In the blockchain and smart contract space, we're always looking for the next innovation and cutting-edge use case for our technologies. In the past, we've explored the possibilities for decentralized ledger technologies within the scope of voting, vaccine distribution, identity verification, supply chain management, social media, and more. But as decentralized finance (DeFi) and cryptocurrency continue to enjoy a wider user base, we are now looking at the possibility of decentralized finance being part of loan origination and mortgage lending. Let's go a bit deeper.
Before we talk about loan origination through the lens of blockchain, we must first look at the existing lending structure and the shortcomings associated with it. Anyone who has purchased a home or applied for a loan is likely already familiar with some of these, but let's just take a quick moment to outline them:
Inflated production cost
Applying for a loan requires a lot of coordination between many parties, multi-level executions, and complex reconciliation procedures which cause delays and the expenses associated with them.
No standard rules and regulations for storing land records
Whenever a property changes hands, searching, validating, and investigating land records from government databases is a tedious and expensive activity.
Difficulty verifying documents
Any issues or misrepresentation in the databases—especially as they concern income, occupancy and property details, undisclosed debts, and identity details—which form the key parameters, results in false loan approval and disbursement.
Limited access to documents
When duplicates of important data and documents are available, different parties with different procedures maintain them.
Lack of transparency
Limited visibility of data management leads to lower user experience and customer satisfaction.
Blockchain homebuying could revolutionize the mortgage lending process.
So, how does blockchain address these issues? Well, since blockchain thrives on the concept of decentralization, the distributed ledger framework may very well be at the center of our answer because of these benefits:
When many people at many organizations get involved in the conventional loan origination process, they need to get paid for their time, but since blockchain doesn't need third parties and intermediaries, this cuts extra expense. Blockchain and smart contracts also minimize the number of physical documents needed for transactions since all the required information will be stored and recorded on the block.
Blockchain also stores all transaction history and sales records that use blockchain and makes it available for all parties involved in the transaction. The added benefit of this is that the information stored on the blockchain is immutable, meaning no one can alter it—adding a clause or changing a transaction, for example—without all other parties' approval.
If you've just been introduced to blockchain technology, you'd be forgiven for believing it to be a slow-moving process; after all, like the traditional loan origination, every copy of the ledger needs to change with each alteration even when housed on the blockchain. But while the traditional process requires a relay of documents back and forth, taking days if not weeks to complete, the distributed ledger technology that is part-in-parcel with blockchain makes this process take mere seconds.
Blockchain technology is among the most secure methods of record keeping and data storage. Before a record is added to a block, all concerned parties need to agree to the information stored on it. Once approved, the record joins the block, connecting to the previous block in the chain. Once there, all records are encrypted. What makes blockchain so secure is that if someone were to change the records in a block, they would also need to alter the "hashes" (which are pieces of cryptographic information) associated with the block that information is stored on and all other blocks on the chain. While we can't say blockchains are 100% hack-proof, they are beyond the reach of the vast majority of hackers and a bad actor is exceptionally unlikely to be able to successfully infiltrate a blockchain and introduce their hacks without drawing attention to themselves.
So, in sum, is blockchain loan origination the future of mortgage lending? Well, ultimately blockchain and smart contract solutions are not standard in the mortgage industry yet. There is a lot of promise and many signs that in the not-too-distant future, these decentralized principles may well be part of the home buying and loan origination process. Watch this space.