Bitcoin Chaser - May 8, 2018
Major financial institutions are promoting the standardization of blockchain across the globe. This includes not only banks and hedge funds, where investors are expected to flock, but assets trading and real estate as well.
While stories of people buying houses with Bitcoin are becoming increasingly frequent, blockchain’s sudden prominence warrants a closer examination. The financial backend of multiple industries is outdated and due for an upgrade, and the complementary advantages of distributed ledger technology are hard to ignore. As such, multiple blockchain solutions focusing exclusively on real estate investments are currently under development.
Purchasing a home is an entirely financial decision. Everyone needs shelter, and many people dream of owning their own home. The path to property ownership, however, is paved with intricate paperwork and a complex system of underwriters, insurers, and banking personnel.
Although blockchain cannot eliminate the process in its entirety, it can facilitate much of the transaction friction involved as well as the distribution of important documents, while mitigating credit and default risk. While purchasing a property is by no means a simple process, adding to this the complications of a mortgage loan increases the duration of this process exponentially.
Mortgage loans are a work-intensive process, requiring that the applicant go through the steps of choosing a lender, applying for a loan, and providing the necessary documents. All of this just to be considered, after which the lender is fully within their rights to turn the applicant down.
Often, the process of securing a loan involves multiple levels of intermediaries and their various tangential considerations. Each requires a fee, and hence, any form of simplification by a blockchain will save the applicant money.
Because many of these steps in the process exist merely to insure and verify the money changing hands, blockchain platforms offer more sensible pricing options. Automated systems that operate without a need for the trust factor eliminate verification requirements entirely, because verification is a feature that can be embedded within the system itself.
A distributed ledger based on blockchain offers immutable proof of the money that has changed hands, and of such transfers having occurred. Fees can be avoided using the cryptocurrency native to the blockchain, which often requires only a nominal fee to offset the computing power necessary to validate the transaction.
For mortgages, this means the funds can change hands quickly and efficiently, while remaining secure. Smart contracts based on distributed ledger technology can be set up for automated processing only when certain conditions have been met (such as the provision of acceptable collateral).
In addition, proper identification is often embedded directly into the system for the cryptocurrency used as the medium of transfer. Depending on the blockchain, user credentials are permanently assigned to the user’s address, thereby allowing all interactions to be traced. The system itself validates the transactions, but this form of ledger also allows a third party to audit the system at will.
Real estate financial startup Homelend is exploring how to leverage blockchain technology for this purpose. Using an internal distributed ledger, it plans to fractionalize mortgage loans. Dubbed “slices” by Homelend, lenders will be able to diversify their investments among various property loans. This obviously mitigates default risk, while also allowing for a rotating length of investment. Sequential loans spread out among several entities allow investors to realize profits at regular intervals, or even compound their interest from each slice.
This type of peer-to-peer investment necessitates a strong creditworthiness check by the Homelend platform. Because Homelend intends to open these crowdfunded mortgages to more non-traditional borrowers, they plan to use a combination of “hard” and “soft” metrics to determine risk.
For example, college students often accumulate a substantial amount of debt quickly, something that would traditionally damage their ability to take out further loans. However, their age and education can be considered, despite these being non-traditional statistics. Therefore, anyone who pays off their student loan debt responsibly and can afford a mortgage is eligible for a loan through Homelend.
Slices can be purchased using the HMD token. All transactions are listed in U.S. dollars, but the use of a native token allows funds to be transferred quickly, efficiently, safely, and most important—at a relatively low fee.
Conversions are performed when lenders purchase all the slices of a single mortgage loan. The blockchain is smart contract capable, meaning that the loan is executed only once all the slices are bought; otherwise, all the funds are returned to the lenders.
Mortgages and real estate are a major new target market for cryptocurrency and blockchain integration. Because we’re still in the initial stages of adoption for this emerging technology, inventive methods of combining the more traditional and newer industries are sure to ramp up. Blockchain facilitates numerous processes for consumers and providers alike. With no signs of slowing, blockchain technology will only become increasingly easier to integrate, and adoption will accelerate accordingly. The mortgage loan process is only one of many systems that can be simplified, and Homelend offers a proof of concept. If a process as complex as mortgage loans can be simplified, nearly anything can.
*The views expressed in this article belong to the author. Bitcoin Chaser does not endorse the contents of this article. The reader bears all the responsibility for any actions he or she takes based on the information presented in this article.