Blockchain In The Mortgage Industry

This year there has been a lot of hype regarding Blockchain and its use in the Land Title industry, and specifically the Mortgage process.  Blockchain has become a popular term because of its foundation use in cryptocurrencies like Bitcoin, and as a result there is speculation in many industries as to how it can be used.

What is Blockchain?  In simplest terms it is a distributed database that is a record of transactions that are stored in multiple locations, usually at least equal to the number of participants.  Blockchain is a technology that provides a distributed, tamper ‘proof’ ledger where transactions can be recorded in a database with copies distributed to multiple partners.  It facilitates the creation of accurate, permanent, secure archives that can be trusted as a single source of truth.

Because Blockchain’s distributed ledger network involves no central control of data, it can’t be easily be tampered with, and once a record is posted, it can’t be changed.  To be sure only authorized users have access to the information, with Blockchain systems using cryptographic based digital signatures to verify identities.   Users can have different levels of access from viewing, to posting to verifying to changing.

An interesting aspect of Blockchain is that most expect that it is tamperproof because of the distributed nature of the system and that all would have to be changed.  However the reality is that Blockchain like any data environment is only as good as its weakest link, which is the individual user and their ability to maintain a secure password and the resultant access.

The positive aspects of Blockchain include built-in backup, verification of transactions, validation of data and consensus on the data.  It can be maintained without  central authority, and data can be entered into the database only if the rules that have been mutually established have been followed.

Early uses of Blockchain are appearing in transaction environments like in supply chain activities such as in shipping and fresh food control, where each step of the process needs to be validated and entered so that a historical record is created that can be interrogated if an issue arises.

The question remains why use Blockchain for Land Records?  In the creation of Land Records there is significant interest because of the multiple parties involved, the need to organize their addition of information, and the checking of prior actions and events as the Title documents are being created.  Having open access so partners can easily search, submit or add to the data is significantly improved compared to the isolated activities that are normally brought together in a somewhat independent way.  It also can include the payments and payment information which integrates an important element of the process.  The data is durable as there are multiple shared copies that are tamper resistant, transparent and fraud resistant.  It also can combine images with text documents so that all information remains together.  If one looks at the myriad of participants in creating and closing a loan, from insurance to underwriting, taxing authorities, flood and hazard agencies, legal and administrative participants, and many others, the thought of having everyone work from a single database is appealing.

While this looks promising the picture is not nearly as clear once the document is completed and the loan is closed.  At this point all data is together, there is no need to add information, and the steps in printing, scanning, delivery and recording all deal with a fixed data source which does not need Blockchain to keep track of what is being added by whom.

There has also been speculation that Blockchain could do away with Title Insurance but the reality is that Blockchain is only dealing with the present transaction and is unlikely to have the history and the relations that have been established outside the transaction.

There have been attempts by county recorders such as Cook County Illinois to do a Blockchain pilot.  The County and the consultants responsible for the pilot have widely divergent views as to what occurred and whether Blockchain can in fact help the indexing, recording and filing that occurs in the recorder’s office.

The net of all of this is that there may come a time when a lender uses Blockchain to manage the Loan Origination service and the interaction between the bank and the consumer.  The advantages of employing Blockchain in the post-closing environment have not been demonstrated and so far there have been few suggestions that address this.

In summary there may come a time when Blockchain technology plays a role in the mortgage business, and if so it is likely to be in the origination area.  It is important to keep in mind that it cannot happen unless all parties agree to participate.  More importantly Blockchain is only as secure as its weakest link, which could be any one of the participants.  Technology can be helpful and disruptive if it adds value.