Transforming Mortgage Securitization through Blockchain
Thursday April 4, 2019, by Brillio
Mortgage industry is going through significant transformation and blockchain technology provides the potential to extract business value by creating the trusted environment for multiple stakeholders, enabling single source of truth as well as security and leveraging real-time data for high confidence decision making.
Brillio has been strategically investing in Blockchain thus ideating and building innovative solutions as well as business models with use-cases across industries like healthcare, utilities, supply chain management, e-commerce, banking and financial services and insurance.
Distributed Ledger Technology (DLT) addresses challenges of highly regulated and complex industries with enhanced security, data consistency, transaction transparency to enable lower transaction cost and simplified ecosystem while meeting the needs of diverse stakeholders.
DLT can also significantly impact mortgage lending process by bringing in the element of automation and security to eventually reduce the operational cost, fees and fraud.
Mortgage backed security creation
Securitization (Mortgage Securities Ecosystem) is an important source of capital not just for financial sector but for the wider economy. The more transparent mortgage industry is, the more confident investors will be, letting capital markets invest in diversified pool of loans leading to increased market liquidity.
Process of Mortgage Backed Security Creation
For this process to occur, mortgage must come from an authorized and regulated lender. MBS investors rely heavily on credit ratings and tranching process for risk analysis, at the expense of yield.
By using blockchain-based technology, originators, sponsors, lenders, rating agencies, trustees, investors, servicers, regulators and other industry participants have an opportunity to streamline operations considerably, validating a loan from its origination through maturity.
How blockchain technology impacts mortgage-backed securities? (securitization market)
Distributed Ledger Technology (DLT) with smart contracts streamlines processes, lowers costs, increases transaction speed, enhances transparency, fortifies security impacting all securitization lifecycle participants.
Using blockchain, all parties participating in the MBS are able to track assets, manage cash flow, and perform trusted business operations. Blockchain transforms many activities in the securitization life cycle, lowering the risk in the securitization market, leading to greater investor interest. It brings all market participants onto a single platform, where sharing information is simple and changes leaves an immutable audit trail, facilitating every aspect of structuring a security.
It creates a single source of truth which participants can use for analysis & forecasts, allowing servicers, rating agencies and investors to take measures based on verified, real-time immutable data, consequently eliminating the issues of poor documentation and fraud.
When architected correctly, DLT makes it possible for participants to maintain an accurate, real-time, tailored workflows that synchronizes business process orchestration involving a transfer of value. Apart from data consistency, DLT provides cross-market view of data, enabling to atomically transact across participants.
How does DAML by Digital Asset, help in mortgage backed securities?
DAML (Digital Asset Modelling Language) by Digital Asset, a smart contract modelling language, for building solutions based on DLT, allowing to capture multi-party business workflows, safe and concise, with minimal effort and risk.
DAML is specifically designed to model business and commercial agreements. The concepts of business are core structures of the language itself. DAML abstracts complexity with built-in low-level details such as hashing, cryptography, consensus protocol, allowing to focus on smart contract business logic. Static code analysis is continually performed in the DAML Editor to demonstrate all parties consent to their obligations. This enforcement makes it harder to introduce logic errors in the flow which would otherwise result in dead ends or gridlock.
DAML guarantees ledger integrity, preserves privacy and confidentiality of sensitive information while providing transparency of the ledger, empowering participants to validate their overall position at any moment in time with absolute certainty. A state of a ledger is set as Active Contracts on the Ledger. However, the Command can change the state of the Ledger. Operators have the sole responsibility for managing who can participate in their transactions, have final say in determining when a transaction is final, and maintain the golden record of all transactions conducted within the chain. Each participant is also able to maintain their own records for trades, which are generally compiled from messaging among stakeholders and end of day reports.
Here are the highlights of Mortgage Backed Securities pilot using DAML; developed teaming up with Digital Asset:
- DAML Digital Asset Modelling Language – Any one of the signatory parties can kick off the workflow by creating a Pending contract on the ledger (Signatory and Observers can be Operator, Borrower, Lender, Credit Agent, Title Verification Agent or Regulatory Committee)
- Decentralized storage using Interplanetary File Systems (IPFS) for secure sharing of document
- Automated Mortgage Underwriting to arrive at logic-based mortgage decisions, eliminating human bias and normal 60-day duration to near-instantaneous loan approvals
- GDPR Compliant – sensitive PII data is not stored on the network, neither in the form of hash
- Regulatory Reporting for better assessment of the financial conditions and provision for prompt corrective actions
- Azure Cloud Hosting for scale, security guard rails and high availability
“ A 2018 Gartner report forecasts that the business value from blockchain will reach $3.1 trillion by 2030 through cost reduction and revenue growth”
Blockchain has the potential to transform the mortgage business and its value chain. It can bridge the gap and provide a seamless digital channel to enable quicker and transparent mortgage processing thereby elevating the overall experience and helping drive costs down.
Mortgage businesses are currently facing various challenges and these emerging technologies present a great opportunity to address many of those. At Brillio, we are building business models that leverage the blockchain technology to solve some of the complex industry problems.
At Synchronize 2019, Brillio in partnership with Digital Assets will be showcasing more on how DAML can give your enterprise the unprecedented analysability, along with strictly deterministic execution, thus allowing for the development of highly reliable systems with predictable behaviour.
Know more on Mortgage Origination and Securitization solution here.