Mortgage blockchain disruption is already here, so it’s time to start learning how blockchain works instead of saying it’s “a solution looking for a problem” in housing finance.
So how does blockchain work? When will it go mainstream in mortgage? And how will blockchain drive cost-savings working within your tech stack?
On September 16, Sagent set out to answer these questions and more in our webinar sponsored by HousingWire. Featuring Sagent CEO and President Dan Sogorka, Figure CEO and Founder Mike Cagney, and moderated by The Basis Point Founder Julian Hebron, the webinar — entitled “How Mortgage Blockchain Works and When It Will Go Mainstream” — was huge for beginners and experts alike as we explained practical applications across originations, servicing, and securitization.
In case you missed it live, we’ve put together a Q&A-style recap* of the webinar so you can get a taste of what we covered, and you can also watch the full session on-demand.
What Will Digital Disruption in Mortgage Look Like as Blockchain Becomes Mainstream?
Julian Hebron: “We know that the pandemic helped mainstream things like payments and digital banking components of consumer finance — for example, Pay Pal active users were 305 million in the fourth quarter of 2019, and 403 million in the second quarter of this year — a growth of 100 million in 18 months. I think we would all love to add 100 million customers in 18 months but the point is, in areas of consumer finance, outside of our world in mortgage and housing, digital has truly gone mainstream, in large part because of the pandemic.”
“And the same thing is happening with crypto and blockchain. “
The total crypto market cap right now is 2.16 trillion, and the total decentralized finance market cap is 137 billion.
“But the regs and the organizations coming in — the sheriffs are joining the Wild West, so to speak.”
“And yet, the pandemic didn’t do anything to change the mortgage industry structure because we were all so busy having an almost $4 trillion year last year, and everything’s basically the same.”
Disruption is slow, especially when it’s big, structural disruption.
“When we talk about industry disruption, it isn’t just about, “Hey, let’s see if we can shave off some basis points.” The disruption discussion today is about the structure of the industry itself — and the funding securitization, and servicing mechanisms therein.”
“Disruption is the proverbial frog in boiling water. It’s slow, especially when it’s big, structural disruption, but then all of a sudden, boom, it’s there.”
What Are the Benefits of Bringing Mortgages onto Blockchain?
Mike Cagney: “We think that for mortgage, we can use a blockchain to significantly reduce TPR costs, eliminate the need for MERS registry, provide a much more efficient marketplace from a trading standpoint, and leverage what Sagent is doing with a real-time remit platform. And so there are big benefits that are going to accrue in an ecosystem for this tech.”
For example, for HELOC, we have demonstrated 117 basis points of savings from origination through to deal execution.
“We are building a cohort of other originators who are leaning in and saying, “We want to be part of this because we see the economics that are coming out of it.” And the economics are significant.”
What Is Provenance and Why Is It the Ideal Blockchain for Mortgage?
Mike Cagney: “Provenance is a blockchain that we built back in 2018, and we’re continuing to add and extend it. Earlier in this year, we open-sourced it and made it public, relinquishing control so that we have no ownership or control of Provenance. Anyone can use it and, as I said, it’s open-source, open API. And there are plenty of third parties that are now building applications independently on Provenance.”
“The two unique things about Provenance from a blockchain standpoint: 1) It’s distributed stakeholders, so it is very fast. Provenance can handle 10,000 transactions a second, and it can go higher than that if it needs to. 2) It’s very inexpensive. So, what you’re paying when you transact on Provenance — the hash that you buy for gas fees equates to the electricity costs that the validators need to effectively write and append to the block.”
How Does Provenance work with Mortgage Assets?
Mike Cagney: “One of the most important things about Provenance is that the architecture is such that when I put a loan on Provenance — let’s say I put a mortgage or a HELOC or another type of asset. What’s happening is that the blockchain is taking that data and creating a unique hash of the information that I have, and that hash is what’s going out to all the validators — not the data itself.”
