Blockchain Technologies as a Tool for the Mortgage Loans Digitalization
The mortgage market is one of the largest segments of the credit market. Mortgage has always been and remains a socially significant tool.
Digitalization of the mortgage market is one of the prerequisites for simplifying, reducing the cost and increasing the accessibility of the process of acquiring housing for citizens. The emergence of real estate marketplaces and super services to accompany their purchase, changes in legislation and the introduction of electronic mortgages have already significantly changed the face of the market for the better. However, due to the large number of participants – developers, aggregators and marketplaces, banks, depositories, state-owned companies – this segment is still very complex and requires further development, including through the use of breakthrough digital technologies.
Digital Drivers of the Mortgage Securitization Market
Securitization is the transfer of low-liquid, non-tradable financial assets, which include mortgage bonds, into tradable instruments of the securities market. In another way – the issue of securities secured by assets or future financial flow from such assets, which are debited from the balance sheet of the initiator and obtain legal independence by transferring such assets to a special legal entity. The main problem of securitization, in addition to the standard conflicts of market participants, is the low level of monitoring of risks associated with underlying assets; at the same time, additional insurance coverage of mortgage bonds helps to increase the interest and confidence of investors.
The main tasks solved in the framework of the interaction of participants in the securitization process – banks, mortgage agents, underwriters, rating agencies, insurance companies – are the assessment of assets and the formation of portfolios from them, the redemption of portfolios, the issuance of bonds and their insurance, as well as monitoring the risks of underlying assets . Obviously, within the framework of these tasks, market participants need to actively interact with each other and exchange a large amount of confidential information.
Platforms based on distributed ledger technology operated by a technology (rather than a financial) company are an ideal tool for organizing a fast and secure data exchange channel that reduces the time and cost of market participants.
Application of the Smart Contract Platform for Complex Residential Real Estate Purchase and Sale Transactions
A significant part of the residential real estate purchase and sale market is made up of complex or so-called alternative transactions involving several participants (at least three) and different real estate objects (at least two). The share of such transactions can vary from 40 to 80% depending on the general economic situation – in stable and favorable periods, more new apartments are bought, and in times of crisis, the secondary housing market is more stable than the market for new buildings.
Alternative transactions are a chain of interrelated transactions. On the one hand, they allow expanding the number of available options and conditions for buyers and sellers, and on the other hand, they increase the timing of transactions and increase the risk of disruption of transactions due to falling out of the “weak link” chain (for example, if one of the participants changes their mind or turned out to be unreliable information about the property). Such transactions, due to their complexity, are usually organized by real estate companies that are looking for options and ensure the security of transactions. However, we must not forget that the involvement of realtors increases the costs of the participants in the transaction.
At the same time, there have long been large popular sites on the market – real estate marketplaces, which accumulate a large number of offers for buying and selling. Such marketplaces, as a rule, have functionality that ensures safe transactions. Connecting all such platforms (and possibly realtors, if they want to stay in this segment of transactions) to a single smart contract platform will significantly expand the number of options for the transaction chain. This will make transactions more flexible and profitable for ordinary citizens, as well as reduce the agency costs of their participants by automating many processes. For example, you can easily implement a check that all apartments involved in the transaction are pledged or simultaneously register all transfers of ownership of these apartments in the register.
Tokenization of “Future Square Meters”
Now developers cannot use buyers’ funds frozen in special escrow accounts until real estate objects are put into operation – this measure was introduced to protect the interests of buyers and prevent abuse by unscrupulous developers. However, for the same reason, conscientious developers experience difficulties in attracting financing – it costs them more than it could cost, and these additional costs, in turn, are built into the value of real estate. In other words, it is the buyers themselves who pay for the safety of buyers’ funds.
To get away from the need for additional property appreciation, the developer can obtain “cheap” financing by issuing digital assets on the platform in the form of bonds with the investor’s income tied to the growth in property value. Thus, the developer quickly and cheaply raises the funds necessary for the implementation of the project, and investors, for their part, get the opportunity to count on the profitability associated with the growth in the value of real estate, without having to buy real square meters (especially the whole apartment).
An interesting task is to determine the so-called oracle – a source of reliable data on the current market value of housing. Such an oracle can be either the issuer-developer itself, broadcasting real prices from real estate purchase and sale agreements, or various market indices or appraisal companies.
Benefits of Using Blockchain Technology in Mortgage Lending
The advantage of the technology is the possibility of excluding intermediaries in real estate transactions. With the successful application of blockchain technology, the participation of officials will not be required at all. Theoretically, realtors, lawyers, notaries can lose their jobs. Sellers and buyers, in turn, will save money: all the listed specialists will no longer be paid, their functions will be taken over by the new system. The money deposited by the buyers will be transferred to the seller’s account immediately after the conditions of the electronic contract are fulfilled (all conditions will be specified in it initially). At the same time, data on the transaction will appear on thousands of computers on the platform, information on the transfer of property rights can be confirmed at any time.
Summary
The considered cases show that the introduction of modern digital technologies can become a significant factor in the development of even such a classic market as the segment of real estate transactions. Due to the significant volume and social significance, even a small (in percentage terms) reduction in the cost of housing, acceleration of the process of its acquisition and simplification of mortgage loan support will have a significant economic effect for the entire market.
Boosty Labs will soon begin providing mortgage lending solutions.