Since its inception, researchers, market watchers and industry leaders have remained steadfast in their claim that blockchain will transform lending. Some believe blockchain will overhaul the entire financial sector. Today, splashy “crypto backed mortgages” are all over the news, but there are many other ways in which lenders are applying blockchain technology. Over the last five years, dozens of financial services firms, mortgage brokers and lending platforms have announced blockchain programs. These programs are intended to streamline their operations and improve access to aid. Even major banks like JP Morgan Chase, Wells Fargo and Bank of America have developed entire departments dedicated to blockchain technology. Smaller banks are joining multi-bank blockchains to improve the speed and reliability of fund transfers. Mortgage lenders who use blockchain could benefit from more accurate record-keeping. They could also achieve lower costs for lenders and borrowers, easy title chain verification and an overall more seamless escrow process. Milo, Nexo, BlockFi, Avalanche, Liquid Mortgage, Figure, We Trust, Unchained Capital, Zventus and Home Loan Expert are all changing the home loan industry. From mortgages to HELOCs, they are making the process easier, more secure and less time-consuming for both lenders and borrowers. Many of these companies also help borrowers consolidate credit card debt, take out low-interest personal loans and more. Follow below to learn all about the lenders launching blockchain pilot programs. The focus of this post is blockchain and mortgage lending. However, we also touch on how the decentralized ledger technology could transform lending as a whole. For example, OpenLaw Finance is changing the world of student loans and BankSocial is leading the way in blockchain-supported P2P lending.
Terms to Know
Peer-to-Peer Lending
Also called P2P lending and marketplace lending, peer-to-peer lending helps borrowers and investors cut out traditional institutions. This shift produces more streamlined, direct lending relationships. According to Eric Rosenberg in a recent article for Credit Karma, “peer-to-peer lending connects potential borrowers directly with individual investors who finance loans.”
Peer-to-peer lending enables everything from micro-loans to major crowdfunded real estate developments. It largely eliminates the need for larger financial institutions like banks, which have strict lending requirements related to income, credit history and current debt. Today, a growing number of peer-to-peer lending platforms allow investors to provide borrowers with access to loans they might otherwise be unable to secure. Some P2P platforms include Upgrade, SoFi, Best Egg, LendingClub, Prosper, LendingPoint and UniversalCIS.
Both single borrowers and small businesses whose owners lack established banking relationships benefit from P2P lending. This is because no industry knowledge is needed to engage with these platforms. At the same time, lenders can diversify by investing in partial loans – i.e. providing a certain fraction of the money needed by each borrower. Over the last decade, blockchain has been implemented by several P2P lending platforms to boost transaction speed and security. For example, the first peer-to-peer lending platform secured by the Ethereum blockchain launched back in May 2021.
Pros and Cons of Peer-to-Peer Lending
Advantages
In general, P2P lending makes both investing and borrowing more accessible and inclusive. There are many other benefits of P2P lending – especially when compared to traditional lending. For example, borrowers may benefit from a soft credit check rather than a hard pull. This means that their credit score will not plummet due to multiple loan applications. In a recent article for U.S. News, Kim Porter, Ali Cybulski and Ray Frager identify additional advantages of P2P lending over traditional lending.
According to Porter, borrowers benefit from “flexible qualification requirements,” “good deals on interest rates” and an immediate influx of cash. As long as you make regular payments, a small personal loan could even improve your credit score by diversifying your credit history. There is also less paperwork and fewer hoops to jump through. Quoting Rutger van Faassen from Curinos, Porter notes that “‘peer-to-peer lenders have a much better streamlined process for borrowers.'” In many cases, borrowers receive funds “‘within a day or so.’” Lenders also benefit. P2P lending opens the industry to a wider group of investors by democratizing access. Most lenders need an annual income of just $70k or a net worth of $250k to get started. Certain platforms require accreditation, however.
Disadvantages
Of course, there are risks involved in P2P lending – for both borrowers and investors. However, some of the potential negatives involved in P2P lending are just as common in traditional lending. For example, your credit score could fall temporarily when your utilization rate increases. Borrowers could owe an origination fee after the lending platform processes their loan. You might also be offered a partial loan instead of the entire amount applied for.
There are some disadvantages that are specific to P2P lending platforms. Some platforms restrict what you can use borrowed money for. Few P2P lenders offer assistance if you experience job loss or illness and are unable to make payments.
Decentralized Finance
DeFi – or decentralized finance – and peer-to-peer lending are connected. DeFi is essentially what makes peer-to-peer lending possible, opening the financial sector to a wider variety of investors and borrowers. Writing for Investopedia, Rakesh Sharma notes that “peer-to-peer (P2P) financial transactions are one of the core premises behind DeFi.”
