Despite the significant stir blockchain is making in several areas, most notably financial services, mortgages appear to have escaped the upheaval rather than being negatively impacted. The impact of blockchain technology on the mortgage industry is gradually reshaping traditional processes, introducing efficiency, transparency, and potential transformative changes for homeowners and financial institutions alike. This is rapidly changing, though. Financial organizations are drawn to blockchain because of its potential to disintermediate and lessen the friction between customers and banks involved in loan transactions.
Nevertheless, the mechanism that drives up transaction costs is still deeply ingrained in the real estate lending sector. This is gradually changing as blockchain's impact permeates the industry, bringing with it new platforms and products that pose a threat to the current quo and have the potential to alter the mortgage industry drastically.
While decentralized technologies have several benefits over the status quo, their viability and adoption rates are key considerations. The mortgage landscape may drastically change in a few years if blockchain technology can overcome these obstacles and carve out a significant place for itself in the market.
Blockchain technology can be summed up as a distributed, digital, decentralized ledger or database. Blockchain technology is divided into three components:
- The record
- The block
- The chain
Any transaction, even acquiring real estate or goods from another person, may be included in the record. Every information about the transaction, including the purchase price, the parties involved, and the items purchased, is contained in the form. Each participant's digital signature is also included.
Uses For Blockchain
Blockchain is usually associated with cryptocurrencies like Bitcoin, although it has many other possible uses. The following are some of the existing and potential applications of blockchain technology.
- Currency: Without the assistance of a central bank, cryptocurrencies run independently. Like any other currency, they are used by people to make purchases mostly online. While Bitcoin is among the most well-known cryptocurrencies, other cryptocurrencies also exist.
- Health Care: Regarding electronically keeping patient records, two main concerns are patient privacy and security. Patient information can be kept secret thanks to blockchain technology's security. The procedure of exchanging patient data with other physicians and healthcare providers is also made easier by blockchain technology.
- Elections And Voting: Voters' ballots can be instantly recorded and tabulated by election officials using blockchain technology. The likelihood of voter fraud and manipulation would also be reduced because the technology is more secure than alternative solutions.
- Supply Chain Management: Businesses can use blockchain technology to confirm the origin of materials they employ in their products or to reassure consumers that an item comes from a reliable source.
- Banking: Blockchain is being used by banks and other financial services organizations to automate payment record-keeping and loan processing.
- Property Records: Blockchain technology can assist in confirming or establishing the identity of a property's owner. It can also assist in lowering the price of title searches and property insurance.
- Mortgages: There are various ways blockchain technology might help the mortgage sector. It may contribute to accelerating transaction times, resulting in quicker settlements. It can also result in more accurate documentation and lower participation costs.
Blockchain accelerators and blockchain technology are still relatively new in the mortgage market but have potential. Understanding every step of the standard mortgage process and how long it takes will help you fully appreciate the advantages of blockchain mortgages.
What Happens During The Traditional Mortgage Process?
The time it takes to obtain a mortgage through the traditional route might range from 30 to around 60 days, depending on the time of year and the number of people looking to purchase a property at any particular moment. The normal stages in obtaining a mortgage are listed below.
- Prequalification: A mortgage lender evaluates your credit and provides you with an estimate throughout this process.
- Application: Applying is the next stage. A house buyer will often fill out the Uniform Residential Loan Application. The application includes all the pertinent information a mortgage lender would need to approve or reject your application, including your income, assets, and work history.
- Processing: Verifying all the information on the application or processing the loan is the next stage. Appraising the house you want to buy to ensure its value is at least as much as what you're paying is another step in the loan approval process.
- Underwriting: A mortgage is still being prepared even after the loan processor has checked everything and approved it. The underwriter then receives the file, reviews it, and determines whether to approve or reject the loan. In particular, the underwriter assesses the risk and determines if a certain applicant would be a problematic borrower.
- Settlement: The last stage, often known as closure, occurs when the underwriter approves the mortgage. The buyer can move into their new house once the mortgage is finalized following the settlement.
How A Blockchain Mortgage Works?
Understanding the fundamentals of blockchain mortgage processing advantages will enable you to comprehend how it streamlines the mortgage process. This is one instance. A buyer of a property is already pre-qualified for financing. They want to purchase the house they've located. Once filled out, the mortgage application turns into a block. The information in the application is almost instantaneously confirmed, and all parties involved in the mortgage process have access to the league.
The buyer gets an encrypted key to sign the offer after the financing is approved. The buyer's signature record is added to the chain as a distinct block. Transferring the loan cash to the buyer is the next stage both the title and money transfers become links in the chain. Utilizing blockchain technology reduces the time it takes to get accepted for a mortgage and settle on a loan from several weeks to a few days.
Blockchain technology is still relevant after a mortgage is approved and closed. Mortgage servicers can use blockchain technology to monitor borrower payments. Blockchain can assist in proving property ownership for homeowners looking to sell or refinance their property. Blockchain can assist mortgage businesses in verifying that the original servicer has ownership rights to the loans in case one wishes to sell their loans to another mortgage company.
