By now, most people in the business world have heard the term “cryptocurrency.” It refers to a type of virtual currency, such as Bitcoin, Lite-coin, Ripple, and others, that came into existence in 2009. Bitcoin was the original digital currency and used cryptography to control security and manage its exchange.
Transactions of Bitcoin and other digital currencies are controlled by a secured, distributed database known as a blockchain. A blockchain, as mentioned in the August edi- tion of Originate Report, is used to monitor and manage an infinite chain of records that track the sale, barter, and transfer of cryptocurrencies.
The benefit of blockchain technology is its sequence, meaning it is time-stamped and corresponds to the previous transaction in the chain. Once recorded, the data in any one block cannot be altered. It becomes an incorruptible permanent record until another block is recorded. Although it is hosted on peer-to- peer networks as an open, distributed ledger between two parties, the software algorithm can be set to trigger transactions automatically based on certain criteria or on a pre-determined schedule. Now, the mortgage industry is exploring opportunities on how to use blockchain’s distributable ledger software technology for loan transactions. Blockchain’s ability to write records that are incorruptible, unchangeable, and cannot be copied but can be pre-programmed, is of increasing interest to the financial community.
While many analysts say it will be some time before blockchain becomes an everyday solution for mortgage transactions, it appears to be an ideal solution for functions such as title insurance, inspections, appraisals, and loan servicing. When a blockchain transaction is initiated, the computer network validates the data between the two parties. When the operation is complete, the software informs all participants that a secure record action has occurred and the record is permanent.
The encrypted transaction occurs quickly-typically within 10 minutes from beginning to end.
This time frame leaves little chance for hackers to infiltrate the transaction and crack the encryption. The speed and security of the transaction are what makes blockchain so appealing to the financial services industry, especially mortgage servicers and investors.
Blockchain uses mathematical algorithms to book transactions. These algorithms can be written to include certain data or exclude it. Take the secondary mortgage market for example. If a securitized mortgage pool is offered for sale, but one loan or a group of loans is outside the buyer’s criteria, blockchain technology makes it possible to automatically remove those loans from the sale without a third party intervening.
The mortgage industry could use blockchain technology to provide a more streamlined record-keeping and transactional process. As blockchain operates peer to peer, there is no need for a third party to validate a transaction. This benefit could save time and reduce the fees paid by the lender and the borrower during a transaction. Since it is only the two parties involved in a transaction, both will have confidence that the information recorded is accurate.
Some industry analysts say that adopting blockchain for mortgage transactions could take up to a decade to fully implement. There is little doubt that any mortgage application of the software will take time. Interested parties will have to develop a proof of concept, design an implementation plan, perform testing and modification, and then persuade their employees and clients to buy in. However, given the appeal of the idea and the potential for investment from the financial services sector, we think that blockchain use for mortgage banking may become a reality in the “not-too-distant future.”