In 2017, the total value of mortgage loans in the United States reached $9.9 trillion dollars. Comparatively, the entire debt value of the U.S. Government only reached $20.21 trillion – just over twice that of mortgages. As such, mortgages are a major part of what drives the U.S. economy.
Yet, the application and approval process for mortgages has not changed in decades. Many of the steps involve paper documents and long wait times. The average processing time for a mortgage is 50 days, meaning many of the applications take even longer. Given advancing technology and the public drive for upgrading legacy systems, it may be time for the mortgage process to evolve.
The problem is particularly poignant for millennials, many of whom struggle in the mortgage loan industry. Student debt can have a negative effect on credit scores, despite proper management and timely payments. More so than any previous generation, millennials are suffering from high student loan debts. A more egalitarian system that allows alternate funding will empower an entire range of new home-owners. Crowdfunding and peer-to-peer (P2P) funding platforms both offer advantages for borrowers and lenders alike.
Crowdfunding mortgage loans
Crowdfunding offers a unique means of gaining the capital for large purchases and new projects. To bring this new system to the mortgage loans industry, there must be an additional layer of protection for those involved. Lenders need to know that their money will not only be returned but also accrue the interest it has earned over time.
Like any traditional loan, some form of collateral is required to ensure lenders do not lose money. This type of system would not be an immediate solution to all of the millennial generation’s problems – they would still need to prove their creditworthiness. It would, however, allow a larger cross-section of the population to get involved in funding mortgage loans.
After all, Mortgage Backed Securities (MBS) are a major financial instrument. Mortgage loans are bought and sold on an open secondary market, often finding their way into the hands of third parties. These third parties can be so obscure that it makes communication difficult for the borrower.
A crowdfunded platform could potentially eliminate this problem, as the platform itself would handle all the payments and communications. Buying and selling of the individual portions of the loan would take place in the background, in a way that does not affect the borrower.
The Homelend platform
Offering crowdfunded P2P mortgage loans, startup Homelend is integrating blockchain technology into their network. A distributed ledger, crucial to blockchain platforms, allows Homelend to keep an immutable record of all transactions related to their mortgage loans. This allows all participants to verify what is happening to their money, and to their property. Further, the distributed ledger exists in multiple places, all validated individually. This makes it difficult for any one party to change the details on the blockchain.
Homelend’s platform creates an ecosystem where borrowers can fractionalize their loans. After an initial down-payment, their mortgage goes up on the platform in a sequence of ‘slices’ that can be purchased by lenders. Attached to these slices is pertinent information that would usually help determine creditworthiness.
Investors can parse the available slices on their own, and determine which they would like to invest in. If all the slices of one loan are purchased, the mortgage is issued, and the property held as collateral by Homelend. If the slices are not purchased in a specific time frame, the money is returned to the investors.
Security through blockchain
While a distributed ledger secures record keeping, an internal cryptocurrency can also help with keeping transaction friction low. The process of transferring cash through multiple intermediaries often results in a large loss of capital. The Homelend platform’s solution of using cryptocurrency creates an internal ecosystem where funds can flow freely. Smart contracts handle the distribution and execute at pre-determined times to ensure smooth flow of finances and information.
The Homelend platform intentionally avoids any financial middlemen that are unnecessary. While many of the functions of mortgage lending must be preserved – underwriters, insurance, appraisers – many others can be removed.
Cryptocurrency’s inherent trustless basis allows for much less expensive transfers of funds. As such, it removes many of the financial institutions traditionally involved with mortgage loans. Although cryptocurrency values can fluctuate, sometimes dramatically, Homelend’s mortgage prices will be calculated and listed in fiat values. The price per unit of the cryptocurrency will be considered when the transactions are processed.
Expanding mortgage offerings to a larger population increases potential profit streams. However, it also comes with potential risks – necessitating strict creditworthiness checks. Traditional mortgage loans use credit scores and well-established criteria to determine the level of risk. Using machine learning and artificial intelligence to aggregate historical data, Homelend leverages new methods of determining risk.
Loans offered through Homelend will still be carefully selected, avoiding any potential ‘Sub-Prime Loans’, but ‘soft’ data factors will also be considered. Age and education level can be considered, potentially opening new options for those with student loan debt. Homelend is not just seeking to open loans to millennials, they are also looking to bring new technology to a legacy industry. The Mortgage Loans sector is ripe for disruption, and most customers will appreciate a new layer of efficiency.
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