Applying for a mortgage might be one of the hardest things about buying a home. It takes longer than, say, applying for a credit card, and it’s a lot more expensive for homebuyers thanks to processing fees. But according to a recent Moody’s study, blockchain technology — the same encrypted record-keeping system behind Bitcoin — could save the mortgage industry $1 billion every year by cutting down on fees and redundant audits every time the application changes hands.
Why does that matter for homebuyers? It could also bring down the cost of applying for a mortgage.
What’s blockchain again?
Blockchain is a record-keeping technology, most notably the one behind Bitcoin, that keeps digital information (the blocks) stored in a public database (the chain.) It’s also referred to as distributed ledger technology (DLT.) Each block stores information about the transaction, participants and data to distinguish it from other blocks. A DLT offers users transparency, control of the data, comprehensive records and a simplified system.
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Because the information is distributed across a network of computers, it’s very difficult to hack or change the system. Each time a new block of information is added, it’s added to every user’s ledger and tied to the following block. If a hacker wanted to tamper with one block in the chain, they would have to change every block across all distributed versions of the chain.
Typically, getting a mortgage loan is complicated
A mortgage application process typically involves a lot of paper, several third-party services and a ton of time. Once a buyer agrees to buy a house, they have to apply for a mortgage. This usually requires bank statements, a credit report, existing loan information and proof of income.
The lender will then have a surveyor do a preliminary property evaluation, confirm details about the property’s ownership, have a credit agency run a credit assessment and conduct a final property valuation. If approved, the buyer will sign mortgage loan agreement documents and the lender will reach out to registry offices to update title deeds. In total, the process can take between 30 and 60 days to finish and has an average of 500-2,000 pages.
Blockchain would streamline the mortgage process
With blockchain, the data for the entire process will live in one digital document. When a home buyer completes a mortgage application, it becomes a block that each party has access to. Each step in the process is a new block of information and the database is updated for the next party. Rather than having to manually update each participant (lender, credit agency, government records, etc.) every time another step is progressed the blockchain is collectively and automatically updated. Instead of every participant having their own separate paper copy of the data, it will all live in one place with instant access, a small error margin and no redundancy in effort.
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Ruslan Yusufov, a cybersecurity expert with MINDSMITH, told us that, “Banks and securitization organizers will be able to place orders for mortgages, and brokers and originators will automatically underwrite a borrower’s application with all buyers of mortgages simultaneously. This will allow the borrower to instantly receive all offers by submitting just one application. At the same time, any broker can immediately conclude a mortgage agreement and sell any mortgage security due to smart contracts algorithmization.”
Smart contracts can also be enabled in a blockchain, which would speed things up even further. For example, the lender can set funds to automatically transfer to the buyer once the mortgage loan agreement has been signed.
This model cuts down on processing time, makes verification simple and can lower fees by eliminating some third party middlemen. Even after the home purchase is complete, the blockchain can live on as a record of ownership.
Too long, didn’t read?
Blockchain technology is an exciting new model for the mortgage lending process. It can save everyone involved a ton of time and money, will increase transparency and simplify the process. Adoption of the technology may be a slow going process — upfront investment in the technology isn’t cheap and because it’s unregulated, there’s no standard method for processing mortgages via blockchain yet. But companies like the online lending startup Figure are sparking more serious interest.
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