Digital mortgages are threatening to upend one of finance’s oldest and biggest markets. In the US alone, $1.75 trillion in mortgage loans originated during 2017. For each mortgage, there is a line of middlemen, happy to take their cut. Now their cut is threatened by a new development in blockchain technology.
The internet has gone through a wide variety of developments over the years. In doing so, it has led to the creation of an array of innovations that have changed the way the internet works. Moreover, how it is used. Nowadays, it has become a center for different activities and an environment for the distribution and sharing of information.
One of the most notable creations is that of digital currency, and stemming from that is the invention of blockchain technology.
Much like with the initial creation of the internet, blockchain was certainly no stranger to skepticism. As difficult as it may be to believe for some, not everyone was open to this new technology. Be that as it may, blockchain would go on to prove that it goes beyond being just a latent technology for digital currencies. As a matter of fact, it is possible to accommodate it for different uses. These uses range from a variety of industries to a variety of sectors.
Blockchain technology is already beginning to provoke disruptions within the financial industry as a whole. Admittedly, the worldwide adoption of the technology is slow and has yet to see a resolution. However, that doesn’t mean people are not starting to finally realize its appeal. They are gradually understanding that it’s actually very simple for the banked and the unbanked alike.
The benefits that come from utilizing this technology are plentiful. It seems inconceivable for someone to not take advantage of services that are efficient, faster, secure, and decentralized. These are qualities that the traditional banking system would not typically provide.
Fluidity: Mortgages garnering power from Ethereum
In the spring of this year, the fintech startup, Fluidity, made an important announcement. They were preparing the first Ethereum-powered mortgages in the states of California and New York. The chief architect of Fluidity, Todd Lippiatt, had this to say:
“We’ll tokenize the house, which will effectively take the collateral that is the equity of the house.”
To trigger a sense of anticipation, it was stated that Fluidity’s mortgages would utilize both smart contracts and cryptocurrency. With them, they can work with back-end management. Lippiatt said that the startup, at the time, was exploring partnerships with Ethereum-centric lending platforms. Such platforms would include MakerDAO’s dollar-pegged DAI loans.
Though the stablecoin has yet to achieve stability and liquidity in broader markets, Lippiatt is not fearful. He says that mortgages from any such potential partnership will simply involve a risk that can be mitigated. This is mostly due to neither the borrower nor the property seller being able to directly touch cryptocurrency. Unlike traditional currency, cryptocurrency is not physical.
“We will deal with the inner workings of the decentralized system … The borrowers pay back in dollars and we will also be managing the risk profile of the underlying securities.”
Overall, borrowers need to submit online credit checks and personal information; as is the case with any other type of online loan platform. Fluidity will then process this information and build a smart contract by using a tokenized representation of the mortgage.
Lippiatt adds that it is possible to package these loans together and resell them as securities. This is achievable by way of using an exchange like AirSwap. According to Fluidity’s website:
“Traders can buy and sell Ethereum tokens instantly or over-the-counter easily, securely, and without any trading fees. AirSwap’s mission is to empower people through global, frictionless trade.”
Provenance: Large and fast originators
Provenance is among the leading production blockchain protocols for the financial services industry. According to their website:
“It is a permissioned, proof of stake protocol that acts as a global ledger, registry, and exchange across assets and markets.”
At this time, Provenance has one of the largest mortgage originators, as well as one of the fastest-growing originators that utilize digital mortgage technology. These large numbers will inevitably continue to grow as there are more to come. The blockchain for this platform allows financial firms to benefit from a variety of features. These include same-day settlement times, lower costs, and the potential of higher ratings from rating agencies.
It is true that many people have ensured similar benefits. However, there are a number of things that no one has been able to do, like:
- Construct the product
- Push it towards a launch
- Placing material volume through the product
- Persuade large financial businesses to commence the transfer of their assets over
This is where Figure comes in.
Figure: Changing the game
Figure is a company that distributes digital mortgages. These bring an abundance of significant advantages in an array of facets. Said facets primarily include transaction settlement times, costs for transactions, and the asset ratings from rating agencies.
There was once a time when the automation of the mortgage transaction was not possible. This was due to each mortgage either being analog (physical paper) or electronic (Committee on Uniform Securities Identification Procedures [CUSIPs]). Those specific technologies are not exactly harmonious with “automation software.” With time, the arrival of a digital mortgage would change all of that. Ever since Figure’s launch, it continues to experience substantial growth.
Recent numbers pertaining to Figure show that it is issuing $85 million in loan originations every month. These statistics place them on more than $1 billion in annualized conceptions.
Figure has successfully carried out each one of the four aforementioned features from the section on Provenance. While it would be easy to give them all the glory, the truth of the matter is that they are not the only ones. The company states that one of the largest mortgage lenders, Caliber Home Loans, has jumped on the bandwagon. They are beginning to conceive, service, and finance mortgages on the Provenance blockchain.
Pros & Cons of Digital Mortgages
Digital mortgages are being touted as trailblazing innovations in financial services by many, though not by all. Similar to how there are disadvantages to blockchain technology, so too are there disadvantages to digital mortgages. It’s wise to understand the pros and the cons when speaking to lenders about the digital process that they offer for mortgage lending.
When it comes to loan application, the main advantage is that it provides faster decisions. Moreover, it has the ability to upload documents with the initial application. Be that as it may, the disadvantage stems from compatibility. It is very likely that there may be issues with compatibility on different devices. Additionally, there could also be browser issues.
Loan shipping is an entirely digital process, with quick decisions and multiple lenders generating fee sheets. On the downside, this procedure requires that the same information be input each and every time. Any trace of divergence in the input could potentially lead to inaccurate rate quotes.
In terms of loan documentation, the digital process may require next to no documentation. I say “may” because, in the end, it all depends on the employer and the current bank. On the other hand, any type of divergence in income stability or asset balances could lead to unfavorable outcomes. It may end up sparking extra documentation requirements.
These are only a handful of digital loan processes with notable advantages and disadvantages. It’s important that you do research on the subject to see if, in your opinion, the pros outweigh the cons or vice versa.
Where does this leave intermediaries?
At its core, one of the primary reasons – if not the primary reason – for blockchain’s creation is to cut out the middleman such as with digital mortgages. There is a mindset that is becoming more frequent that financial matters would be better off without a third party. It’s difficult to say that this belief has no substantial justification because it has several merits to support it.
Does this mean that middlemen are heading towards a proverbial extinction? Well, that is too soon to predict, let alone prepare for. At this point, they are still active, but at the same time, blockchain technology is continuously developing. It is true that this innovation is far from perfect, however, that does not detract from all it is accomplishing. For middlemen, that might just be the biggest threat.