Blog

Are Smart Contracts Entering the Mainstream of Mortgage Lending?

CHRIS GRIMES

The hype we have previously experienced about blockchain and cryptocurrency is dramatically becoming a reality, thanks to this actionable invention of the twenty-first century—smart contracts.

 

After the devastating mortgage meltdown during the 2008's financial crisis, there had to be a way to safeguard mortgage lenders and borrowers from losses during the entire loan life cycle. That was instrumental in the birth of crypto, its integration into blockchain, and the successive developments we have experienced in both spheres. 

 

blockchain and cryptocurrency

 

Currently, there is a lot of untapped potential in smart contracts that all stakeholders in the mortgage industry—and real estate at large—can thrive on. 

 

For instance, a publication by Capgemini Consulting predicts mortgage borrowers could potentially save a whopping $960 per loan and lenders up to $11 billion annually, plus a ton of other benefits, as we shall see later. 

 

Let's first begin with a quick primer.

 

What Are Smart Contracts and How Do They Work?

Smart contracts are open-source business automation programs written in blockchain to facilitate the exchange of valuable assets once the predefined conditions have been met.

 

Traditionally, there has been serious mistrust between buyers and sellers in real estate. Homeowners looking to sell their property have always been skeptical about handing over their property before buyers send funds, while the buyers are afraid of losing if they send the funds before receiving the property. And that's where intermediaries like banks, credit unions, caisses populaires, and other mortgage companies capitalize. 

 

While they have been significantly instrumental in streamlining the exchange processes, there's still so much inefficiency, mistrust, overhead costs, and insecurity from the buyer and seller's perspectives. 

 

The good news is—smart contracts replace these intermediaries with self-executing programs to mitigate the challenges and make the process even more seamless. 

 

Mortgage lenders specify all the details they may need from customers, define threshold conditions to be met, and deploy the smart contract on the blockchain. Smart contracts are programmed to operate like vending machines, but they use digitized mortgage documents in place of money.

Before launching them on the blockchain, mortgage lenders must test them first because the conditions cannot be modified once deployed into the blockchain environment, and they are immutable.

 

How Smart Contracts Are Transforming Mortgage Lending and Servicing

 

Alleviating Latency in Mortgage Lending

Conventionally, mortgage lending is a hectic process. While applying for a mortgage, borrowers must provide a plethora of documents to evaluate their creditworthiness. That is followed by a stringent underwriting process where underwriters go through each document detail by detail before giving their verdict. According to the Canadian Real Estate Magazine, the entire process typically takes 25 days, or even more. Now, this is not interesting at all.

 

With smart contracts, everything—including the underwriting process—is predefined in the code. Borrowers' information is evaluated against the predefined conditions, and if they are met, the mortgage is processed instantaneously. 

 

That saves time for both lenders and borrowers, not to mention how it phases out the many challenges underwriters face daily.

 

Improving Efficiency in Mortgage Servicing

Just like a typical loan, the mortgage servicing clock tickles once the mortgage has been closed. Loanees are expected to honour the terms of the mortgage. Note that smart contracts run on a public blockchain where different nodes—computers in that network are connected. Those on the network can only append on the ledger to keep a record of all transactions. Therefore, once the borrower makes a payment, it's recorded and subsequently shared with the lender. This synchronized and secure system is part of the reason Decentralized Finance (DeFi) continues to scale.

 

Optimizing Security Throughout the Mortgage Life Cycle

Centralized mortgage lending is quite vulnerable to a sheer number of risks. Keeping track of all the documentation, contracts, and sensitive details makes it both demanding and risky. It's challenging to maintain integrity throughout the entire life of a mortgage cycle.

 

But now that smart contracts are here, mortgage lenders should be considering going down that path. Blockchain maximizes security through its append-only features, tamper-resistance, a series of transaction blocks that depend on each other, etc. 

 

Facilitating Tokenization and Integration of Digital Payments

Smart contracts are the power behind asset-backed cryptocurrency, which is largely dependent on asset tokenization. Among the key benefits of tokenization features their friendliness to small investors. This attracts many of them into the mortgage lending market, injecting more returns to mortgage lenders. Also, considering the radicalization of crypto in the real estate industry, the exchange of digital assets is now much faster than before. 

 

blockchain, cryptocurrency, chains

 

Embracing Smart Contracts and Fundmore.ai to reshape your mortgage lending business 

The mortgage industry has always lagged behind on matters technology, but this time the curve is shooting elsewhere—to FinTech and beyond. 

 

As we have seen, smart contracts can unlock many opportunities, streamline the lending and mortgage servicing processes, and enhance security through each stage of mortgage the mortgage life cycle. 

 

Better yet, AI-driven machine learning platforms like Fundmore.ai allow mortgage lenders to customize their pre-funding process to enjoy improved customer experience, lower risks, faster transactions, and eventually increase their ROI.

 

So as a mortgage lender, the best you can do today is think about these technologies, question how useful they can be to your business—BUT don't ignore them. In the near future, the difference between thriving and surviving is likely to narrow down to the steps you took today. 

 

Does this sound overwhelming, or would you like to know how you can leverage the technologies in your business? Message us today, and our team will guide you through the next steps.

 

Tags: mortgages, lending, Mortgage processing, finance, real estate, second mortgage