It offers lenders higher yields and borrowers flexible yet dependable access to much-needed cash. By leveraging blockchain technology, decentralized finance makes the financial services industry more secure, more accessible and less reliant on traditional – often outdated – systems. It also globalizes lending.
In his article “What is DeFi? A beginner’s guide to decentralized finance” for Bankrate, James Royal explains. Royal writes that DeFi is “a new vision of banking and financial services that is based on peer-to-peer payments through blockchain technology.” DeFi aims to provide borrowers and investors with “many of the financial services that [they] currently enjoy [like] loans, interest on deposits, payments.”
Rather than using traditional methods of loan origination and payment tracking, DeFi uses smart contracts and immutable ledgers. Smart contracts are self-executed once terms are met. They eliminate the need for third parties that often slow down transactions while making them more expensive. In short, decentralized finance “creates new infrastructure to deliver similar financial products and services.”
Crypto Mortgage
Despite much hype in the wider media, this post will not focus on crypto mortgages. Rather, it will focus on how mortgage brokers and other lenders currently utilize blockchain and how they plan to apply it in the future.
Though this post will not focus solely on crypto backed mortgages, our readers should still have a bit of background. This is because several platforms and financial institutions have begun to explore crypto lending. Some currently allow applicants to borrow money either with digital currency or by leveraging crypto assets.
What is a Crypto Mortgage?
Crypto loans allow investors who have accumulated a large enough amount of one or more valuable cryptocurrencies to leverage those holdings. They can leverage their cryptocurrency like any other type of collateral, which means that investors need not liquidate the asset.
In the mortgage space, this means using cryptocurrency as the asset against which you borrow money from a broker to purchase your new home. There are now a few companies that offer crypto mortgages. However, major banks have yet to dive in — largely because of how much crypto values fluctuate.
eNote
Buying a house involves quite a bit of paperwork. An applicant’s mortgage documents include their loan application, pre-approval letter, good faith estimate, truth-in-lending disclosure statement and settlement statement. They also include details of your mortgage — called a “note” — and the deed to your new home.
To streamline and simplify the process for both applicants and lenders, some brokers offer eMortgages, eClosings and eNotes. In an article for Rocket Mortgage, Erin Gobler explains that an eMortgage is “an electronically created and stored version of the standard mortgage documents.” In many cases, an eMortgage also refers “to a fully electronic mortgage process, including an eClosing and digital signing of documents.”
All eMortgages include an eNote, which Gobler writes is “an electronic version of a promissory note.” Part of your loan documents, the promissory note both explains the terms of your mortgage and records your agreement to those terms. Your mortgage broker will hold onto the promissory note until your very last payment. With a digital eNote, “the document is registered with the MERS mortgage eRegistry and stored in a digital vault.”
According to FreddieMac, eMortgages offer a series of benefits to both lenders and borrowers. Their resource “Get Started with eMortgages” notes that eMortgages virtually eliminate the “risk of losing the original paper Note.” They also reduce storage costs, increase liquidity and “improve data quality with an automated certification process.”
How Blockchain Could Change Lending
According to research published by Laura Gonzalez – a CSULB Associate Professor of Finance – in Managerial Finance, blockchain is already making P2P lending more efficient. Professor Gonzalez notes that “the gradual implementation of blockchain technology in peer-to-peer lending platforms facilitates safe and quick access to funds.” It does so “without having to deal with the more complex and costly processes of banks.”
However, it also has the potential to modernize traditional lending. Professor Gonzalez writes that “blockchain can compensate for biases in lenders’ decision-making.” It can also “improve monitoring by helping track digital money transactions and assisting in bad loan recovery efforts.” This is especially significant in the mortgage industry, where many borrowers are making the most expensive financial decision of their entire lives.
Lenders Launching Blockchain Programs
From fintech startups to established financial institutions, blockchain is slowly becoming a pillar of modern lending. For example, Goldman Sachs, J.P. Morgan Chase, the Swedish Central Bank, HSBC, Wells Fargo and Bank of America are all on board. These banks are either working on blockchain programs or have already implemented programs.
Some are using blockchain to update their infrastructure, streamline their day-to-day operations and secure sensitive data. As noted above, many financial institutions have embraced blockchain because they can use it to record and execute smart contracts.
Others are using the technology for crypto-collateralized lending. The applications are endless: Wells Fargo and HSBC recently announced plans to use blockchain to settle cross-border payments. Below are a select few of the many lenders launching blockchain programs in the United States.
Mortgage Brokers and Home Loan Platforms Using Blockchain
Many fintech startups and major financial institutions have been quick to explore blockchain’s applications. However, it appears that traditional mortgage lenders have been a bit more hesitant.
In early 2022, the government-sponsored Federal National Mortgage Association — better known as Fannie Mae — released findings from their Mortgage Lender Sentiment Survey® (MLSS). Writing for Fannie Mae, Director of Fannie Mae’s Enterprise Innovation Team Ryan Jackson reflects on how lenders spoke about blockchain technology in their responses.
