Blockchain was first conceptualized in 1991 by Stuart Haber and Scott Stornetta. But for about two decades down the line, there was no significant growth until Satoshi Nakamoto brought in the idea of decentralization with cryptocurrencies featuring Bitcoin.
Since then, Blockchain has achieved and continues to promise so much more than any other technology in the BFSI sector. It's even interesting to see technologically rigid industries like real estate taking advantage of underlying Blockchain technologies like smart contracts to foster growth across different respects.
This development has specifically impacted the Alternative Lending domain big time. While it has already been on the rise, Blockchain accelerates the growth, creating a conducive lending environment, especially for small and mid-size investors who have traditionally been locked out by the high entry barriers in centralized markets.
But before we delve deeper, let's first get the basics.
What is Alternative Lending?
True to its name, alternative lending refers to any credit funding issued outside traditional lending institutions like banks.
Alternative lending companies started coming up after the 2008 – 2009 financial crisis that caused many banks to go bankrupt. They desperately had to raise their thresholds for loan qualification to keep their credit risk within manageable levels. Also, they increased interest rates which further scared away borrowers and investors.
In 2017, Canada's Office of the Superintendent of Financial Institutions (OSFI) increased the mortgage stress test by 2 percent above the contract rate. Under this directive, all borrowers would be tested, contrary to the previous norm, where those with a down payment of 20+ percent would be exempted.
All these incidences converge at one point—high mortgage barriers from the conventional lenders. And now, considering the tough times COVID-19 imposed on our financial lives, you can be sure obtaining a mortgage is going to be more and more difficult in the coming months. That's why alternative lending truly has a place in the heart of every real estate borrower, investor, and lender.
Where Does Blockchain and Alternative Lending in Mortgages Intersect?
As the banks and regulators tighten their lending requirements, alternative lenders strategically seize this opportunity, and Blockchain comes at the very time they need to make the most out of it. But how exactly?
Automated Systems vs Human Resource
Considering that centralized mortgage lenders are highly dependent on human resources, Blockchain automates the entire lending process, which is sure to minimize operating costs. With that, alternative lenders are in a position to charge more reasonable rates that attract more customers.
Predefined Conditions vs Manual Underwriting
When building smart contracts for managing the mortgage life cycle, alternative lenders have the freedom to define the terms within which they plan to operate. That brings a lot of flexibility that traditional lenders do not have.
And now that more alternative lenders are coming into the space, this flexibility will amount to the diversity of services, allowing more investors and borrowers to actualize their goals.
Traceable Systems vs Unpredictable Banks
Traceability of resources is quite integral in maintaining integrity in any financial institution. Unfortunately, keeping track of the numerous transactions in busy environments, like banks, has always been a concern. Note these records are the foundation of lending decisions they eventually make. This was a major cause of the Lehman Brothers' failure during the 2008 – 2009 global recession, and the company recorded the highest bankruptcy level in history.
Benefits of Blockchain in Alternative Mortgage Lending
Blockchain, in general, has far-fetched benefits across the real estate industry—as we covered in our recent blog. But what comes out significantly in alternative mortgage lending is the concept of decentralization, where most of the other benefits are hinged.
Decentralization in alternative lending mainly focuses on disintermediating banks, which have been at the center of mortgage lending for the longest time. By phasing them out of the equation, mortgage lenders save a lot of time and resources that have otherwise been spent dealing with intermediaries.
Better yet, the decentralized ledger supported on the Blockchain helps strengthen the trust of everyone in the network. Since all transactions are recorded securely in real-time, mortgage lenders can use this data to evaluate their lending performance and make informed decisions.
Leverage Blockchain and Fundmore.AI in Mortgage Lending
In this digital age, what matters most to a mortgage lender is the simplicity of processes, quality of service to customers, and the ultimate conversion rate. Unfortunately, the methods that centralized banks have adopted do the opposite—disappointing borrowers and investors when they desperately need financial support.
However, we are at the dawn of a new era. As pointed out earlier, this is the time for mortgage lenders to shine. After all, times are changing, and we have to adapt or die! That's why you don't want to be left behind.
You'll also love to know AI, ML, and RPA are equally making strides to realize the same goals. For instance, Fundmore.ai uses machine learning algorithms to automate the mortgage underwriting process.