A group of big financial institutions wants to use the blockchain to make it easier and less costly to track home mortgages packaged into securities.
Credit Suisse, U.S. Bancorp, Wells Fargo and Western Asset Management Co. said Thursday that they successfully tested the distributed ledger technology as a way to standardize the data involved in securitized home loans and make it more transparent.
"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.
That industry has shrunk dramatically since nearly destroying the global banking system in 2008. Before the crisis, bundling home loans together and then selling those baskets to investors was a huge profit center for banks. But when many borrowers couldn't repay their debt and the value of the securitized loans crashed, trillions of dollars in losses resulted.
There were about $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 $2.7 trillion in 2007.
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.
