Blockchain For The Mortgage Industry

CSC8207 – Security Analysis of Complex Systems – Report

Yang Li
Newcastle University, Newcastle upon Tyne, UK

Abstract—This report discusses the analysis and application of the blockchain in the mortgage industry, as well as its strengths and weaknesses.

Keywords—Blockchain, Mortgage Industry, Trust, Security

   I.       Introduction

This report will analyzethe current background of the mortgage industry and the development of blockchain technology, discuss the feasibility of the blockchain in the mortgage industry, and discussedthe advantages and disadvantagesof Blockchain. It will not showthe method at the technical level.

  II.      Background

A.   Financial Informationization

With the development of information technology, the proportion of e-commerce applications in enterprises has increased. More and more financial industries such as banks and securities have begun to use online trading systems, such as online banking and online trading. Because of the perceived usefulness and perceived ease of the online trade, there are more and more online system deployed to deal with thesebusiness. [11]However, the traditional e-commerce system adopts a centralized architecture, so, it is difficult for the server to resist the invasion of the attacker and the tampering behaviour from the inside of the enterprise. It is also difficult for customers to fully believe that the data in the system has not been tampered by the companies.

B.   Mortgage Industry

As the PwC (PricewaterhouseCoopers, one of the Big Four) statistics,  ​“the recent weak housing price growth is in line with the broader market data for trading and mortgages. At the UK level, the latest data shows that the total transaction volume has dropped from about 75,000 in February last year to about 64,000 in February this year. As shown inFig 1, sales in all UK regions declined as of February. Sales in London and the South have fallen the most. As a result, the traditional housing mortgage market has been weak in recent years. Blockchain-based e-commerce systems may be able to revitalize the low-end mortgage market.”[9]

Fig 1 – UK house price inflation since 2005 [9]

C.   Blockchain Technic

The concept of blockchain was first mentioned by Nakamoto in2008 [6]. In 2009, the Bitcoin network was created, and the first block “GenesisBlock” was developed. The main feature of the blockchain system is decentralization and disclosure. By storing data in a distributed ledger, anyone can participate in trading and transfer recordingfor everyone . [3]Through the principle of cryptography to ensure that transaction records are not tampered with. So the content in the blockchain is completely trustworthy and difficult to be tampered with by the attacker unless the attacker has mastered more than 51% of the blockchain. This attack is called 51 Percent attack because it is difficult to master more than 51% of computing power and a lot of power, so this attack is difficult to achieve [7].

  III.     Blockchain For The Mortage Industry

A.   Traditional Mortgage Industry

Barclays Bank is  one of the largest  British bankswith a history of more than 300 years. The following is an example of Barclays mortgages to explain the operational procedures of traditional home mortgages. There are several types of mortgages to choose from. Overall, there are six stages in mortgage lending.[1]

1)  The borrower prepares the materials and submits the application: The borrower needs to prepare basic materials such as identification and income proof and submits a mortgage application to the bank.

2)  Bank approval: The bank confirms the authenticity of the borrower’s information and conducts a comprehensive assessment of the borrower’s credit status, economic strength,and development prospects, and decides whether the borrower will mortgage the loan.

3)  Signing a mortgage contract: If the bank considers withthe mortgageapplication and considers that each item meets the requirements and agrees to the mortgage, it signs a mortgagecontract with the borrower.

4)  Handling Mortgage and Issuing Loans: After signing the loan contract, the borrower will apply for a mortgage through personal identification, house ownership, and other information. The borrower gets the funds.

5)   Recycling and extension of loans: When the loan expires, the borrower shall repay the principal and interest of the loan in full and on time according to the loan contract. If the borrower cannot return the loan in time or wants to continue the loan, the borrower communicates with the credit officer whether to renew or renew the loan.

