The word “blockchain” is most frequently conjoined with terms such as “cryptocurrency” or “bitcoin”. But it is much, much, more. However, for most people, including myself, understanding the inner workings of the blockchain concept is – to me at least – mind numbing; something akin to accidentally walking into a graduate-level seminar on astrophysics.
But in a recent March 8, 2018 article by Jack Guttentag, aka “The Mortgage Professor”,[1] I found his explanation refreshingly clear, which underscored why blockchain has potential applications to almost all other aspect of real estate, beyond just mortgage financing. See: “Will Blockchains Upend The Home Mortgage Market?”
His answer, in a word, is “yes”. The reason?
…blockchains will reduce the costs and risks of originating mortgages, servicing them, consolidating them into securities, and transferring ownership of individual mortgages and mortgage securities.
These reasons, which are the same for every industry that blockchain has been considered, are greater efficiency, which results in cost savings. Plus, rolled into this efficiency, is advanced security.
The “Block” Part of a Blockchain. According to the Professor:
The block part of a blockchain is a set of accounts connected to a transaction, including all assets and liabilities, which are recorded electronically, and to which only selected parties have access, though in some cases this could be the public. Viewing a single mortgage-financed home purchase as a block, the following parties may be involved: borrower, third-party property investor, originating lender, future servicer, home seller, Realtor, appraiser, title company, mortgage insurer, mortgage purchaser, Fannie Mae, Freddie Mac, FHA, Consumer Financial Protection Bureau.
Presently, all of these players have their own self-contained systems, e.g. records, accessible today by only a few of the total number of participants in a mortgage transaction, e.g. the lender and its appraiser. But according to the Professor:
If the home purchase is a block, in contrast, all the information contributed by all the participants becomes part of the block. There is now one final error-free and tamper-proof source of information about the transaction instead of multiple sources scattered in the files and computers of the individual participants. All participants sign off on the validity of the information in the block, and they may be the only ones who have access to that information. (Emphasis mine.)
The “Chain” Part of a Blockchain. Here is where things get interesting. One can link together multiple financed transactions, or “chains”, within a single block, and also link multiple blocks together. As an example of linking several blocks into a single chain, the Professor points to mortgages headed into the secondary mortgage market, e.g. being sold to Fannie Mae. Ditto for mortgages headed to particular servicers. The cost-benefit is obvious, due to economies of scale.
In addition, he notes that since information only needs to be entered once, the risk of error diminishes.[2] And by incorporating “decision aids” into the chain, the Professor foresees blockchain as an enabler of consumer information for participants to select mortgage terms, downpayments, interest rates and points.
Stakeholders or Naysayers? However, as the Professor points out: “The difficult question is how long it will take, since the forces that will array themselves against mortgage-related blockchains are formidable.”
The stakeholders at the table are, indeed, “formidable”: Borrowers, property investors, the originating lender, future servicers, home seller/buyer interests, consumer protection advocates, the appraisal industry, the National Association of REALTORS®, the title insurance industry, mortgage insurers, mortgage purchasers, Fannie, Freddie, and FHA, and of course, the elephant in the room, the CFPB (which may be less of an impediment as in years past, due to recent defanging efforts by its new chair, Mick Mulvaney.[3]
While most stakeholders would not likely advocate against blockchain reform, each has a particular patch of turf to protect. Think, for example about one small slice, the public records departments in every county in the country. Public recording underpins the validity and priority of every real estate transaction, mortgage, lien, easement, judgment, UCC filing, etc., going back to the 1800’s. Imagine if blockchain rendered public recording a thing of the past.[4] While it might sound innovative, the unstated issue is displacement of government workers – the very groups buy-in would be necessary in order to implement a changeover. If that industry feared job losses, one has to wonder whether blockchain will be wholly embraced, or viewed as a threat.
Query: If blockchain is, in fact, immune from fraud and mistakes, what will the title industry have to sell, and for what price?[5] Introducing greater efficiency and access to information can translate into job losses on a massive scale. Think about the last time you used a travel agent after the Internet was up and running. ~Phil
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[1] Per his webpage (here): “Jack M. Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania and author of The Mortgage Encyclopedia. Throughout his career, Professor Guttentag has been concerned with the difficulties faced by consumers in the home loan market.”
[2] Professor Guttentag did not address the risk of perpetuating a single error, but I suspect this nascent industry has some safeguards in mind.
[3] Mr. Mulvaney, a constant critic of the CFPB, was, following his recent appointment to head the bureau, likened to a “Mosquito at a Nudist Colony” because he had so many targets. See, https://www.nytimes.com/2018/05/07/us/mick-mulvaney-budget-director-consumer-bureau.html
[4] See video, here: https://www.forbes.com/video/5483616290001/#14d7f8e05297
[5] For a contrarian view, from the industry itself, see: https://www.alta.org/news/news.cfm?20180419-Blockchain-Cant-Protect-Property-Rights-but-Title-Insurance-Can
