Over the past few years, blockchain technology has extensively scaled from just implementing digital payments like cryptocurrency to becoming a boardroom agenda for most real estate entities.
And that's particularly in the mortgage domain—where it's now a question of WHEN and not IF public blockchain will transform securitization and secondary mortgage markets—because of the many promising capabilities it features.
According to Deloitte's 2017 report, there's no doubt that blockchain and smart contracts are going to impact the entire securitization lifecycle big time.
The approach of these technologies is pretty simple but very intentional—disintermediating the currently centralized systems to phase out intermediaries who, for the longest time, have been the reason behind most downsides.
The Underlying Issues in the Present-Day Securitization and Secondary Mortgage Markets
Before exploring how blockchain comes into play, it's good to grasp how centralized secondary mortgage markets work.
When consumers approach mortgage lenders, they apply for loans sufficient enough to purchase the homes they want. But with time, local lenders often go out of liquid cash, and that threatens their businesses.
To remain operational, they resell the loans to secondary mortgage institutions like Fannie Mae, Ginnie Mae, and JPMorgan Chase—most of which are Government-Sponsored Enterprises (GSEs). The big-6 banks and the Bank of Canada, through their Canada Mortgage Bond program, are the most active in Canada.
Consequently, these firms bundle the loans from local lenders to form Mortgage-Backed Securities (MBS)—backed by the claims against the attached property—then resell them to investment banks that give willing investors access. This process of converting loans into securities to act as collateral for raising investors' funds is called securitization.
The main problem is, these operations only get more complicated from one stage to the next. That's why there's a dire need for computerization—precisely what blockchain does!
Benefits of Using Public Blockchain in Securitization and Secondary Mortgage Markets
Digitization of Documents Resulting in Improve Efficiency in Business
Record keeping in the mortgage industry has traditionally been a serious concern. Piles of papers ranging from identification and income documents to appraisals and credit reports are too many, even for a single lender to maintain perfect records.
This only gets messier as you go up the ladder because of the many intermediaries coming in, which compromises the integrity of data records. This was a significant contribution to the financial crisis in banks during the 2008 financial crisis.
During the National Mortgage Settlement of 2012, established banks like Wells Fargo, JPMorgan, and Bank of America had to pay a $50 billion fine because of losing customer data.
However, blockchain could have been a perfect solution then.
In the public blockchain, features such as irreversible signature help maintain incorruptible documents throughout the mortgage loan cycle. Since it's a peer-to-peer environment, every stakeholder has a copy of all documents and can add necessary records.
Additionally, recovery and archiving capabilities come in handy because some loans last for up to 25 years in Canada and even longer in the US.
Significant Reduction of Mortgage Closing Costs
Note that each intermediary in the chain aims to profit, which translates to additional closing costs and a burden to the borrower. By phasing them out, blockchain helps cut down the overall cost significantly.
Costs such as title search and title insurance fees could be eliminated because anyone on the blockchain can access the information from the distributed ledger.
Using smart contracts could also help reduce the essence of human participants like solicitors and minimal engagement of local authorities because all information is recorded and updated in real-time on the distributed ledger.
Automation of Mortgage Servicing Saves Time Considerably
As the prime controllers of the secondary mortgage market, GSEs handle tons of transactions every day that are worth billions of dollars.
Maintaining accurate loan activity throughout is clearly a challenge that could potentially result in massive losses. Mistakes such as mismatches, overpayments, underpayments, and prepayments are also prone to happen, with no guaranteed means to handle them.
The beauty of integrating smart contracts in a public blockchain is that it synchronizes all transactions autonomously, with predefined conditions that help flag off all unexpected operations.
As long as conditions are met, transactions from the borrower through lenders and GSEs to investors happen in real-time. This reduces the loan payment cycle big time.
Issuance of MBS and Administration of Mortgage Bonds Is Trivialized
The entire bond administration system is synchronized through smart contracts in the blockchain. That means the securities transferrable from GSEs to investors must meet the investors' conditions.
Since everything is specified in the code, the MBS is transferred automatically once the GSEs accumulate enough loans to warrant a bond, which is issued to the GSEs.
Combining FundMore and Blockchain for Securitization in Secondary Mortgage Markets
What we have discussed above is just a portion of how blockchain will affect secondary mortgage markets in the near future. The impact will certainly be more prominent, primarily because of the recent developments we see in Artificial Intelligence, Machine Learning, and Robotic Process Automation (RPA).
Decentralization in the secondary mortgage market will help all stakeholders save money, time, energy and streamline the issuance of mortgage bonds. Again, these technologies are sure to disrupt the centralized primary mortgage market big time.
So whether you are in mortgage lending, the GSE industry, or an investor, this is the time to rethink technology. Fortunately, the Fundmore.ai team is dedicated to this same course.
Engage us today by filling this online form, and let us show you how to leverage these technologies in your business.