In the traditional mortgage process above, there are several obvious shortcomings. The approval process is opaque, and the borrower cannot be treated fairly. Borrowers may use forged information, and banks may face the risk of mortgage fraud, which directly leads to the bank’s economic losses. The approval process is too complicated, and the borrower usually has to wait 30-45 days.[2]

B.   The Use Of Variant Of Blockchain

The blockchain is a Peer-to-Peer network, which can store data in this network. The user trades through the digital key, and the user broadcasts the transaction information to the miners in the network. A miner is a computer running a blockchain client in the network. The miners record the transaction information while participating in the mathematical operation. A large number of miners get Proof-of-Word (PoW) by calculating the target hash value, and once the miner gets the target hash value, the miner can be rewarded. At the same time, the miner links its recorded transaction information to the blockchain, which also stores the hash value of the previous blockchain to ensure that the blockchain is not tampered with. The following features of the blockchain ensure that its application in the mortgage sector has advantages:[6]

  • Decentralization: Because the blockchain is a Peer-to-Peer network, itdoes not have a central server. All nodes store a copy of the entire data. Single node downtime neither affect the normal operation of the blockchain network nor affect the integrity of the books, so decentralization improves data integrity and availability.[8]
  • Information cannotbetampered: once the information is verified and added to the blockchain, it is permanently stored, generating data records that are chronologically marked and difficult to tamper with, ensuring traceability and data Greatly reduce the falsification of data at different nodes at different time points.
  • Open and transparent: The public chain system is open and maintained by all nodes. Anyone can query the blockchain data and develop applications through the public interface unless the stored transaction data is encrypted, so the entire system information is It is open and transparent.

Therefore, a mortgage can use the blockchain as a trading system to complete all the processes in the mortgage. The blockchain replaces the traditional credit reporting centre and records all of the applicant’s credit data and past loan repayment records. Once the data is recorded, it cannot be tampered with, and it also avoids the borrower’s falsification of the application materials, so the data is highly credible. Because the data is open and transparent, any bank can access the borrower’s credit data as a basis for evaluation, and the evaluation process is more transparent. Since the blockchain is a decentralized network, no government agency can manipulate the credit data.

  IV.      The proerties bank concerned about

A.   Against Malicious Attacks

In the traditional mortgage process, the most important attribute of the bank is whether the assessment of the information provided by the borrower is accurateor not, and whether the credit data obtained from the third party is true or not. In other words, if the borrower provides fakeinformation, or if the borrower has a bad credit record, the borrower may not be able to repay the mortgage after the bank lends, itwill cause direct economic losses to the bank. Therefore, banks face malicious attacks such as fraudulent data of borrowers and tampering of credit data.[10]

Fortunately, blockchain technology is fully characterized by the bank’s most important attribute requirements and against malicious attacks against these attributes. The blockchain technology will act as a mortgage centre. As a one-stop  centre, the borrower’s payroll, financial information, tax status and loan repayment records can be accessed by the person in need. By obtaining these documents from the original source and storing them on the blockchain, the system will represent an immutable, trustworthy, and interoperable resource that is less susceptible to attack by fraudsters. Through the above methods, the accuracy of the data evaluation that the bank is most concerned about and the validity of the credit data obtained by the third partiesare guaranteed.

B.   Trust Model

The blockchain is based on cryptography to ensure that information cannot be tampered with and deleted [6], so the bank can assume that the borrower record in the blockchain is completely credible, and the bank trusts the blockchain system that the bank trusts the borrower. The borrower can query the bank’s record of the borrower’s approval process in the blockchain, and the borrower trusts the blockchain system,  which meansthe borrower’s trust in the bank. Through the above methods, two-way trust between the bank and the borrower can be realized, thereby solving the trust problem in the traditional mortgage industry.

V.  Pros and Cons

Although the blockchain can solve the problem of trust, there are some unresolved problems due to the limitation of the blockchain system.

The transaction speed limit per second is the biggest problem. In a traditional bitcoin network, only 7tx/s can be performed, which is much lower than Visa’s transaction speed of 10,000tx/s.[7]Although there are already some variants of the blockchain such as Byzcoin capable of achieving 1000tx/s, the speed is still not fast enough. The use of blockchains requires the digesting of large amounts of computer resources because the blockchain runs on the Peer-to-Peer network, and each node runs the same program, so it can consume a lot of power and computer computing resources, thereby increasing Operating costs. In addition, the blockchain system may still have unforeseen problems, as blockchain technology has only been available for a decade.

VI.  Summary

In summary, although the blockchain system has transaction speed limitations and other issues that need to be resolved, the blockchain system can solve the problem of mutual trust between banks and borrowers in the traditional mortgage business. By replacing the classic credit reporting centre with an open, transparent, unmodifiable blockchain system. The bank’s trust in the borrower’s data will be increased, and transparency in the bank’s approval process will be increased. To a certain extent, it will also increases the efficiency of approval of mortgage loans.