Four top tier financial institutions are collaborating on the use of distributed ledger technology to revive the market for mortgage-backed securities, the reviled financial instruments which precipitated the global banking crisis in 2008.
Credit Suisse, Wells Fargo, Western Asset Management Company, and US Bank say they have completed a proof-of-concept with R3 Corda to address the challenges related to the sharing of loan-level data during asset-backed securitization.
Current securitization processes for private label mortgage-backed securities are complex and involve significant duplication of efforts from numerous parties, periodic data exchange in multiple formats and reliance on manual intervention for reconciliation.
The R3 PoC demonstrated the potential to provide permissioned access to all parties involved in the packaging of securities alongside the ability to conduct smart contract validation and store relevant shared data.
James Schopp, director at Credit Suisse, comments: “The ecosystem of participants involved in a single MBS transaction is vast, and the support system for even the most simple Special Purpose Vehicle (SPV)/Trust structure is very complex. The proof-of-concept that we developed here had input from various market participants and it shows that the promise of distributed ledger technology can be applied to the MBS world. Even in early stages of development, the advantages of DLT in this use case are obvious - immediate access to standardised data, with auditable history and approvals.”
He says the partners intend to push ahead with the development of a Minimum Commercial Viable Product (MCVP) to try out the application in a live environment.