Blockchain, the technology behind online cryptocurrencies such as bitcoin, is attracting a lot of attention lately. Sierra Leone made history in March, for example, by being the first country to use blockchain-verified election voting during its presidential election.
For many financial services professionals — especially those who must maintain more conservative policies and practices — blockchain is not fully understood. Blockchain is a digital ledger in which transactions are recorded chronologically and publicly. A simple metaphor proposed by author Bernard Marr in a Forbes article is to think of blockchain as the “internet of value.” Blockchain allows anyone to send value anywhere in the world, Marr writes. A private, cryptographically created key allows people to own blocks in the digital chain. By giving the private key to someone else, the value is transferred.
Because information is stored and exchanged by a network of computers without any central authority, blockchain establishes trust and identity by ensuring that no one can edit a blockchain without the corresponding key. It’s important for mortgage professionals to understand this technology because blockchaincan be employed for major functions involving financial institutions — such as verifying identities and preventing fraud, and recording the legitimate transactions faster and more accurately.
Another benefit is blockchain supports financial transactions by recording authorized entries in several locations that act as collaboration among sources to verify the accuracy of the information. The effect is similar to learning about a person by speaking with many people who know the individual.
Everyone has heard of bitcoin, which is merely a ledger of deposits and withdrawals of a digital currency whose value is neither backed by assets nor promises from any entity. There also are a growing number of digital currencies created for investment purposes where value is backed by assets, such as land, buildings and construction projects.
“ Digital titles protect against the myriad problems that ensure when titles are misfiles or lost or the old county courthouse burns down. ”
These digital currencies are largely being used as a means to fund projects in a streamlined fashion that do not require the expense of attorneys and investment banks. Yet, blockchain can be a record for any type of information that far exceeds the scope of digital-currency portfolios. For the mortgage industry, blockchain can be used to record the contractual terms and conditions of all sales and purchases of real estate. It can also affirm the identity of buyers and sellers along with their assets, employment, investment income and credit rating,
Blockchain can identify the chain of ownership of property, including any liens, deed restrictions, easements and encroachments. The technology also supports investment into the resulting mortgage note within the secondary market by any combination of private and public investors.
Taken to its logical conclusion, when blockchain can confirm who you say you are and confirm that you have the necessary assets and income, and that there are no deal-breaking encumbrances on the property being transacted, then real estate transactions will become completely paperless — and as fast and as easy as a credit card transaction.
One area where paperless transactions will make the most impact is digitizing title information. Here’s what has to happen to make moving title information into blockchain economically feasible. In some states and counties, title information is housed digitally in databases, while in others it is housed in paper files across many county courthouses. With proper funding, all of these public records can be stored in blockchain. With few exceptions, however, the official records would remain where they are today.
The value of digitizing title data is that it eliminates the cost of dedicating a large physical space for paper files, along with the staff to maintain those records. Digital titles protect against the myriad problems that ensue when titles are misfiled or lost or the old county courthouse burns down.
More than a database
The value of blockchain goes far beyond simply using digital databases. Blockchain provides the ability to offer a uniform, instant check on title quality that is national in scope. This allows a mortgage originator or a lender offering a refinancing program an effective way to accelerate the loan initiation by conducting a low-cost, quick check early in the loan process.
The initial title search would tell a lender whether the loan could be fast-tracked, processed normally, or placed in a slow track to deal with liens, zoning issues and other deed restrictions. This verification process requires only a small investment to initially capture and continually update the information in blockchain.
Other areas where blockchain delivers value in moving title data is with other financial services verticals, namely the secondary market for mortgages and the insurance industry. By incorporating feeds of insurance-company policy claims into our hypothetical national title-data blockchain — such as adding records of claims for fire damage, water damage, earthquake damage, falling trees, landslides and wind damage — the value of a national title-data blockchain repository would begin to soar.
This scenario benefits real estate developers, buyers, investors within the secondary market and others. Insurance companies also benefit, such as those providers who write homeowner-insurance policies, flood-insurance policies that protect owner and renter property, flood-zone determination policies that protect note holders, as well as reinsurance companies that finance property and casualty insurance companies by buying their risk in bulk.
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There’s no doubt that blockchain will continue to gain visibility and credibility in the financial services industry. The title data example is just one of the ways blockchain can modernize and enhance the mortgage industry’s processes. As banks, mortgage lenders and financial services providers embrace more financial technology, blockchain can be used to propel the mortgage industry into its digital future.