Web 3.0. Blockchain. Cryptocurrency. While these terms are part of the zeitgeist, many mortgage professionals don’t fully understand what they mean, much less how they could impact their industry. Too often, cryptocurrency is viewed as a future marketplace with no immediate uses for consumer lending.
Think of artificial intelligence (AI). It’s helped machines to better understand web content, provide better search results and detect fraud (such as fake reviews). In lending, AI powers support-automation platforms that extract data, sort documents, automate workflows and reduce the risk of error while creating more predictable outcomes.
Just as implementing AI in mortgage processes has shortened the time it takes to get things done and has improved the accuracy of data, the promise of blockchain technology is the next step. It’s a move beyond wet-ink documents or PDFs, where true and secured data that can be reduced to code is the contract.
Think of Web 1.0 as the early days of the internet when online information was accessible to anyone with a computer, but the information was disorganized and hard to navigate. The second wave, or Web 2.0, involved the rise of companies like Amazon, Google, Twitter and Facebook in the early 2000s, which made it easier to connect and conduct transactions online. But these companies now hold all the power. Web 3.0 would be more decentralized, with the consumer regaining some control.
The key vision for Web 3.0 is that applications and users will communicate securely with each other. This requires openness and trust. Cryptography and blockchain technology allow for secure ownership and sharing of data through zero-knowledge proof — a process of confirming that information is true without divulging the actual information. What this means for mortgage lending is a consolidation of bulky systems and chains of custody in favor of a process that empowers the consumer to remain in charge of their own data.
Systems of record underpin the consumer lending industry along with the entire mortgage ecosystem. This includes point-of-sale systems, loan origination systems, product and pricing engines, customer relationship management systems, loan servicing systems, asset management and trading systems, and content management systems.
In addition, an array of ancillary fintech solution providers participate in the lending process, bringing with them their own systems of record via integrations such as RESTful advanced programming interfaces or some other connectivity solution. The lending process relies on myriad, disparate systems of record that have a hard time communicating and must constantly ensure the accuracy of data.
The process is hobbled by the time-consuming nature of producing and scanning documents, completing consumer ID validations and consummating transactions. And it’s not just slow — it’s also expensive.
A search of the internet for decentralized finance trading platforms where consumers can buy and sell cryptocurrencies via blockchain yields more than 30 platforms to join. If accepted, you can begin trading immediately with no upfront costs, no licensing requirements and no maintenance agreements, all in a secure and expeditious process in exchange for a small transaction fee. This is the kind of service the contemporary consumer expects. He or she can complete almost any transaction on the internet — and quickly.
An industrywide transformation to true digital lending won’t happen overnight. The adoption of blockchain-supported technology, however, will facilitate a traditional mortgage company’s transition from the mix of analog and online systems currently used to a more secure, consumer-controlled data structure.
The due-diligence and blockchain companies leading the charge are in discussion to offer a service that permits the seamless migration of analog, hybrid and digital consumer debt obligations. This would allow mortgages, consumer loans and auto loans, for example, to move from legacy origination and servicing technology to the blockchain for use by investors, bond issuers, trustees and servicers.
Web 3.0 will make every segment of the mortgage lifecycle more efficient, reliable and secure while lowering costs.
Part of this migration process is the validation of data in legacy systems before creating what’s called a digital twin. To do this, a secure, digital custodial service will validate, compress, encrypt, anonymize and store large quantities of data in many forms — such as documents, graphics, biometric templates and compressed images on the blockchain.
The loan-backed asset that is produced (the digital twin) is authenticated so that only someone with the proper authorization can update, edit or remove data. The digital twin is a unique, comprehensive, validated dataset of a loan that remains paired and synchronized to the physical version of the loan for its full life, so that payment data is correlated in near real time.
This collective analog-to-blockchain process creates a comprehensive, validated, correlated and tradable digital-twin token on a predominantly decentralized blockchain platform, thus moving mortgage processes closer to the model of cryptocurrency platforms described earlier. This is a real-life lending industry example of how Web 2.0 solutions can be easily migrated to a Web 3.0 solution.
Technologies already used in AI-powered support-automation platforms will facilitate the eventual shift from legacy systems to Web 3.0. By using AI knowledge bases, neural networks, natural language processing, machine learning, predictive cash-flow analytics, blockchain and smart contracts, legacy rules engines will become obsolete.
Code will drive the creation of the loan asset. In parallel, digitally native loan-level events and data will be hashed in the blockchain and used as a loan archive, including the electronic validation of the data transmission from the actual data sources (i.e., true data). Every aspect of the loan manufacturing process will be stored in a crypto-digital custodial repository. Access will be provided to the owner of the loan along with their authorized representatives and counterparties.
As has been seen for decades, the management of change can be difficult for some mortgage executives. Web 3.0 will make every segment of the mortgage lifecycle more efficient, reliable and secure while lowering costs, eliminating loan defects, improving client satisfaction, increasing speed and facilitating the proper regulatory compliance. The value proposition is so compelling, Web 3.0 adopters will succeed by growing market share at the expense of their competition.
The sooner that mortgage ecosystem participants begin to work on a transition to digitally native loan-level data, the sooner the industry and the U.S. economy will benefit from this innovation. When is Web 3.0 for mortgages going to happen? It is happening even now. As business management expert W. Edwards Deming said, “It is not necessary to change. Survival is not mandatory.” ●
John Heck is senior adviser of lending solutions at Capacity, a software-technology company that uses artificial intelligence to automate support for clients and employees. He has held senior-level positions at IBM, EMC², First American, Fidelity National Financial, PNC Financial and Citigroup. Heck’s passion is to transform the mortgage industry by delivering a digitally native and cloud-delivered mortgage platform, which standardizes asset creation based on investor needs while delivering a true value proposition for lenders and borrowers.
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
The technical storage or access that is used exclusively for statistical purposes.The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.