Blockchain: Mortgage and Settlement Industry Stands on the Edge of Tomorrow

1. A S P E C I A L F O C U S O N Mortgage Technology Blockchain: Mortgage and Settlement Industry Stands on the Edge of Tomorrow By Derrick Jones Y foundation of) bitcoin technology. And you’ve probably heard, to some degree, that blockchain technology could be a “game changer” throughout the mortgage industry. But unless you’re a student of the topic, you may be wondering why we’re not hearing more about this. Most agree that the introduction of blockchain technology would, indeed, bring a change more dramatic than any we’ve seen in the mortgage industry for decades. However, concerns about potential security flaws (ironic, since one of the potential benefits of the ou’ve probably heard the term “blockchain” mentioned in the past year or so. You may know that it’s technology would be the inability to alter or tamper with its data) and the fact that blockchain, as it is today, cannot facilitate massive amounts of transactions faster have derailed the possibility of it impacting the industry soon. Thus, the same things that make blockchain so appealing—its decentralized nature and the trust garnered by the difficulty of altering blockchain data—are also what are holding it back from being used for new purposes. But that doesn’t mean blockchain can’t or won’t make its mark on the mortgage world eventually. Setting aside the premise that blockchain applications may not be imminent for our industry just yet, let’s have a look at what this “white whale” might mean for the mortgage and settlement services industry, and how it could revolutionize the way we do business down the road. How it works Mortgage Finance Gazette, in an article posted May 1, 2017, defined blockchain technology as follows: “Blockchain is a new computing architecture that was initially created to power the cryptocurrency application Bitcoin. The architecture is both a network and a database, optimized for real-time, global synchronization of transactions and related data. Much like the Internet, blockchain technology can be used to build many different applications utilizing its underlying secure, flexible, and auditable transaction and ‘settlement’ infrastructure, not just to power virtual currency.” related to (actually, at the MORTGAGE NEWS NETWORK INC. 1220 Wantagh Avenue • Wantagh, New York 11793-2202 516-409-5555 • Fax: 516-409-4600 • E-mail: advertise@MortgageNewsNetwork.com NationalMortgageProfessional.com

2. “blockchain technology created the backbone of a new type of Internet. Originally devised for the digital currency, Bitcoin, the tech community is now finding other potential uses for the technology.” might help establish more accurate record-keeping. At fulfillment, it could provide immutable proof that loan estimates were sent within three business days. Smart contracts would speed up settlement flows. In the mortgage servicing process, blockchain could track the movement of payments. And in the secondary markets, it might provide transparency about the ownership of underlying assets. We think blockchain could be relevant at every stage. “In the secondary market, smart contracts could help the securitization process. They could streamline how master services agreements, investor contracts, and pooling and service agreements inform these securities, too. And when mortgage-backed securities are created more efficiently, or when MSRs are traded more quickly, this adds liquidity back into the market. That’s good for everyone.” Mike Sorohan of MBA NewsLink describe the process in this way in his article, “Mortgage Industry Eyes ‘Blockchain’ Technology,” from MBA NewsLink, Feb. 2, 2017: “How does blockchain work? It starts when someone requests a transaction. The request is broadcast to a P2P network, consisting of computers. The network validates the transaction and the user’s status using known algorithms (the verified transaction can involve cryptocurrency such as Bitcoin, contracts, records or other information. “Once verified, the transaction is combined with other transactions to create a new block of data for the ledger. The new block is then added to the existing blockchain in a way that is permanent and unalterable, completing the transaction.” The potential uses for blockchain, once it has evolved to a point at which it can facilitate large numbers of transactions securely, are powerful … How would it improve the industry? At the heart of the blockchain value proposition is the accuracy and security of the data entered into the system. This from a PwC white paper, “What Might Blockchain Mean for the Mortgage Industry?” from June 2016: “Blockchain technology may radically alter the process through which consumers buy a home, as well as the way financial institutions handle mortgages. Specifically, the technology could remove cost and friction from the process, create transaction records that are infallible and incorruptible, and facilitate near instantaneous settlement. It could also dramatically change the way mortgages are serviced and sold on the secondary market. “At origination, blockchain In the same article, Sorohan quoted BlockGeek to describe the unique value of the technology: “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value,” wrote Don and Alex Tapscott in their book Blockchain Revolution. “And BlockGeek says by allowing digital information to be distributed but not copied, In terms of practical applications, we could see any number of practical benefits from a blockchain solution upgraded for security: l Reduced counterparty risks because transactions are settled near instantly. l Better transparency and more trustworthy MORTGAGE NEWS NETWORK INC. 1220 Wantagh Avenue • Wantagh, New York 11793-2202 516-409-5555 • Fax: 516-409-4600 • E-mail: advertise@MortgageNewsNetwork.com NationalMortgageProfessional.com

3. documentation, leading to improved compliance through better reporting and monitoring. l Dramatic acceleration of the settlement process, allowing transactions to complete in minutes or perhaps even seconds. l Significant reduction in the need for and speed of error handling and reconciliation due to real time tracking. deal of rekeying, ineffective communication and problem solving (usually “work arounds” for disparate systems) that seem inherent to the process. In all likelihood, blockchain could eliminate that. The average time to close today is in the mid- 40s (days). Imagine how much faster the transaction could be where most of the inefficiencies in production and auditing could be eliminated! Similarly, a good deal of the settlement process involves record keeping, documentation and quality control. With a trustworthy single source of the relevant data, provided by blockchain systems, even more time, inefficiency and inaccuracy could be stripped from the process. It seems likely that those service providers which are already outsourcing or relying on trusted partners or technology will have a leg up when block chain engulfs the settlement side of the transaction. It has been shown again and again that most providers using proprietary solutions or “do it yourself” methods are the latest adopters and the last to adapt when industry disruptions occur. In short, the potential of blockchain technology is enormous. Even if we disregard the clear benefits it could bring to securitization and origination, its likely impact on one of the most convoluted stages of the transaction (the settlement) cannot be ignored. Although the technology is not yet there to implement to our system, it will be eventually. The benefit to the consumer and the originator alike will likely steamroll any objections based upon anything other than data security. Thus, it may be time for all participants in the mortgage process to consider where this evolution will take them, and how to adapt. Let’s have a better look at the final two benefits, especially. Most would agree that, today, one of the most dramatic bottlenecks to the mortgage process—especially from a consumer standpoint—is the segment of the transaction that transpires between the conclusion of the sales agreement between buyer and seller, and the closing. It’s during that time that two distinctive processes take center stage: The lender’s underwriting approval and the settlement process— comprised primarily of appraisal and title insurance (but including other functions as well). In many ways, underwriting remains an internal process for lenders. But settlement services are much different—a fine mosaic (or chaotic cacophony) of multiple firms using multiple technologies to come to one result. There’s obviously a great Derrick Jones is vice president at SLK Global Solutions America Inc., which provides technology based solutions for the real estate lending and settlement services industry. He can be reached by e-mail at Derrick.Jones@SLKGroup.com. MORTGAGE NEWS NETWORK INC. 1220 Wantagh Avenue • Wantagh, New York 11793-2202 516-409-5555 • Fax: 516-409-4600 • E-mail: advertise@MortgageNewsNetwork.com NationalMortgageProfessional.com