Balancing the Joy of Home-Buying and the Agony of Mortgage Loan Processing with Blockchain

Aneeza Haleem

Aneeza Haleem is a Senior Manager in Cognizant’s Banking & Financial Services business unit, working mainly with independent mortgage banks, nonbank servicers and select depository institutions. She’s taken up multiple roles in her career spanning both technology and domain consulting, always with an eye for challenging the norm. She can be reached at Aneeza.Haleem@cognizant.com; https://www.linkedin.com/in/aneezah/.

(This is part two of a series. The first installment can be found at https://www.mba.org/publications/insights/archive/mba-insights-archive/2019/the-future-of-lending-technology-as-a-force-multiplier-x258850?_zs=WqkwB1&_zl=qV5J5).  

Talk about two polar opposites: the excitement of purchasing a new home vs. the drudgery of the mortgage loan process. Borrowers are saddled with gathering documents and providing clarification/validation. Lenders struggle to obtain elements of information from borrowers and numerous third parties, collate data in a compliant fashion and ensure information is validated and audit-proof. And then, of course, there are the countless hours spent on follow-ups.

Now close your eyes and imagine a world with real-time borrower and property data available that was guaranteed to be accurate. Pipe dream you say? I say near-future achievable.

Throughout the mortgage loan lifecycle–from origination to servicing (https://digitally.cognizant.com/the-digital-future-of-mortgage-servicing-codex4007/) to secondary markets–the use of blockchain (https://www.cognizant.com/enterprise-blockchain-solutions) would help resolve many longstanding issues that make the process inefficient, time-consuming and stressful for all involved.

At a macro level, much of what bogs down the mortgage loan process revolves around the need to gather information across three broad categories:

–Know the borrower.

–Know the property.

–Know the transaction.

For all three categories, the multiple points of inefficiency arise from:

–Dependency on documents (either hard or soft copy).

–Verification, versioning and audit of documents.

–Dependency on information from third parties (title, insurance, etc.).

Lenders rely on borrowers and third-party vendors to provide documents verifying information like employment, title ownership and insurance. Each of these documents contains unique elements of information that are required but also plenty of “white noise”–additional data points that aren’t pertinent and the borrower might be reluctant to share. For example, the buyer’s income statement would include his or her base salary (which lenders require) but may also include how much the individual pays for health insurance, which lenders don’t require. As it stands now, however, there’s no other way for the lender to determine the buyer’s income.

Imagine if instead of providing more data than is required, buyers or third-parties could allow access to just enough. This concept of elemental information is particularly important for financial institutions, given the privacy and compliance regulations surrounding the protection, use and handling of consumer data and the spirit of maintaining the integrity of customer information. Consortia like Enterprise Ethereum Alliance (https://entethalliance.org/) are exploring options of private blockchain networks within which elemental information could be shared among members. Here’s how this could be implemented for lending.

Know the Borrower

Using a blockchain concept called “zero knowledge proofs” (https://en.wikipedia.org/wiki/Zero-knowledge_proof), individuals could provide institutions with access to the elemental information required to qualify them for a loan by linking back to a verifying person or institution, without conveying any additional information that doesn’t pertain to the request. This is what blockchain promises: tamper-proof, digital, elemental information in nanoseconds, authorized by the owner of the information.

Zero knowledge proofs could enable real-time verification of income, assets and employment, thereby guaranteeing real-time qualification of borrowers. This would eliminate the dependency on paper or electronic documents to “know the borrower.”

Currently, the verification process requires not just the acceptance of documents but also multiple levels of verification of these documents. Not all these documents are structured and even if they are, they aren’t necessarily standardized. Title documents vary across counties, paystubs across employers, insurance carriers have their own formats–all of these are huge deterrents to effective OCR/ADR operations and, thereby, force lenders to do manual reviews. This is not only time-consuming but also prone to manual error that can compound from originations to servicing and to secondary markets, where incorrect documents can increase costs for lenders.

Shinhan, one of the oldest and largest banks in South Korea (https://www.coindesk.com/south-koreas-shinhan-bank-turns-to-blockchain-to-speed-up-loan-issuance), is using similar blockchain technology to speed up the approval process for loan products. Specifically, the bank will use a blockchain platform to verify the items of proof required for credit lending, such as qualification or certification documents.

Know the Property

Authentication and verification of property-related information is the mainstay of title companies and is also supported by insurance companies and agencies like MERS that record transactions. These third parties add to the overhead in both cost and time for lenders to close a loan.

Now imagine instead that there was a single, immutable record for properties, with the transparency to show ownership and other required information (hazard details for insurance, flood zoning, etc.). This record would be hosted on a distributed ledger that was available to all parties that required the information, and the elements of information within it could be permissioned as required. While zoning and property details like square footage or year built are public, specific insurance coverage is private. A governing agency and/or the property owner could update access on an as-needed basis. Verification would be instantaneous with no requirement for audit.

Historically, the volume of paper-based information and the reluctance of title companies to invest in diluting their control over the market have blocked improvements in this space. Making progress will depend on large industry players being willing to collaborate for the greater good of the customer.

For example, working with blockchain startup Propy, the state of Vermont has passed legislation to use blockchain technology to effectively manage its public records. In this pilot project, all of the documents involving the transfer of rights, ownership and interests from one entity to another will be stored in contiguous blocks with blockchain technology.

This is a great first step toward eliminating the inefficiencies of working with multiple third parties and their timelines to “know a property.” 

Know the Transaction

By combining all this elemental information on borrowers and property, the industry could build the foundation for real-time loan approval and funding. There wouldn’t be a need for redundant verification because each transaction would be recorded on a blockchain asset (like smart contracts (https://www.linkedin.com/pulse/smart-contracts-smarter-lending-aneeza-haleem/) that contain business rules), in a transparent and immutable way.

Our Proposition for Blockchain-Based RealTime Lending

Create a blockchain asset for each loan which contains:

–Data needed for origination

— –This is static data and would contain all the information gathered during the “Know The Customer” and “Know The Property” phases

–Data needed for servicing

— –This data will be constantly updated as the borrower makes payments, land taxes change, insurance rates may change etc.

–Elements of these 2 data groups can be made available through smart contracts to secondary market players

Now host these assets on a private, permissioned blockchain network for a consortium of industry players including mortgage providers, servicers and third parties like title and insurance companies. Each player will be able to view and share information as controlled by rules defined within smart contracts applied to every asset.

Realizing ROI from Blockchain

Implementing blockchain technology would require an upheaval across the industry and a higher level of trust between entities than what’s there now. But as noted above, many of these concepts are already being explored in the lab or as a proof of concept. In the next few years, as the cost of setting up a blockchain network goes down and more information becomes available digitally, these use cases will mature rapidly to full-blown solutions. As blockchain and other advanced technologies like artificial intelligence (https://digitally.cognizant.com/smart-homes-are-here-to-stay-but-what-about-smart-home-buying-codex5032/) infiltrate the mortgage lending space, it’s time for financial services organizations to begin planning for the inevitable changes ahead.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)