The Benefits Of Blockchain Mortgages
For all parties participating in the mortgage process, blockchain technology has advantages. The following are some possible benefits of the technology.
- More Accurate Record-Keeping: As everyone who has ever bought a property knows, the conventional mortgage application process requires an astounding volume of documentation. Buyers must substantiate their assets, income, and work history. Underwriters and loan processors may find themselves engulfed in piles of paperwork. Blockchain gathers all required papers and data into digital records that can be accessed anytime by clicking a button.
- Lower Costs To Buyers: Blockchain technology can help cut costs by eliminating the requirement for third parties throughout the settlement process.
- Easier To Verify The Chain Of Title: When purchasing a home traditionally, purchasers are frequently required to acquire title insurance if the property is subject to liens. Title insurance is no longer necessary because blockchain technology greatly simplifies the chain of title verification process.
- Implementation Of Smart Contracts: Coded sets of instructions known as smart contracts are activated in response to predetermined events. For instance, the mortgage procedure can proceed automatically to the next stage if the buyer purchases homeowner's insurance.
Are There Legal Issues Concerning Blockchain?
Given its efficiency and security, why is blockchain yet to be used everywhere? Despite its many advantages, blockchain technology is still relatively new, especially regarding applications like mortgage processing. This implies that there are still certain issues to be mindful of and worries regarding the technology. The fact that blockchain is still uncontrolled is one of the more urgent concerns. Using blockchain technology to handle mortgages needs a set standard or procedure. That could be thrilling to some people. Some people may be worried about possible problems that arise during the process or that the technology might not be able to handle sufficiently.
Blockchain is not impenetrable, even though it is generally more secure than more traditional means of information sharing. Astute hackers may still be able to breach a system and obtain private data, bank records, or user funds. A blockchain's vulnerability can be increased by its scale and the variety of parties that can access it. The fact that everyone participating in the mortgage process must be on board for blockchain to function well and simplify the process presents another possible legal risk. The lender cannot determine whether or not to use blockchain on their own, apart from the buyer and seller. All parties involved must participate for the technology to work.
Also Read: Revolutionizing Real Estate: How Blockchain Technology is Streamlining the Industry
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 operations, 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 that at each step of the loan process, an intermediary slows down the mortgage's eventual approval. In the US, each mortgage application must go through financial services, realtors, lawyers, and more between accepting an offer and closing a sale. Each step includes fees and adds days to an already long process. All told, mortgages in the US can take up to two months to be approved.
The second problem is trust. One of the largest sources of delays in mortgage applications is 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 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?
Blockchain provides a model that reduces some of the industry's challenges but could give a better solution. Blockchain solutions for transparent mortgage processes introduce a groundbreaking improvement, making transparency the foremost and pivotal advancement offered by this technology. Distributed ledger technology (DLT) on the blockchain significantly improves the existing model: it decentralizes information storage. It instantly makes all transactions visible to every node in the chain. Since the data is shared across a whole network and is not under their sole control, the first upgrade prevents lenders and businesses from falsifying information or using it for other nefarious purposes.
The second enhancement, perhaps more significant, makes every transaction a public record in a simultaneously updated ledger impervious to manipulation. Businesses that provide decentralized crowd-lending platforms, such as Viva Network, claim to do away with intermediaries and establish a more transparent home loan market. These platforms use smart contracts and ledger technologies to develop an accountable system that makes cheating impossible. Thus, much of the friction associated with mortgage applications is eliminated.
Disintermediation is the other key area where blockchain technology might be helpful. It might cost thousands of dollars to approve a mortgage before any money is ever paid towards the loan. Before getting their applications approved, property purchasers must pay several expensive fees, including underwriting and legal expenses. The intermediaries in centralized systems, such as those that stand between banks and mortgage lenders, can likewise be eliminated by blockchain technology.
Businesses such as Synechron concentrate on offering superior value throughout the lending process, making it easier for both parties because of less automation. Though they speed up the process, these remedies need to address the underlying issue, which is a complex process. Businesses such as Homeland are fully committing to blockchain-centric digital solutions. Through direct connections between lenders and borrowers, the company's P2P network eliminates numerous process steps, including legal and underwriting. It substitutes them with artificial intelligence and machine learning technologies. It is possible to cut the duration of the prequalification and approval process in half.
The trend towards securitization has greatly increased financial supply over the past three decades, which has increased the complexity of the mortgage value chain. However, most mortgage financing procedures still need to be conducted on paper and involve numerous parties, making them difficult, time-consuming, and slow. This has several negative consequences for the borrower and other parties involved.
Conclusion
The revolutionary waves of blockchain have long been met with resistance by the conventional mortgage business, but times are changing. Blockchain technology offers a revolutionary answer to the long-standing complexity of mortgage processes because it is decentralized, digital, and transparent. Streamlined blockchain mortgages exemplify innovation by significantly reducing costs, enhancing record-keeping efficiency, and expediting transaction times from months to days. The blockchain's promise of openness, accountability, and disintermediation may address the industry's problems with intermediaries and opaque processes despite worries about security and regulation. Blockchain-based solutions are the key to a future where mortgages are accessible, efficient, and radically changed as long as they continue to develop.