According to Jackson, only 25% of respondents “were familiar with the technology and its possible applications in the mortgage business.” A majority had yet to look into blockchain. However, 41% of the lenders that had already looked into blockchain said they “plan to adopt it within four years.”
Respondents tended to be more familiar with decentralized finance (DeFi) than blockchain itself. In fact, 40% of all surveyed lenders said they believe “DeFi has high to very high potential to disrupt incumbent financial institutions.”
Just over 30% of lenders think mainstream mortgage companies will start accepting cryptocurrency instead of USD dollars within the next few years. Below are a few companies that have already begun accepting crypto as collateral or direct payment — or applied blockchain technology in some other way.
Crypto Mortgages from Milo
Milo — a crypto lending company — recently announced its 30-year crypto mortgage. This signals a major departure from the collateralized home loans offered by BlockFi and Unchained Capital. Those loans have short terms and fairly high interest rates. In “Crypto mortgage lenders are entering the hottest housing market ever” for Fortune, Marco Quiroz-Gutierrez explains how Milo’s approach differs from its predecessors’.
Quiroz-Gutierrez writes that Milo allows borrowers to “buy U.S. real estate if they put up an equivalent amount of money in Bitcoin.” In short, borrowers can have a 1:1 loan to value ratio or LTV. An LTV compares the value of the property you wish to buy with the total mortgage loan amount. Milo evaluates each borrower’s eligibility solely on the amount and value of the crypto they have acquired. Applicants are not judged on their credit history, debt-to-income ratio or available down payment.
After staking their crypto as collateral, borrowers get “a 30-year mortgage for their home purchase.” This loan is paid off just like a regular mortgage — “in monthly installments to Milo.” Interest rates are much more competitive than those offered by BlockFi, which can reach 14%. At Milo, most borrowers receive a variable interest rate of between 5 and 8% of the property’s purchase price.
As one might imagine, Milo’s model accounts for the volatility of cryptocurrencies like Bitcoin when writing loan terms. According to Quiroz-Gutierrez, a borrower’s rate will change as the value of the coin they used as collateral rises and falls. If the value of their collateral drops precipitously, borrowers might be forced to stake more crypto coins. They might also have to provide additional digital assets as auxiliary collateral.
Are Crypto Mortgages a Good Idea?
Milo is not the only company offering crypto-backed mortgages. In addition to BlockFi and Milo, Abra and Propy also recently launched a program. Through their program, borrowers can leverage crypto holdings to take out home loans. Crypto loans offer an alternative to traditional home loans, but are still inherently risk for borrowers. In the article “Why you shouldn’t get your mortgage in bitcoin” for Business Insider, Alcynna Lloyd argues that crypto mortgages are not only risky. They are also far less flexible than they appear.
According to Lloyd, the “big catch” with crypto mortgages is that they prevent homeowners from holding “full control of their asset.” With a traditional mortgage, homeowners can sell their property at any time — even if they have yet to pay off the loan.
Once they sell the property, current homeowners must pay back their lender with proceeds from the sale. In certain cases, they can transfer the loan to the new owner. Of course, only some home loans are assumable. Government loans are typically not assumable.
If the house sells for less than what the current owner owes, he or she must make up the difference. Homeowners who cannot afford to pay the balance must come to an alternative agreement with their lender. None of these options are available to Milo borrowers.
Lloyd writes that homeowners who “wish to sell their property [must] pay off their loan in full — in US dollars — before the company releases a lien and transfers the Bitcoin back.” Other crypto lending companies utilize a similar model to Milo’s. Figure will originate loans for borrowers if the property they wish to purchase equals or exceeds the total value of their crypto holdings.
Asset Tracking from Liquid Mortgage
Another blockchain lending platform, Liquid Mortgage was founded back in 2018 by Ian Ferreira. According to the company’s website, Liquid Mortgage is “a digital asset platform supporting document integration and data synchronization across the industry.” The company reduces redundancy and limits inefficiency by streamlining “loan-level documentation, payment information, and transactions.” Writing for National Mortgage News in “Mortgage leaders break down the benefits of blockchain,” Andrew Martinez identifies Liquid Mortgage as an industry pioneer.
Martinez writes that Liquid Mortgage was the first company to use blockchain technology “in a $431 million, non-agency, residential asset-backed security.” Liquid Mortgage serves as each transaction’s DLT agent. It provides investors “with daily reporting of loan-level payments of principal and interest on the underlying mortgages.” This is in contrast to the “usual industry one-month delay.”
Liquid Mortgage recently joined forces with Canopy Financial Technology Partners to create a “digitally native mortgage.” Writing for Financial Regulation News, Douglas Clark notes that this partnership will build on both companies’ existing products and services. Clark writes that the partnership will pair Canopy’s “due diligence product” with Liquid Mortgage’s “digital asset dynamic.”
