transactions to create a new block of data for the ledger. The new block is then added to the existing blockchain in a way that is permanent and unalterable, completing the transaction.
For example, Ghosh said, any transaction that happens in a blockchain is conveyed to participants, helping with data integrity, security and speed of transference. In the blockchain, a piece of distributed data is available to all participants. The network is limited to a select group of participants, and the blockchain ensures that all transactions take place securely.
“What blockchain has done is create a secure financial transaction,” Ghosh said. “If I send someone $5,000, it can reach the party in about 10 minutes. Hackers need at least 12 minutes to break the encryption code; to do it for a blockchain, they would need 68 servers to do it. By then, the note has already come up and has been completed. So the blockchain is extremely fast, extremely robust and secure.”
The financial services industry has seen increased interest in permissions-based systems. Ghosh said blockchain technology can enable those systems. And while a mortgage could be a part of a blockchain, Ghosh said, a major drawback is that blockchain technology is not cheap at this time, although it is becoming commoditized as more industries use it. . “Bitcoin uses blockchain, and it hasn’t had any security disruptions, but it’s an extremely expensive system,” he said.
Ghosh said broad blockchain adoption could easily take five to 10 years. “But now is the time to start engaging with your technology vendors to take the first steps,” he said. “De-mystifying blockchain is an important step to take. The discussion as to whether blockchain can enhance your systems starts now.”
Ghosh said lenders and servicers need to think carefully in deciding if blockchain technology is for their business model. “You can realize some real cost savings by participating in a blockchain,” he said. “Blockchain will help at any point where you send out or receive data.”
