Blockchain is revolutionising industries, including mortgage lending. We analyse the potential blockchain has to transform the home loan market.
Blockchain technology is transforming the way businesses operate in almost every industry across the globe. While it may seem distant with the majority of the home-lending sector struggling with the adoption of digitisation, blockchain has gradually penetrated a few areas in this industry, with members anticipating a stronger push soon — and rightly so.
The home loan industry is overrun by lengthy end-to-end processes involving numerous parties and documents, and the adoption of blockchain has the potential to reform that and more.
Here’s how blockchain is set to disrupt the home loan process in the future.
Quicker Approval Process
To get a home loan today, you have to go through various intermediaries — financial, legal, real estate, and governmental — that add time and cost to each step of the process, which ultimately you end up bearing. From pre-approval to settlement, the whole process can take an average of two full months, 1 for each application.
Blockchain can replace this third-party-dependent model with decentralised records that show a traceable history of each transaction. Since every record is connected to the one before and after it, the lender’s computer can consult the blockchain ledger to validate the information. After the verification, the transfer will be visible via the new data entry added to the chain.
Through Distributed Ledger Technology (DLT), lenders will verify identity proofs and property evaluations without involving third-party providers. This will eventually aid in quicker approval and settlement. Borrowers, too, would be able to make large payments via tokens without incurring the high transactional costs of traditional methods. Blockchain is expected to reduce the total transaction time by 25%
A non-transparent mortgage sector led to the Global Financial Crisis of 2008, which prompted the US Treasury to look for possible solutions to mitigate future disasters, especially with the emergence of online marketplace lending. A whitepaper by the Treasury suggested the need for greater transparency in two key areas — the pricing terms for borrowers and the standardised loan-level data for investors. While Australia did not enter a recession, it did experience a sharp downturn by the end of 2008, indicating the need to apply the same principles to the Australian home loan sector.
With DLT bringing all market participants on a single platform, blockchain can address both recommendations. By recording, sharing, and exchanging the data about the loan on the blockchain, lenders can enable it to function as a custodian. It will ensure transparency by automating loan validation and payment.
Blockchain will also enable investors to assess an indestructible audit trail and produce forecasts based on verified data in real-time. With a cross-market view of loan-level data in reach, they wIll be able to make informed decisions.
When you apply for a home loan, the lender examines all of the original documents of the property. This includes no-objection certificates, title deeds, and other ownership information. They also hire surveyors who conduct technical price evaluations to settle the appropriate loan amount. All these add legal and financial mediators to the verification procedure, making the lengthy administrative process more complex and time-consuming.
Through its use of private keys, blockchain can overcome this paper-pushing that traditional lending institutions require. The transactions and information on the blockchain require your digital signature, which is created using private keys. These keys are virtually impossible to forge because of cryptography. Each transaction you make on the blockchain will be securely tied to your identity. So lenders will only need to consult the ledger to determine proof of ownership.
Blockchain technology can store vital information such as property address and valuation, which the lender can access, verify, and process in real-time. In fact, the Bank of China has already begun using blockchain for property evaluations, with 85% of the bank’s mortgage-related real estate valuations processed using its private blockchain. Moreover, binding the smart contracts with verification and approval criteria will enable the automatic execution of the approval process. This will further simplify the whole operation and also lower processing costs to save banks US$3 billion to $11 billion annually.
The mortgage loan-origination process we employ today is mainly paper-based. This gives room to many privacy and security issues. Every time mortgage-related documents are created, copied or forwarded, your non-public and personally identifiable information are at risk of exposure.
Moreover, the document-based system has an inherent presence of manual errors and delays that dated digital applications — which require strict oversight of the chain of custody — cannot combat. Even if the lender employs electronic systems, your information is only as secure as the lender’s server.
Since the blocks in a blockchain are added linearly, with the most recent one being at the end of the chain, it is challenging to alter the data of any block without gaining consensus from the rest of the network. To avoid detection, the bad actor would have to change the configuration of all the blocks linked to the tampered one, which becomes less and less probable as the size of the network increases.
What’s more, with the help of cryptography, each participant will only be able to see parts of the ledger that are relevant to them, making acquiring someone else’s personal information virtually impossible. Combining the elements of decentralisation, cryptography, and consensus, blockchain will facilitate unparalleled security, especially considering the massive safety and privacy loopholes present in the traditional home loan process.
A 2018 report reveals that lenders’ non-transparent pricing of home loans stifles mortgage price competition, costing borrowers more than they may require to pay if they negotiate. The problem is that leading lenders adopt discretionary pricing models that favour them and are difficult to question in a market with limited competition.
Blockchain in the home loan sector will open up peer-to-peer lending (P2P) with investors on the network. This will lead to a price war between the lenders and ultimately benefit the borrowers through reduced costs, better services, and ample options.
Improved Customer Experience
Home-loan borrowers look for a few key features that can guarantee satisfaction. These include flexibility in repayment options and interest rates, minimal overhead fees, seamless approvals, and ease of the documentation process.
Although leading Australian banks enjoyed increased customer satisfaction last year for their stellar work during the pandemic, they still lack refinement in these critical areas — as do all institutions following a traditional lending model — and inevitably spoil the overall customer experience.
The adoption of blockchain will enhance customer satisfaction by responding to their needs in all three areas. It will make intermediary and transaction costs negligible by eliminating trusted third parties and reducing operational overheads by making the loan status visible to all parties at any time.
The unchangeable audit trail will simplify document verification, recording, safekeeping, and reassessment. Moreover, since blockchain will give way to P2P lending, the competition between the lenders will translate to more interest rates and repayment options for the borrowers.
Embrace The Marriage Between Home Loans And Blockchain
Although the home loan sector faces quite a few legal and regulatory challenges in adopting blockchain, its infusion in the near future is inevitable. Blockchain can disrupt the whole home loan value chain by introducing cost-effective, transparent, secure, and efficient processes inherent to its functioning.
When the transformation comes about, traditional lenders must embrace technologies like the blockchain to offer them much-needed support by replacing their archaic innovation practices. However, since there are still a few years before we can have a blockchain infrastructure that can support the whole home loan sector, a few tools have been introduced in the market with the same benefits as blockchain.
Joust offers borrowers a Live Auction service that removes intermediaries to provide a transparent, secure, and flexible process of acquiring a home loan — all requiring minimal effort from you, the borrower. This is aided by the fact that the lenders are the ones that receive your loan profile (sans personal details) and provide real offers in a bid to secure you, drastically reducing the interest rates you would have had to agree to in a traditional transaction.
Moreover, with their Instant Match services, Joust assesses your needs and all the offers by the lenders, selecting the top three lowest rate home loan options to inform your decision.
What are you waiting for?