“And so I retain control of the data; I retain control the PII information. But if I were to trade that loan to you 30 days from now, I would give you the loan file and you would be able to validate it as authentic and see what it was at that point of origination. You’d also be able to capture any subsequent transaction, so if there were payments that were made, they’ll show up and be appended into that immutable history of the asset.”
It’s fast, it’s cheap, and it gives you control of your data.
“And consequently, it’s had some success, both from the regulatory side and from the practical side. There’s a whole set of banks and funds that originate, trade, finance, and execute on Provenance. We (Figure) received a broker-dealer alternative trading system (ATS) exemption to operate an exchange on Provenance for securities, so we can actually run a securities marketplace on the blockchain.”
“And then more recently, New York Community Bank became the first bank to mint a digital marker or stable coin on a blockchain, and they did it on Provenance. The ramifications of that are huge and it opens up a massive amount of opportunity in terms of the ecosystem that’s being built out.”
“We’ve done billions and billions of dollars of transactions on this and have demonstrated significant impact and significant savings from everything from our audit and QC expenses to our trading timeline and expenses to our servicing costs, and it is going to be a significant disruptive force.”
How Does Blockchain Make MSR Trading Easier?
Mike Cagney: “Because of the way that the blockchain is constructed, what you’re really trying to do is displace trust with truth.”
“You’re trying to get digitally sourced information of your loans — very analogous to Day One Certainty. You’re trying to create an asset such that if a buyer looked at it, they know that the asset is real, and they know that you’re the owner of it. And you’re providing a medium for that asset to trade in real-time between counterparties such that the buyer will have a stable coin or digital marker in their wallet, the seller will have the loans in their wallet, and then they face off and there’s a real-time movement of coin to one wallet and loans to the other.”
“That eliminates the whole aspect of counterparty and settlement risk and provides an instant trade.”
How Are Sagent and Figure Working Together to Make Mortgage Blockchain a Reality?
Dan Sogorka: “Our partnership has two main facets: 1) Figure is a customer of Sagent so we’re going to provide the servicing software on-chain for mortgages going forward. 2) Figure will also contribute its current servicing assets to our partnership, whereby we’ll extend that, from the products he does today into all the products in mortgage.”
“That will give us a real opportunity to prove out servicing on-chain, and then bring it to the rest of our customers and prospects. And at the core of this is truly exceptional SaaS built with a consumer-first methodology, both today off-chain and tomorrow on-chain.”
“And we’re getting to do this at scale with people to truly understand blockchain and know what needs to be done to take it mainstream in our industry.”
Have the GSEs Provided Any Feedback About Blockchain or Tokenization?
Mike Cagney: “We haven’t engaged with FHFA yet, but we’re going to on a couple of different fronts.”
“We want to get enough volume and scale to get to a point of indisputability that this is a benefit to the ecosystem that ultimately benefits the consumer. If it costs you $8000 to originate a mortgage that costs me $1750 to do, I’m not going to necessarily reflect that in pricing — I’m going to have that margin — but ultimately, that margin will get competed away to the normal profit margin to the benefit of the consumer with lower rates. And that’s what this current administration is very focused on.”
I think blockchain is very congruent to the objectives of the administration and the FHFA affordability.
“There are also other aspects of what we’re doing that align with GSE objectives. For example, if you’re a rent payer, in our banking application we’re now taking that rent history and basically saying, “If you pay rent for 12 months, we will guarantee you access to a purchase mortgage, in lieu of what your FICO is and what other characteristics exist on your credit file.” We’re doing that because, again, this is where the FHFA is trying to move to and we’re very supportive of their efforts in terms of expanding access to purchase loans.”
For a more detailed look at how mortgage blockchain will work and when it will go mainstream, as well as insights into our strategic partnership with Figure, watch the on-demand webinar here.
Editor’s Note: Panelist answers are direct quotes when possible but in some instances, their answers have been edited or paraphrased for clarity and brevity.