In recent months, several platforms have emerged that promote blockchain to offer mortgages to a wider base, using techniques such as crowdfunding, or that plan to offer mortgages as a way for smaller investors to get involved in property markets. Will this be how blockchain disrupts the mortgage industry?
Regulatory and other concerns
Platforms offering mortgages on the blockchain have attracted considerable attention. Investors may want to be cautious, however, as tokenization may result in syndicated mortgages, and there are concerns about their legality in some jurisdictions. In addition, given the regulatory environment in Canada, there is a strong possibility that tokens associated with crowd-funded or tokenized real estate investments will be considered securities. In consequence, there may be concerns about whether tokens issued by these platforms would be subject to securities regulations.
Another issue is whether adding blockchain to the mortgage industry will solve existing problems, or if it will merely create new ones. For a cautionary example, consider Brazil, where there is currently no central land registry system. Instead, land is registered, by region, with private agents. The system is complex, and corruption is not uncommon. Brazil is currently testing blockchain technology to improve security, trust and transparency, and to provide land access to some of the estimated 5 million landless families in the country. There are still several challenges that must be overcome, however. Given the lack of existing records, transactions must still be confirmed to create double titles. This is a real concern: in one state, for example, four times more land has been privately registered than actually exists. For blockchain to bring legitimacy to the land transfer and mortgage system in Brazil, identity and land title documents will need to be legally verified.
Promising use cases
The news isn’t all bad for blockchain and the mortgage industry, however. There are several highly promising use cases for blockchain in this space. Because distributed ledgers allow information to be transferred seamlessly between all parties in a transaction, processing errors and delays can be minimized. In addition, with no need for paper documents, errors cannot easily be introduced, and there is little opportunity for tampering or fraud. In addition, because lenders and buyers can interact directly, fees associated with intermediary processing are much lower.
Blockchain-powered smart contracts can also be used to automate the mortgage application and approval process. Since they execute automatically when agreed-upon terms are completed, mortgage applications can be streamlined, along with credit checks and related financial procedures. In addition, placing land titles and property records on a distributed ledger reduces opportunities for fraud and falsified documents. Because multiple parties require access to these documents, and because the information they provide must be both verified and secure, DLT is an ideal solution. Several governments worldwide are exploring this technology, including the U.K., India and Sweden.
In the U.K., for example, the Digital Street program is working closely with key figures, including lenders and mortgage brokers, to identify the best ways to use smart contracts to facilitate interactions with the land register, to determine the range of applications that can derive from blockchain and DLT for land registration, and to develop methods to confirm and securely share identity information. In India, property transactions in Haryana state will be permanently recorded on the blockchain. This will “create a single source of truth of ownership status, and history of a property.” And in Sweden, testing has begun for a system that uses smart contracts to automate transactions. This lets buyers and sellers complete a transaction using verifiable digital signatures.
Finally, blockchain offers an opportunity for the mortgage industry to make certain processes more efficient. International transactions can be completed more quickly using blockchain, and smart contracts could be put in place to automate payments for referrals, something that is now typically done manually. Blockchain also offers greater scope for regulatory compliance, since it provides access to information and proof that documents have undergone the required compliance checks.
From this assessment, it seems likely that blockchain won’t immediately change the way mortgages are funded, at least not in the short term. On the other hand, using distributed ledgers and smart contracts does have the potential to streamline the administration of identity and document management, land transfers and financial settlements. In this way, the mortgage industry will truly be transformed.