Blockchain Mortgages & Real Estate
Ivan Mikhaylov
Chain 1: Why do we need blockchain for mortgages?
As demonstrated by the 2008 financial crisis, the housing market can profoundly affect the whole world’s economy. This means that its mismanagement must be avoided at all costs. Before the 2008 crash, mortgages were given to people with terrible credit scores who were likely to default (unable to pay back the loan). Financial institutions created and heavily invested in mortgage-backed securities backed by these risky mortgages. However, rating agencies still gave the mortgage securities a high rating which attracted unaware investors. Eventually, many people defaulted on their mortgage loans causing the financial crisis predictably. This shows how financial institutions can hide risky investments behind their reputation, so we need a way to make investments more transparent.
Chain 2: How will blockchain prevent this from ever happening again?
Blockchain makes mortgages more transparent because all the related information is recorded on the public blockchain and available to everyone. As a result, even if mortgage security is highly rated, investors can see the underlying components, such as credit quality, loan-to-value ratio, debt-to-income ratio and property location, and decide for themselves whether it is a wise investment. In addition, all the information recorded on the blockchain will have to be agreed upon by both parties. As a result, lawyers on either side won’t be able to secretly enter any terms into the mortgage contract because the hashes on the nodes won’t match up, showing that the document has been tampered with.
Chain 3: What are the other benefits of implementing blockchain?
The main advantage of blockchain mortgages is making the process quicker through the use of smart contracts. Currently, getting a mortgage takes 2-6 weeks. However, blockchain technology can reduce this to less than a week. When a person applies for a loan, he will enter all the relevant information into the blockchain. If the required conditions are met, he or she will receive the loan, and the information will be sent to the lawyers and property owners so that they can update the blockchain. This will eliminate the need for tons of error-prone paperwork, which is what currently slows down the process. All information will be available to all parties on a document which is updated in real-time.
Furthermore, blockchain will reduce costs by eliminating the need for a middleman. This applies to all industries, including mortgages. Blockchain is a decentralized ledger which allows you to directly send information or money to another party by making the process trustless. All the transactions are recorded on the blockchain, which eliminates using a middleman. You no longer need a bank or lawyers to verify that a transaction has happened. Thus, the mortgage process is made quicker, reducing the cost.
Chain 4: What are blockchain’s drawbacks?
Currently, the main obstacle to blockchain mortgage development is the lack of adoption. Unfortunately, most mortgage lenders are unaware of such technology or haven’t considered using it. This problem will be easily overcome in time. As more lenders start to use blockchain technology, they will be able to enjoy the benefits it gives. Ultimately, they will outcompete other lenders by offering lower costs and processing time. This will cause most lenders to jump to blockchain to stay in business.
This brings me to the next problem – scalability. In 2021 the global mortgage market was worth $ 11,487.23 billion. This demonstrates the enormous size of this industry. However, each node has a limit to how much information it can process. As a result, the transaction fees will rise to accommodate the increased demand making blockchain technology unavailable to everyone. The decentralized network might not be able to cope with the increased demand causing the servers to crash.
Chain 5: Can blockchain be used in other areas of real estate?
Another exciting use of blockchain is partial ownership of property. Property ownership is divided into property tokens (cryptocurrency). This means you own a percentage of the property and are entitled to a share of rent and profit if the property is sold. This solves two main problems of the real estate market. Firstly, this makes investing in property more affordable since you don’t need a considerable sum upfront to buy a whole house; instead, you can purchase a share you can afford. With house prices increasing by 3.8% annually, blockchain provides an excellent opportunity for small investors to diversify their portfolio with a new asset. Secondly, property tokens make real estate a much more liquid asset since they can be sold quickly on the blockchain. This eliminates the need to find a real estate agent and process many ownership documents. The ownership of these tokens is immediately transferred and verified by the blockchain as soon as the owners decide to sell them.
