As the mortgage industry enters a down cycle, blockchain technology is emerging as a viable tool for lenders struggling with high origination costs, shrinking margins, complex processes and slow investor delivery, according to mortgage advisory firm STRATMOR Group.

In this month’s Insights Report article, “Mortgage Technology: The Road to Blockchain,” co-authors Lisa Springer and Brett McCracken break down recent blockchain developments and analyze some of the impacts this innovative technology could have on the mortgage industry. Springer is STRATMOR Group’s senior partner and CEO, and McCracken is a senior advisor.

 In the report, Springer and McCracken compare blockchain to pre-pandemic eClosing technology. Before the COVID pandemic hit, eClosings were a notion that lenders understood, but few believed it offered tangible ROI. As the pandemic took hold and lenders scrambled to provide remote closing capabilities, priorities changed and eClosings became a necessity.

While blockchain technology is just beyond the cutting edge for most lenders, so too were eClosings just a couple of years ago. The authors see a similar path forward for blockchain technology.

“The core value blockchain technology offers are a secure, transparent, publicly distributed, decentralized digital ledger,” Springer said in the article. “It represents a series of blocks, digitally encrypted and chained together for security, that store details of all transactions added to the chain which are authenticated. These transactions are verified by the platform’s validators, who approve them using their computational power through computer system nodes.

 “With blockchain, market participants can replace trust with truth as counterparties to a transaction, a transaction in which information is immutable,” Springer added. “This concept of ‘trust’ versus ‘truth’ has potentially deep cost savings implications that haven’t yet been quantified.”

McCracken pointed out that for all it offers, blockchain is just one component of a more comprehensive technology stack. The new tool would not displace the lender’s existing POS, LOS or other systems. But it could change the way they are used in the future.

“It stands to reason that over time, the core platforms lenders use will find innovative ways to bring more aspects of blockchain technology and principles towards the front of the process,” he said.

 In the report, the authors point to concrete examples of how blockchain is already being used in the industry to good effect. While they point the way, it is not yet clear how these approaches will be embraced by the industry at large.

“It’s difficult to say with any conviction where the industry is headed next in terms of blockchain evolution and adoption,” Springer said. “Given the challenges of today’s market, STRATMOR still sees many lenders focused on preservation instead of innovation, which is completely understandable. Most lenders have not seriously considered blockchain’s application to their business.”

STRATMOR believes it will take a handful of innovative lenders to demonstrate, at scale, this iterative process.

“Once small and mid-sized originators, who often don’t have the capital or resources to experiment, see tangible results, it greatly increases the probability loans onboarded to the blockchain will have the significant support the industry needs to adopt this new technology option,” Springer said.