How Blockchains Are Entering The Mortgage Industry

Since the launch of Bitcoin and its relative success in becoming a global financial asset and multi-billion dollar market cap settlement layer for transactions, blockchains have been in the spotlight. The ability to transfer funds across the world in a trust-minimised way with only a smartphone or laptop by your side has millions of users migrating some of their wealth to these systems.

As the Bitcoin market grows, so too does the idea of hosting real-world assets on a blockchain, making them interoperable with Bitcoin transactions or stablecoin transactions. Tokenising real-world assets from real estate ownership, mortgage debt contracts, and more are now starting to gain traction.

The reasons touted for the move are:

• Efficiency: Blockchain can help to streamline the mortgage process by automating many of the manual tasks that are currently involved. This can make the process faster and more efficient for both borrowers and lenders.
• Transparency: Blockchain can provide a transparent and auditable record of all mortgage transactions. This can help to reduce fraud and improve trust between borrowers and lenders.
• Security: Blockchain is a very secure technology. It is difficult to hack or tamper with blockchain data, which makes it ideal for storing sensitive financial information.
• Accessibility: Blockchain can make mortgages more accessible to borrowers who may not be able to qualify for a traditional mortgage. For example, borrowers with limited credit history or who live in underserved areas may be able to get a blockchain mortgage.

While the incentives for moving to a blockchain are clear, the reality of management and implementation are wholly different, so how has blockchain begun to impact the mortgage industry?

Well, let's take a look.

The 4 Benefits Blockchain Technology And Smart Contracts Are Introducing Into The Mortgage Industry

Earlier this year, DeFi mortgage protocol PWN raised $2 million in backing. This highlighted the rising popularity of DeFi, blockchain technology, and smart contracts in the mortgage world.

The real estate market is one of the latest industries to be transformed by the use of Bitcoin and blockchain technology, such as DeFi mortgages. As the technology becomes more mainstream, lenders like Unchained and Liquid Mortgage are now using blockchain for mortgage lending- with good reason.

Defi Mortgages Can Offer Improved Transparency

Defi mortgages are gaining ground against traditional bank-backed mortgages as they are being touted as the answer to avoiding another mortgage crisis. Recently, crypto investor Mike Novogratz tweeted,

"If banks had the transparency of DeFi protocols, we would not have had the mortgage crisis. Defi will win because it's better. Atomic settlement. Bearer assets. Composability. Transparency. We just need to solve for KYC, which is coming. We need to educate our politicians."

Mike claims that banks generated over $12 million in overdraft fees, largely driven by their lack of transparency in mortgage deals and loans. This further impedes the purchasing power of consumers when buying a home. It can also impact the amount you can afford as a first-time tenant or homeowner.

With house prices steadily rising and the average first-time home costing 6.5 times the average salary, increased outgoings like money spent on overdrafts and account fees can push the dream of ownership further away.

With DeFi mortgages and blockchain lending platforms centring around smart contracts, the algorithms behind each transaction are open and available in a publicly distributed ledger. By being accessible to all, rental lease agreements and mortgage agreements are hassle-free and clear.

The Time Taken For Transfer Of Ownership Reduced When Done Over Blockchain

Smart contracts automate certain steps in the mortgage process. This, in turn, can reduce the time taken to complete the mortgage origination and application process. For mortgage lenders, it can also mean the consolidation of certain roles (and a potential saving).

Another way smart contracts can save time is by cutting out the intermediary. Since it can automate the execution of the contract once pre-defined conditions are met, it also streamlines the process and removes the need for a middleman. Since the transactions are processed on the blockchain, it is available for anyone to see and enable real-time verification. For potential homeowners, this could mean valuable savings on the entire homeownership process thanks to lower fees.

Implementing Smart Contracts Creates Enhanced Built-in Security Screenings

Another benefit of the use of smart contracts and blockchain technology in crypto-backed mortgages is the increased securitisation it introduces. It is thought that smart contracts are almost tamper-proof. They reduce the chance of human error and use cryptographic techniques.

Cryptography refers to the process of securing information with codes and encryption. Also, blockchain technology operates with multiple layers of security measures, making it more difficult to commit fraud.

According to the LexisNexis Risk Solutions 2022 True Cost of Fraud study, the cost of mortgage fraud has risen over 20% in the U.S. For each $1 that is lost to mortgage fraud, it costs $4.23 to rectify it. It was also shown that the volume of mortgage fraud has increased.

It is worth noting that while the enhanced securitisation measures of smart contracts are alluring, hacks do happen. The use of smart contracts also opens the door for technical risks. Finally, any errors in smart contracts are almost unfixable, and therefore, experience is key when drafting one for a Bitcoin mortgage.

Blockchain Technology Gives More Control

Identity fraud is a real risk in the real estate industry. Millions of Americans have their identity stolen and used in fraudulent mortgage transactions. However, the use of Digital Identifier smart contracts (DID) gives applicants more control over their data and the choice of who to share it with. This reduces the chances of mismanagement of data.

While there is still a long way to go on the blockchain technology and real estate front, it is clear that the industry is warming up. Crypto real estate has not only become mainstream, but it is here to stay and will form a transformative part of the mortgage market's future- thanks to blockchain technology and smart contracts.

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Disclaimer: This article should not be taken as, and is not intended to provide any investment advice and is for educational purposes only. As of the time posting the writers may or may not have holdings in some of the coins or tokens they cover. Please conduct your own thorough research before investing in any cryptocurrency as all investments contain risk.

Tags: Blockchain, Real Estate , Mortgages, Real Estate Investing, Guest Post