Buying a house is the largest and most complex financial transaction that most people will ever complete. In the United States, 65% of homeowners have a mortgage, and for most of them, the process was likely complex, expensive, and time consuming.
Putting mortgages on the blockchain has the potential to transform the mortgage process. Blockchain’s distributed ledgers and smart contracts will remove friction and save money for both lenders and homeowners. The decentralized nature of the blockchain will also extend the possibility of home ownership to people who might currently be excluded based on traditional methods of obtaining financing.
Save time and money
Recording mortgage agreements on the blockchain makes it possible for lenders and buyers to interact directly, without the need for an intermediary to manage the transaction. Instead of moving physical documents, all parties access a single source of information. As a result, processing times can be virtually instantaneous. The lack of intermediaries also means that fees associated with payments are substantially reduced. A recent study by Capgemini indicates that adopting blockchain in the mortgage loan industry could result in savings of US$480 to US$960 per loan for consumers. In addition, banks could potentially cut costs from US$3B to US$11B annually through lowered processing costs, and some of those savings would ultimately extend to home buyers.
Distributed ledgers allow for information to be transferred seamlessly between parties. Because smart contracts execute automatically when agreed-upon terms are completed, errors and delays in processing are eliminated. With no need for paper documents, the possibility of introduced errors is also removed, and the immutable nature of blockchain records generates a built-in level of trust and objectivity. Transactions are visible to all parties and are verified automatically, with no possibility of tampering.
There are several platforms that offer specific solutions for the mortgage industry. Synechron offers specialized options that will make it easier for lenders to use blockchain technology for payment and document transactions. Synechron will also use blockchain-powered AI to streamline the process of performing credit checks and related financial processes.
The distributed ledger upon which blockchain records reside is both indelible and transparent. Placing mortgage records on DLT allows lenders to prove that loan estimates sent within guidelines and that all regulations have been followed. In the United States, for example, the Dodd-Frank Act requires mortgage brokers to be more transparent in their dealings with borrowers. Recording contract details on the blockchain makes it easier to meet these regulatory obligations. Blockchain also provides easy access to information that proves documents and data have been through the necessary compliance checks.
Block66 is a blockchain platform that will use DLT to reduce the risks of mortgage fraud. By placing the complete history of every transaction on the blockchain, Block66 not only removes inefficiencies in the mortgage application and approval process, but also creates a transparent audit trail.
Improved access to financial services
In 2015, in the United States, some 9 million households were unbanked, and an additional 24.5 million were underbanked. Globally, in 2017, the World Bank estimates that 1.7 billion people were unbanked. Lack of access to financial services can be a barrier to functioning fully within society, as access to banking is increasingly necessary for gaining employment, accessing government services, receiving health care, and obtaining insurance.
For the mortgage industry, blockchain offers the prospect of extending home ownership much more broadly, in ways that meet the needs of today’s borrowers and investors. MortgageBlock offers a peer-to-peer platform that will let lenders invest amounts as low as $100 into a Smart Mortgage Contract. Applicant and property information is securely recorded on the blockchain, and the MortgageBlock platform matches buyers with investors. The mortgage is approved once investors have pledged 125% of the mortgage amount. Homelend, similarly, offers peer-to-peer lending solutions that use DLT and smart contracts to connect borrowers and lenders directly. Homelend’s options will include crowdfunding, which will target lenders looking for investment opportunities, pooling, which allows lenders to invest money using smart contracts, even before a mortgage loan has been approved, and auctions, which will let lenders compete to offer borrowers better terms than those pre-approved by the platform.
The complexities and inefficiencies of the mortgage industry make it a prime target for disruption. Although there are still regulatory challenges that must be resolved, there can be little doubt that blockchain has the potential to transform the industry. It’s only a matter of time before this happens.