Despite the major buzz blockchain is causing across several industries, and especially within the financial services sector, it seems that mortgages have surprisingly been insulated from the disruption. However, this is quickly changing. The appeal of blockchain to financial institutions is quite clear—the ability to disintermediate and reduce the friction inherent in interactions between consumers and banks such as loans is hard to resist.
Even so, the real estate lending industry remains firmly entrenched in a system that raises the cost of transactions significantly. This is slowly changing as blockchain’s influence seeps into the sector, introducing new products and platforms that threaten the status quo and could significantly change the way mortgages operate.
Decentralized technology offers several advantages over the current model, but they are predicated largely on adoption rates and scalability. Should blockchain technology overcome these challenges and find a real niche in the industry, the mortgage game could look very different in a few years.
Intermediaries and Bank Walls
One of the current issues facing the institutional lending industry is the complexity of the loan process. While the financial technology sector has made strong inroads in streamlining processes, the fact remains that for most institutional lenders approving a potential borrower is a process that often takes weeks, if not months.
The largest culprit is the fact that at each step of the loan process, there is an intermediary who slows down the mortgage’s eventual approval. In the US, each mortgage application must go through financial services, realtors, lawyers, and more in the time between accepting an offer and closing a sale. Each of these steps includes fees and adds days to an already long process. All told, mortgages in the US can take up to two full months to be approved.
The second problem is trust. One of the largest sources of delays in mortgage applications are the errors in the paper-based documentation. The other side of the table is not blameless, however.
A large part of the problem leading up to the 2008 financial crisis was the wild-west-style secondary mortgage market and the fact that many bank approval processes remain murky at best and completely opaque at worst. The result was much tighter oversight and increased costs for users.
What Blockchain Brings to the Table
While blockchain doesn’t offer a perfect remedy to the problems afflicting the industry, it does provide a model that minimizes some of them. The first major improvement the technology brings is transparency. Blockchain’s distributed ledger technology (DLT) provides two major upgrades to the current model—it decentralizes the storage of information, and it makes all transactions immediately available across all nodes of the chain. The first upgrade means that companies and lenders can no longer manipulate information or engage in shadowy practices with data, as it is shared across an entire network and not under their exclusive supervision.
The second and more immediately important upgrade means that all transactions become public record in a ledger that is updated simultaneously and cannot be manipulated. Companies like Viva Network, which offers a decentralized crowd-lending platform, promise to remove intermediaries and create a more open home loan marketplace. These platforms rely on the power of ledger technology to create a system based on accountability and the inability to cheat thanks to smart contracts. This, in turn, reduces much of the friction present in mortgage applications.
The other major aspect blockchain can help with is disintermediation. Currently, the mortgage approval process can cost thousands of dollars before a single dime is paid towards the loan itself. From legal fees to underwriting costs, home buyers must jump through several costly hoops before being having their applications approved. Blockchain can also remove the intermediaries in centralized systems such as those in-between banks and mortgage lenders.
Companies like Synechron focus on providing better value across the lending process, simplifying the process for both sides thanks to limited automation. However, these solutions, while effective at expediting the process, don’t deal with the root cause—a heavily layered process. Companies like Homelend are going all-in on technology-based solutions that revolve around blockchain. The company’s P2P network connects lenders and borrowers directly, removing many of the steps involved in the process—legal, underwriting, and more—and replaces them with artificial intelligence and machine learning technology. The length of the pre-qualification and approval process can be cut by nearly half.
"The mortgage value chain has grown in complexity during the past three decades, due to the trend towards securitization, which has significantly amplified financial supply. Nevertheless, mortgage lending processes remain mostly paper-based and involve many players, making them complicated, tedious and slow. This has several negative consequences for the borrower as well as for other parties involved," reads the company's white paper.
Reaching Critical Mass
These blockchain-based solutions have real potential for disruption and could eliminate many of the inefficiencies that plague the mortgage industry. However, the tools are still in their relative infancy, and their adoption remains the largest concern. If they can prove their worth, however, blockchain could quickly create a significantly more efficient, transparent, and faster model for home lending and buying.