Right now, interest rates on mortgages are some of the lowest they’ve ever been. Applicants are scrambling to take advantage of those rates, but some of them — even with good credit scores — are being turned away.
Even people with down payments and good credit can only buy homes if the banks agree to provide them with loans. In 2015, only 36.7 percent of homeowners were mortgage-free, and most of those were older people who had paid off their mortgages in 15–30 years. People don’t have six-figure sums lying around to put toward homes; they need some help. Mortgage brokers are the gatekeepers of that assistance. But unless brokers find ways to get reasonable loans in the hands of responsible borrowers, lenders will continue to miss out on revenue.
Where Lending Criteria Goes Wrong
Thanks to the financial crisis of the late 2000s, lenders are much more cautious today about which people they trust with their money. In many cases, even if lenders did want to loosen the reins, government regulations don’t give them a choice. This makes it difficult for borrowers with lower credit scores to secure mortgages.
Industry restrictions have mostly done good things on a macroeconomic scale. Banks don’t want to give loans to people who won’t pay them back, and applicants don’t want to wind up in the foreclosure process. However, this mortgage evolution allowed a large group of people with good (but not great) credit to slip through the cracks, denying worthy would-be homeowners of the chance to own a house.
In Canada, for example, brokers recently reported a 20 percent increase in borrower rejections from large, traditional mortgage lenders thanks to stricter regulations. The increased prime interest lending rate in the U.S. also affects the ability of this overlooked group to buy homes. As the rate goes up (which it has done five times since the financial crisis), mortgage rates eventually follow. Borrowers with weaker credit and borrowers who signed deals with adjustable rates get hammered by these fluctuations, widening the gap between those with great credit and those with passable credit.
And even though interest rates are low, mortgage debt service ratios — which measure the amount of gross income dedicated to paying the mortgage — don’t favor people with non-prime credit. High home prices hide the seriousness of potential rate increases, trapping homeowners into paying more for their mortgages (and for longer periods of time) than they intended.
Despite the factors working against the average-credit borrower, the battle is not lost. Mortgage brokers have an ace in the hole to provide reasonable loans to deserving people: blockchain technology.
How Brokers Can Use Blockchain to Serve Mortgages
Blockchain allows brokers three distinct advantages in the mortgage servicing process:
1. Immutable Audit Trail
Blockchain technology creates an immutable audit trail for brokers to follow as they verify applicant information and documents. Brokers no longer have to hope that an applicant submitted honest information: blockchain creates a trustless process, tracking documents to ensure that no one modifies them after submission.
This encourages brokers to service people with lower credit scores. Right now, the mortgage process forces documents through a long chain of custody that opens several opportunities for fraud. With blockchain, however, brokers can rest easy knowing that all submitted information remains accurate. Shady borrowers are easily caught, while honest ones finally get the chance to prove their worthiness.
2. Easier Cross-Border Lending
Some borrowers outside the country who wish to buy a home struggle to find brokers who will work with them. On the blockchain, though, international borders present far fewer challenges.
Thanks to the prevalence of online systems, 40 percent of global payments (more than $135 trillion in 2016) move across borders. And while national systems make it difficult for brokers and other financial intermediaries to track and manage that money, blockchain doesn’t care about those obstacles. Thanks to its universal nature, blockchain allows brokers to serve anyone, anywhere, opening the door for international investors and relocating families to buy homes.
3. Improved Payment Tracking
In the age of smartphones, mortgage payment tracking stands out as an outdated relic. The payment processor might know when payments are late, but identifying habitually late payers and creating action plans to prevent sunk costs remains a tall task.
Again, blockchain provides an easy answer. Thanks to its origins as a platform for digital currency, blockchain is the perfect tool for lenders to accept and track payments directly from borrower to lender — or lenders, as the case may be. Increased transparency and improved payment processing on the blockchain make mortgages an appealing investment vehicle. More investment groups providing cash for loans means more loans available for borrowers with less-than-prime credit.
Blockchain technology is taking the rest of the world by storm, and it’s time the mortgage industry caught up. Borrowers with good credit and cash to spend are waiting for banks to accept their patronage. And blockchain provides the tools brokers need to bridge the gap between would-be borrowers and the people who fund their loans.
Joe Markham is the Founder and CEO of Block66, a new blockchain-powered platform that increases transparency, streamlines the deployment of capital and overcomes geographical lending restrictions in the mortgage industry. With thorough experience as a broker and a disruptor in innovative tech, Joe brings his expertise in fintech to enhance the mortgage experience for every person involved.