A group of big financial institutions wants to use the blockchain to help resurrect the packaging of home mortgages into securities, a business that almost destroyed the global banking system in 2008.
Credit Suisse Group AG (CS.N), U.S. Bancorp (USB.N), Wells Fargo & Co (WFC.N). and Western Asset Management Co. said Thursday that they successfully tested the distributed ledger technology as a way to make it easier to track securitized home loans.
Before the 2008 crisis, bundling home loans together and then selling those baskets to investors was a huge profit centre for banks. But this was the primary cause of the meltdown after many borrowers couldn’t repay their debt and the value of the securitized loans crashed, causing trillions of dollars in losses.
The business then shrank dramatically. There were about US$823 billion of securitized private-label residential mortgage bonds outstanding in early 2017, according to the Securities Industry and Financial Markets Association, down from a peak of US$2.7 trillion in 2007.
“Structuring securities is complex, involving many different parties, manual processes, duplicated documents and data in different formats,” David Rutter, chief executive officer of blockchain startup R3, which is organizing the consortium, said in a statement Thursday. While the group is starting with residential mortgages that aren’t backed by the U.S. government, it plans to expand to other types of asset-backed securities. The next step is delivering a commercially viable product, R3 said.
Distributed ledgers consist of a network of users or companies that share access to a database to track things like bitcoin payments or data reconciliation that’s vital to securitized mortgages.
“Distributed ledger technology will increasingly improve security around data, not just for capital markets but across numerous other industries,” Penny Morgan, global securities operations manager at Western Asset Management, said in the statement.
With assistance from Claire Boston