Blockchain might untangle the notoriously convoluted homebuying and lending process thanks to an assortment of organizations ranging from mortgage technology consultants concentrating on blockchain applications to officials at the Cook County, Ill., Recorder of Deeds.

“For mortgages, there are a lot of parties involved in a pretty simple thing, buying a property,” Alex Bennett, head of mortgages for New York-based Symbiont, tells ThirtyK. Symbiont develops platforms for smart contracts for institutions. Smart contracts rely on blockchain for embedded verification and payments, and home lending infrastructure is one of Symbiont’s main lines of business. “Right now, there are a lot of solutions trying to connect the different services,” including blockchain, he says.

Home buying and selling is an enormous opportunity for blockchain, and a rich proving ground for integrating blockchain with legacy systems.

“If you had a blockchain transaction with a blockchain-based escrow, then you’re greatly reducing the need for the third parties,” explains Lifthrasir.

The process of buying and selling houses is grounded in centuries of tradition regarding how property ownership is defined and how property sales are transacted. It involves multiple layers of data, multiple parties, multiple layers of verifications and multiple layers of reporting to governmental and industry entities. Every layer requires independent verification. Using blockchain to simplify even one aspect of the process would be a boon, which is why there are many who want to use blockchain to completely renovate the process.

Last year, according to the National Association of Realtors, 5.51 million existing houses were sold. Over 71 percent of home purchases were financed, according to Attom Data, an Irvine, Calif.–based real estate data and analytics firm. 

Government and quasi-governmental agencies play a huge role in setting standards and validating data. About 11.9 percent of sales in the first quarter of this year involved loans backed by the Federal Housing Administration, which requires its own separate process of verifying data and compliance. Largely hidden from consumer view, the secondary mortgage business buys and sells mortgages, and is predicted to grow at about 1.9 percent this year, according to Fannie Mae, a government-sponsored entity with a $2.9 billion mortgage portfolio.

Government agencies are not the usual sources for blockchain innovation, which is why a just-concluded pilot by one Illinois county agency is an eye-opener.

Deeds, Indeed

John Mirkovic, the deputy recorder for communications and information technology at the Cook County Recorder of Deeds, tells ThirtyK his office is the first in the country to explore the efficiencies that blockchain could introduce to property records.

The linked system of property titles represents a precursor to blockchain, Mirkovic says. His main takeaway from a 2016-2017 pilot that involved the Cook County office, lawyers and technology consultants was that “we believe blockchain is good and we want to participate in it” and that blockchain offers “the ability to remove people from the transaction who don’t add value outside the system.”

These people “provide value within a broken system. If you fix the system, they become unnecessary,” says Mirkovic.

Here’s one part of the “broken system” in Illinois: There’s a loophole in a state law that doesn’t require property sellers to file all known liens against their properties with county offices. That means property buyers run the risk of buying a property only to discover it comes with a pending legal claim or open bill for, say, work on a septic system.

Yes, title insurance exists to cover that risk, but imagine how much simpler things would be if the loophole in the law was closed and blockchain could be used instead, says Mirkovic.

“It’s one of the few transactions that requires you to buy private insurance to cover you against the public record,” says Mirkovic. “It makes sense to fix the system.” A bill is pending in the Illinois state house to close the notification loophole.

Too Many Cooks?

The Chicago pilot both showed that blockchain could reframe the property transaction process while uncovering many of the embedded business and regulatory barriers, says Ragnar Lifthrasir, founder and chief executive officers of Velox, a blockchain real estate platform, and founder of the International Blockchain Real Estate Association.

The pilot’s team of government officials, technology experts and lawyers looked at the title process and decided the main use of blockchain should be in transferring ownership, not recording the ownership. “By law they have to record anything, but it has to be in the right format,” Lifthrasir tells ThirtyK. “Transferring ownership on the blockchain is between buyers and sellers. Everything else is tertiary.”

Applications such as title search, property inspection and notarizing contracts all pivot around the point of transaction. “It’s most powerful when all the steps are on the same platform,” explains Lifthrasir. “If you had a blockchain transaction with a blockchain-based escrow, then you’re greatly reducing the need for the third parties. And that’s just starting.”

Debbie Hoffman, a mortgage technology advisor and attorney who is founder and chief executive of Symmetry Blockchain Advisors in Orlando, sees property transactions as a way blockchain can be used in for consumer applications.

The tedious process of collecting and submitting multiple copies of multiple verifications of creditworthiness, employment, income and other qualifications to buy a house could all be contained within a data block, she tells ThirtyK. “If I put my information on the blockchain for a loan and an auditor wants to review that loan, I could give permission to access the files to another auditor.”

Using blockchain means some players in the current system will likely lose their spot at the property transaction trough, including financial institutions that hold money between various stages of the transaction. But Hoffman says others, such as underwriters, will be happy to have blockchain make the process more efficient and let them concentrate on higher-level analysis. “Underwriting will always need human judgment,” she says.

Lifthrasir predicts commercial property transactions might be first to use blockchain because their scale likely will yield the greatest savings and return on investment.

Industry Standards Needed

The key to widespread adoption of blockchain is an industry standard. “You don’t want to have portions of the market operating in a technology backwater,” says Symbiont’s Bennett.

In April, the Mortgage Bankers Association created a working group precisely for that purpose, which it hopes will work as well as standards created for other parts of the process, such as legally binding electronic signatures. Currently, 46 percent, or 1,400, of the country’s 3,031 counties offer electronic closings for home purchases, according to government-sponsored entity Freddie Mac.

Though the process is a thicket of regulations, compliance, reporting and verifications, no single sticking point could undermine the entire effort, Bennett says. “We hope it will be completely seamless so that different servicers and investors are on the platform,” he says. “It’s more efficient, but you don’t necessarily know that it’s the blockchain that’s changing the process.”

Joanne Cleaver
Joanne Cleaver is a Chicago-based freelance, business and lifestyles journalist based. Her work has appeared in a number of national and regional publications. Earlier in her career, she was the deputy business editor at the Milwaukee Journal Sentinel.