Future of Blockchain in Mortgage

BLOCKCHAIN EVOLUTION DURING THE PANDEMIC

BY DEBBIE HOFFMAN

Around the world, technology is being implemented at a rapid pace as social distancing requires innovative solutions that are both remote and digital. Businesses are embracing required changes as consumers are also adapting to new processes and spending their money from computers located in home offices and kitchen tables. The acceptance of new technology, along with the need for a change in established processes, opens the door for blockchain technology to grow in contexts well beyond what was historically only associated with bitcoin and cryptocurrencies.

BLOCKCHAIN EXPLAINED

As is commonly now recognized, blockchain, a type of “distributed ledger technology,” is the underlying technology that was originally introduced as the system on which bitcoin was built in 2009. Today, however, it has expanded well beyond cryptocurrencies into thousands of enterprise-use cases. While some of these use cases include the transfer of payment, or cryptocurrency, many are more focused on the transfer of secure data on the blockchain ledger among parties in a supply chain. More sophisticated use cases embrace the transfer of both data and payment combined in one transaction.

The simultaneous transfer of both data and currency from one entity to another are basic attributes of blockchain, but there are many other significant characteristics that that make it a distinguishing technology. First, the information added to the blockchain ledger is a central, real-time deposit and not simply a copy that is sent from user to user. Second, data added to the ledger is “time and date” stamped, and the information added is considered permanent, unable to be altered. Third, blockchain storage is decentralized, meaning the data is stored on computers, called “nodes,” that can be located a world apart, as opposed to having one centralized server with a back-up.

It is the above attributes that lend the technology to be especially useful for transparency purposes, including the ability to provide a comprehensive audit trail that does not have to be independently verified. Furthermore, due to decentralization, the technology is less susceptible to a cybersecurity breach.

BLOCKCHAIN HAS EXPANDED WELL BEYOND CRYPTOCURRENCIES INTO THOUSANDS OF ENTERPRISE-USE CASES. MORE SOPHISTICATED USE CASES EMBRACE THE TRANSFER OF BOTH DATA AND PAYMENT COMBINED IN ONE TRANSACTION.

EVOLUTION OF THE TECHNOLOGY IN A PANDEMIC

In 2020, many emerging use cases of blockchain have focused on COVID-19. For example, blockchain initiatives are centering on providing transparent, reliable, and verifiable medical data in a time when many are questioning information concerning the number of diagnosed and recovered coronavirus cases. It is also currently being considered for use in tracking the distribution of medical supplies to hospitals across the country. Blockchain technology has been proposed to aid with documenting the number of individuals permitted to be in a place at any given time to ensure compliance with social distancing guidelines. Finally, this technology is one which has been recognized as being able to efficiently facilitate payment of grants and

funds related to coronavirus relief. While the use of blockchain technology related to the current pandemic could solve pressing and dire needs, many other industries are recognizing how the technology can lead to advancements in a rapidly changing environment.

BLOCKCHAIN’S HISTORICAL CHALLENGES

The implementation of blockchain technology has been somewhat slow in appealing to the business world beyond recognizing it as a method to facilitate the transfer of cryptocurrency. One of the significant reasons is that using the technology requires the transfer and storage of electronic records, as opposed to paper. Many industries currently built on paper have processes that would have to be converted to digital. Furthermore, regulators would have to embrace digital storage and transfer as an acceptable methodology. In the mortgage industry, the fear of regulatory scrutiny overrides almost every change that is made in an established process that seems to work “well enough,” including when it comes to paper records.

There have been other concerns regarding the adoption of the technology, such as speed of transactions and the rate at which data, or blocks, can be added to ledger systems. On the initial bitcoin blockchain, it could take up to ten minutes simply to add one block of data. However, the speed of the technology has made significant improvement since the first one in 2009, and today’s technology allows some blockchains to add new data in about 13 seconds.

One other historic shortcoming regarding the use of blockchain technology has been the lack of integration capability and communication between different blockchain platforms. This means that one company in an industry might utilize one type of blockchain (e.g. Ethereum), and another company might use a different type of blockchain (e.g. Hyperledger Fabric) and they do not connect to one another. With the recognition of this as a problem, technologists have worked on improving crosschain functionality allowing for an increase in blockchain interoperability. This permits faster transactions and data transfers between platforms and allows for recovery processes if there are transaction errors. Interoperability is not yet where it needs to be; however, it is getting needed attention and will provide for the technology to mature.