In doing so, Canopy and Liquid Mortgage will attach “due diligence reporting and data directly to a loan-backed digital asset on a blockchain.” Canopy and Liquid Mortgage also hope to create a payment tracking feature for borrowers. This feature would be available as soon as the digital asset is minted.
Their end goal is tripartite. First, they hope to “shorten timelines for investors.” Second, they hope to “reduce friction and increase transparency.” Finally, they hope to pass on any resultant cost savings to borrowers.
Home Equity Lines of Credit (HELOCs) from Figure
Many homeowners are already familiar with the different ways they can unlock and leverage the equity they currently hold in their homes. Cash-out refinancing and home equity loans are two ways to draw on the equity you have in your home. HELOCs – or Home Equity Lines of Credit – are another option. HELOCs work much in the way a credit card does – releasing funds as you need them.
As Daniel Kurt writes in a June 2022 article for Investopedia, a HELOC is “a second mortgage…[that is] secured against the value of your home equity.” You might take out a HELOC from your current mortgage company, or you might choose to work with another lender. Once you are approved for a HELOC and sign all necessary documents, your lender will place a lien on your house. A lien allows the lender to lay claim to your home. They can take possession of your property if you stop making the payments outlined in your loan terms.
Figure Technologies Inc. recently launched a HELOC lending platform that is supported by blockchain technology. The company refers to its home equity line of credit as the “fastest on the planet.” They advertise loan approval in five minutes and HELOC funding within five days.
The minimum loan amount offered by Figure is $15k. The maximum loan amount is $400k, which means some homeowners could borrow the entire value of their original loan. Figure’s minimum loan term is five years, but they allow terms up to thirty years – just like a conventional mortgage. Applicants with credit scores as low as 620 could be approved. Unlike Milo, Figure offers fixed rates that are completely independent of any cryptocurrency.
What Makes Figure Innovative?
According to Andrew Martinez in a March 2022 article for MBA Newslink, Figure registers eMortgages “through its own lien and eNote registry system.” This system is called “Digital Asset Registration Technologies, or DART” and is Figure’s “alternative to MERS databases.”
Figure’s use of blockchain technology and proprietary DART registry allows the company to “offer immediate and automated asset management” to borrowers and brokers. Figure originates its eNote mortgages through the public open-source Provenance Blockchain marketplace.
Should I Consider Figure’s Home Equity Line of Credit When Refinancing?
Homeowners take out a second mortgage for all kinds of reasons, but most do so to fund necessary home improvements and/or repairs. Others seek a second mortgage to buy another property, consolidate debt or cover other costs. Figure’s HELOC could be the right choice for certain homeowners.
In April 2022, Aylea Wilkins reviewed Figure’s HELOC for Bankrate. According to Wilkins in her article “Figure: 2022 Home Equity Review,” the company actually won several Bankrate awards. Figure was voted the best HELOC for home improvement and debt consolidation. It was also voted “best innovative home equity product” and the best HELOC for “borrowers with fair credit.”
Among the many benefits of Figure’s HELOC are its lightning fast approval process, competitive interest rates and minimal fees. Wilkins notes that the average HELOC rate back in April 2021 was just 4.61%. Of course, there are some drawbacks for borrowers. For example, commercial properties, multifamily properties and mobile homes are ineligible for Figure’s HELOC. Unlike most traditional HELOCs, Figure requires homeowners to draw their entire loan upfront instead of drawing in increments as needed.
Western Alliance Bank
Last on our list of lenders launching blockchain programs is Western Alliance Bank, which recently partnered with the platform TassatPay. According to Edlyn Cardoza in a recent article for IBS Intelligence, Tassat is “a leading provider of private blockchain-based, real-time B2B payment solutions.” Tassat engineered these solutions specifically for banks.
The company recently announced a smart contracts extension of TassatPay, which will help banks and their users “streamline, simplify and automate” all transactions. Through their subsidiary AmeriHome Mortgage, Western Alliance Bank intends to apply this technology to home loans and their payment plans.
Other Lenders Launching Blockchain Programs for Student Loans, Personal Loans and More
Blockchain has permeated other areas of the financial sector — including student loans, personal loans and more. For example, a number of companies have recently explored blockchain-supported ISAs or Income Share Agreements. OpenLaw Finance, Open Esquire and Polybird have all used the Ethereum blockchain to tokenize and distribute ISAs for students seeking funds for college.
A natural fit, blockchain has increased its influence in peer-to-peer lending over the last couple of years. Last May, BankSocial launched Ethereum’s first ever P2P social consensus lending platform. The company hopes to issue its initial loans some time this year.
Beyond those listed above, Nexo, Avalanche, SALT, Celsius, WeTrust, Unchained Capital and Zentus are all lenders that use blockchain.
