Smart Contract Mortgage
However, smart contracts have the potential to change the way that the mortgage process works and make it much quicker for everybody involved. A smart contract is a pre-programmed contract that self-executes, so there is no need for third parties to be involved. Perhaps a real estate contract be in the format of a smart contract. Every step of the mortgage approval process can be executed automatically as soon as the necessary requirements are met and each party has instant access to the relevant information.
In order to understand the potential benefits of this new kind of mortgage, you must first understand what smart contracts are and how they work.
The mortgage approval process can take several weeks because it relies on a lot of intermediaries. The buyer, seller, and lender all rely on a third party to ensure that everybody upholds their end of the contract and any disruptions can bring the whole process grinding to a halt. Unfortunately, this is necessary to establish trust and even though the current system works, it is incredibly inefficient.
What Is The Blockchain?
Smart contracts rely on a blockchain to function. A blockchain is a decentralized public ledger that is able to hold records of transactions in a secure yet accessible manner. A blockchain has three very important components:
Blocks: blocks contain batches of valid transactions that are grouped together and stored chronologically;
Transactions/ Events: these are the individual units of information that are entered into the ledger;
Chains: these are created when a new block of transactions is added to the existing blockchain.
Blockchains are most commonly used for cryptocurrencies like Bitcoin, Ether, Ethereum, and Dogecoin. However, many financial institutions should now consider using this technology to create crypto mortgages and potentially offer blockchain or Bitcoin mortgages in the future. The benefit of using the blockchain is that it is completely decentralized, meaning that it is more secure and all parties have access to the relevant information. The blockchain can also be used to execute smart contracts designed to automate the mortgage process.
What Is A Smart Contract?
A smart contract is a pre-programmed contract between two or more parties that executes automatically once the terms of the agreement have been met. It will execute without any interference from human oversight, it is automation, and can be programmed to perform a wide variety of functions, including mortgages. A smart contract written for an Ethereum blockchain ensures:
The borrower implements the agreed-upon collateral
The borrower does not transfer ownership of their property until the loan is repaid in full
The lender receives a pre-programmed percentage of interest on an annual basis
The borrower receives their agreed-upon loan amount once set conditions have been met
The Benefits Of Using Smart Contracts For Mortgages
The benefits of using smart contracts to facilitate mortgage loans are:
All pertinent information about the borrower and their credit rating is immediately available to all concerned parties
Smart contracts can speed up the process by excluding unnecessary intermediaries and automating every step of the process
Smart contracts can be programmed to include certain triggers that ensure compliance with the terms of the contract, which prevents individuals from going back on their promise
Smart contracts are easier to maintain and update as required than physical agreements that rely on somebody's handwriting or printing skills.
Smart contracts can drastically reduce the administrative costs involved with the mortgage process.
The Potential Challenges Of Smart Contract Mortgages
Even though smart contracts and blockchain technology have the potential to revolutionize the mortgage industry, there are still some challenges that need to be overcome before mortgages can become a reality on a mass scale. For example:
The technology is still developing – current smart contract programs are limited in their functionality because of the relative youth of this technology
Not everybody has access to blockchain – not all financial institutions have the necessary infrastructure in place to create smart contracts for mortgages
The legal and regulatory framework for smart contract mortgages must be updated. A public blockchain potentially spans many different geographical locations, meaning that it is subject to a number of different privacy and data laws
Lawmakers are still playing catch-up when it comes to blockchain and smart contract technology. It could be some time before the legislation is in place to make smart contract mortgages available to everybody. However, the Florida Blockchain Task Force was created to see how this technology can be implemented.
Smart contracts are still in their infancy and nobody knows for sure how they will be used in the future. But, we can say this: technology is a powerful thing and smart contracts are probably going to change the way that mortgages are originated in the near future.
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