THE MORTGAGE INDUSTRY EMBRACES CHANGE

Change is now a necessity, rather than a nicety; thus, the mortgage industry has embraced technological changes as a matter of course. Faced with the task of closing loan files in a fully remote manner, paper files are becoming a thing of the past. Additionally, the industry must incorporate technology advancements along the entire mortgage lifecycle. Such technology advancements are facilitated by the fact that regulators appear to be more open in allowing operations to be performed both in a remote and digital manner. This has been exemplified by a loosening on the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E. Act) licensing requirements and changes to the regulations pertaining to remote notarizations.

Commencing in early March, most state regulators, with the exception of Arizona,

Georgia, Maine, and Missouri, enacted temporary guidelines and orders. These orders permit mortgage loan originators (MLOs) licensed under the S.A.F.E. Act to work from remote, home locations, rather than requiring the MLOs to have to be physically located in the licensed branch offices of their respective companies. The enactment of such regulations allows MLOs to have more flexibility in where they perform their job duties, but also drives the need for digital loan files. Furthermore, the MLOs are busier than ever working from home offices, as lowered interest rates have resulted in heightened loan file activity, causing the industry to set lending records that is higher than in decades.

Electronic notarization is another area where there have been substantial changes allowing for the growth of digital mortgage technology platforms to flourish during COVID-19. As of late September 2020, there were 28 states that enacted a permanent remote online notarization (RON) law, which allows for remote completion of real estate closing and loan origination documentation. Compare this to 2017 when there were less than five states with RON laws, or at the commencement of 2020 when there were less than 20 states that had enacted some form of legislation regarding RON. A few states that have not yet enacted legislation have pending legislation. In the light of the pandemic, nearly all other states that have not enacted such legislation have waived the requirement for notarization, provided for allowances pertaining to notaries or enabled for temporary remote notarization only during the ongoing coronavirus pandemic.

Fannie Mae and Freddie Mac pushed these efforts forward by permitting the acceptance of RON-closed eNotes to 42 states and Washington, D.C. Additionally, in April 2020, the Mortgage Industry’s Standards Organization (MISMO) announced a new certification program for a remote online notarization certificate to facilitate authentication in digital mortgage closings. Such significant changes in permitting electronic, remote notarizations paves the way for digital recordkeeping and transfer, as facilitated on a blockchain.

The year 2020 has also shown the necessity for movement to a fully digital loan closing process. The industry has recognized this, and companies are spending their dollars to prepare for this change. This is exemplified in the acquisition market: Docutech was acquired by First America to facilitate online real estate closings and settlements; Optimal Blue was acquired by Black Knight’s Compass Analytics to add product and pricing data and analytics capabilities; the acquisition of ComplianceEase by SitusAMC to obtain its capability for digital regulatory compliance and automated loan audits; and, significantly, ICE’s acquisition of Ellie Mae’s loan origination platform alongside Simplifile and MERs, to work towards a complete digital closing process.

THE FUTURE OF BLOCKCHAIN USE IN THE MORTGAGE INDUSTRY

This past year has included tremendous growth of fintech companies, including acquisitions, allowing for digital capacity and a willingness to adopt new technology. This is an emerging approach indicating the industry’s acceptance of innovation to improve current processes. This mindset allows for a heightened interest in blockchain technology and its various potential

applications in the mortgage finance supply chain. While some see the technology as a way to increase cybersecurity concerns, others are beginning to understand the value provided by having a clear audit trail and the transparency into the transfer of data.

With an eye toward a digital closing process, understanding that blockchain technology can provide a seamless, transparent, and secure flow of data across the mortgage origination lifecycle, allowing for auditable access, is sure to be recognized. Along with this comes the fact that time and money associated with the loan file review can be dramatically reduced by use of the nascent technology. Furthermore, with the many benefits that blockchain technology provides in transferring data leading to defect free loan assets, it is likely to be seen as a benefit well into the life of the loan, such as in servicing and trading in the secondary market.

While neither independent mortgage banks nor the government sponsored entities are, as of yet, highlighting their use of blockchain enabled technologies, the industry has a peek into what is around the corner by emerging private companies. Symbiont touts that it is a market-leading smart contract platform for institutional applications of blockchain. The company has made announcements of several collaborations with Vanguard including: (i) trading assets (foreign-exchange forwards) entirely devoid of paper using the blockchain, (ii) testing blockchain enabled asset backed securities trades, and (iii) storing investment data.

