Smart Contracts for the Mortgage Industry
The mortgage industry is ripe for disruption. Today’s real estate transactions rely heavily on intermediaries to establish trust; these third parties act on behalf of the buyer, seller, and lender to mitigate the possibility that one of the parties fails to honor their side of the contract. It works, but it’s slow, inefficient, and costly.
Smart contracts – programable self-executing contracts built using blockchain technology – have trust built-in as a key feature. By moving away from an inefficient paper-based system and reducing the reliance on third-parties, the mortgage industry (and its customers) will save both time and money.
These improvements can be achieved by using two ledgers. The first, a public ledger, would track real estate titles and other information involved with ownership, which would enable all parties to access the information they needed quickly and efficiently. The second, a permissioned ledger, would be used to track the mortgage process, using smart contracts to automate payments according to the terms set out in the loan agreement.
Advantages: Efficiency Savings & Lower Administrative Costs
Moving from the current paper-based processes to a fully-digital blockchain-powered system could have significant advantages for buyers, sellers, and lenders.
Synechron estimate that blockchain could reduce the length of the typical real-estate transaction by as much as 25% (from 40 days down to 30 days), and a review by Capgemini suggests that the reduced processing costs smart contracts provide could save banks between $3 billion and $11 billion every year. Passing some of these savings on to customers could mean consumers save as much as $960 per loan (a 22% drop in total processing fees).
Challenges: Regulatory and Legal Frameworks, Interoperability, and Lack of Talent
Despite the opportunities, the mortgage industry still has some way to go before its ready to embrace smart contracts.
One of the biggest challenges is getting the necessary legal and regulatory frameworks in place to ensure that mortgages using smart contracts have the same legal recognition as their traditional counterparts. Data privacy is another key concern; the information held on the public blockchain could span many different jurisdictions, each with its own privacy and data laws.
Lawmakers and regulators are still catching up with blockchain technology, and it is likely to be some time before there is a concerted, industry-wide effort to create a set of global rules and laws for smart contracts.
Additionally, most individual businesses must overcome internal barriers to adopting smart contracts. Legacy systems and paper processes restrict digitization and are a key blocker for benefiting from blockchain technology.
Next Steps: Getting Ready for Smart Contracts
By preparing in advance for the introduction of smart contracts, mortgage providers can ensure they have a first-mover advantage when the opportunity comes.
Organizations should focus on three areas:
- Moving from Manual to Digital – To use smart contracts, the mortgage process must first be digitalized. Most mortgage agreements still rely on paper forms and other manual processes, which are incompatible with the smart contract process. How can your business make these processes digital now so that they don’t delay future adoption?
- Upgrading Legacy Systems – Outdated systems are another key barrier. Consider both legacy and new systems in the light of a potential move to the blockchain – are they ready? How are any upgrades you’re investing in moving you closer to adopting a fully-digitized mortgage process?
- Encourage Key Talent – Your organization will need access to smart contract expertise – where is that coming from? Who in your organization is staying up-to-date with the latest advances in blockchain technology? Businesses must either engage with outside advisers or encourage internal talent to ensure they’re ready.