In 2017, the value of outstanding mortgages in the United States was $14.9T, and rates of mortgage fraud increased steadily through 2017 and 2018. In Canada, a mortgage broker recently estimated that as many as 20% of all residential mortgages in Canada had some element of fraud associated with them. If all parties involved in the mortgage process could access a single source of verified information, fraud rates would almost certainly decrease.
Blockchain offers significant benefits for the industry:
- Transparency: Blockchain stores records and holdings in an open fashion, but individual identities are protected. Documentation is transparent, secure, and resistant to fraud.
- Cost savings: Completing real estate transactions using blockchain technology allows buyers and sellers to interact directly, without the need for intermediaries. By reducing fees paid to middlemen, overall transaction costs will come down.
- Transactional speed and efficiency: When payments and payment information are preserved on the blockchain, access is seamless for all parties. Smart contracts that execute when mutually-agreed-upon conditions are met will streamline the mortgage process.
Here are some specific ways that blockchain can reduce fraud in the mortgage industry:
With distributed ledgers, all parties to a transaction can exchange information quickly and easily. Smart contracts execute automatically when agreed-upon terms are completed, reducing the chance that errors will be introduced. The lack of paper documentation also limits the chance of errors, and the secure and immutable nature of blockchain records creates a high level of trust. Transactions are verified automatically, and there is no possibility that the transaction can be tampered with or otherwise fraudulently altered.
Several platforms offer specific solutions for the mortgage industry. Synechron offers specialized options that make it easier for lenders to use blockchain technology for payment and document transactions. Synechron also plans to use blockchain-powered AI to streamline the process of performing credit checks and related financial processes. Block66 will serve as a mortgage hub, a central store where financial, personal and tax records can be stored for access by interested parties. These records will be linked to their original sources, adding a high degree of trust to the process. Homelend will use smart contracts to automate the mortgage application and approval processes, as well as for information management.
Land titles and record keeping
Placing land title documentation on the blockchain makes it harder to falsify documents or pretend to own assets. Property ownership records are well suited to the blockchain because there are multiple parties involved who need access to records of prior transactions, as well as information about when and how title documents were created.
In the U.K., the Digital Street research project is in the first stages of digitizing and automating real estate transactions. The project intends to use DLT and smart contracts to make transactions simpler, cheaper, and faster.
Many government agencies globally have conducted studies of how blockchain could be implemented in this area. In 2016, officials in Cook County, Illinois conducted a pilot program to study how blockchain could be implemented to secure land records on a non-government site. The summary report noted that the technology could be used “to combine the act of conveyance and the act of providing notice (recordation) of the conveyance into one event,” and that the security features inherent in the technology “would make unauthorized conveyances more difficult, protecting homeowners and lienholders.” Also in 2016, Sweden began testing a system that uses smart contracts to automate transactions. This allows buyers and sellers to complete a transaction using digital signatures that are automatically verified. The transactions are recorded on a private blockchain; access to records is available to the government and banks.
By developing a decentralized, peer-to-peer lending platform, Homelend aims to streamline the mortgage application and approval process, particularly for younger borrowers, who might not currently be eligible for home loans. Block66 is also hoping to broaden participation in mortgage markets. Tokenizing securities offers an opportunity for smaller lenders to contribute their capital for mortgage customers. Blocksquare offers a platform for property owners to create, issue, and distribute tokens linked to a single property. Blocksquare has also established a decentralized and permissionless protocol on the Ethereum blockchain that will create a secure and risk-free token exchange platform.
Mortgage fraud has long been a serious problem, which traditional solutions have so far failed to solve. Maybe it’s time to turn to an innovative option like blockchain.