Figure is another fintech company that has advertised a mission to leverage blockchain, artificial intelligence, and advanced analytics to unlock new access points for consumer credit products for customers. Figure states that it uses this for origination, custody, trading, and securitization of whole loans and other assets. In August 2020, Figure announced that it launched a blockchain based marketplace, the Provenance loan marketplace, for the buying and selling of HELOCs. Finally, one entrepreneurial startup, Bee Mortgage App, is using blockchain technology for an automated process and sharing of data to ultimately provide a “one-stop-shop” buying experience for distressed consumers seeking debt servicing solutions and affordable home loans.

With a fervent use of blockchain technology in industries across the globe, and the movement toward the digitization of the electronic mortgage, blockchain technology is naturally on the forefront. Some projections estimate that the momentum will cause blockchain to experience unprecedented growth between now and the beginning of 2023. It is likely that the use of blockchain technology will be expanded in upcoming years to enable further remote and digital use cases in the mortgage industry, as blockchain has already proven to increase productivity, efficiency, and security in the arenas where it has been adopted.

Debbie Hoffman is founder & CEO of Symmetry Blockchain Advisors where she works with clients in their education and strategy of blockchain solutions, specifically related to real estate and mortgage. She is a law professor at Barry Law School. Debbie was a 2020 finalist in the Enterprise Blockchain Awards, a 2019 ABA Woman of Legal Tech and a 2019 Women With a Vision. She was selected in 2018, 2016 and 2014 as a Woman of Influence by Housingwire Magazine and was the receipt of two Stevie® Awards. In 2017, Debbie was named Top General Counsel by First Chair Awards and “Hot 100” in Mortgage Professional America.

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Brian Vieaux, CMB President Finlocker Christopher Griffith Founder Vetted VA

INTRODUCTION

Vetted VA is an online community where Veterans can ask real estate and mortgage questions and receive answers from a network of Vetted Financial Professionals without being solicited. Vetted VA founder, Christopher Griffith was seeking additional financial tools to assist Veterans in achieving their financial goals.

FinLocker was identified as a partner to deliver Veterans new financial health and wellness tools with its custom-branded financial super-app that focuses on all aspects of the homeownership journey. In March 2020, Vetted VA partnered with FinLocker to deploy the Vetted VA Go Bag, the financial planning and monitoring tool for Veterans.

The CHALLENGE

Veterans have lacked a comprehensive financial preparedness solution, especially one focused on real estate finance. This is made painfully clear once many leave active service and are no longer supported, instead they are seen as a specialized market that are easy to target and solicit. This solicitation tends to prey on their status as a Veteran by offering specialized services and programs which do not actually provide anything of lasting financial value to the Veteran. The common issue is a lack of understanding and transparency throughout.

“Prior proper planning prevents piss-poor performance,” says Christopher Griffith, Marine Veteran and Founder of Vetted VA. “Both active duty and discharged Veterans understand this saying. With debt specifically, those who cannot plan for the debt they will accrue end up only saving a little money and relying on hope. This isn’t the military way - yet it has been the standard until now.”

The SOLUTION

The Vetted VA Go Bag powered by FinLocker is a secure app where Veterans can safely store their financial data from other financial institutions. The app is built around the concept of consumer-permissioned data, so no financial institution will ever see a Veteran’s financial records until they give permission and share with a specific Vetted Professional. The Veteran has full control of what they store in the Vetted VA Go Bag, who they share the information with, and for what purpose. The Vetted VA Go Bag puts Veterans in control of their financial information.

The custom branded financial super-app provides Veterans with tools that include: • Credit report, credit score, credit monitoring, and alerts • Financial tools that enable spending analysis, budgeting, goal setting, and tracking • Access to an extensive library of homeownership and finance education • Ability to track value and equity of currently owned real estate • Search for properties for sale across the U.S. • Uploading financial documents they will need when they are ready to proceed with their real estate transaction • Direct connection to the Vetted

VA Professionals network for financial advice

Partnering this tool with professional oversight and counseling from Vetted VA Professionals means the Veteran is not only prepared before the conversation, but they have a safe and secure place to take action based on the consultation and, when ready, can take action to share their documents to the Vetted Professional to move the process forward.

Vetted VA focuses on keeping the Veteran in control of their financial future by providing freedom from solicitation, liberty of knowledge from trusted sources, and accountability to deliver what is promised through vetting. FinLocker has fulfilled its part of that vision by supporting the liberty and accountability of information.