Non-fungible tokens or NFTs are an emerging asset class hosted on the blockchain. It refers to a non-interchangeable data unit stored on a decentralized ledger, where each unit is assigned to a unique asset (digital or physical). Unlike cryptocurrencies, NFTs aren’t interchangeable – which is what gives them their intrinsic value. One could potentially trade NFTs just like physical artwork, music, or even real estate, with the information stored in a decentralized ledger called the blockchain.
Note that we said even real estate can be traded as NFTs. In the last few months, several mortgage and lending companies have announced an NFT play, where borrowers and mortgage owners will now be able to transact through NFTs. Could this disrupt the mortgage industry as we know it? Or will it only be a digital alternative to a traditional mortgage, only in a more slightly convenient form, but essentially the same in its core functioning?
We’d lean towards the former – here’s why.
How do NFTs Apply to Mortgage Lending?
The core premise behind NFTs in mortgage is quite simple, really. It entails that a home or real estate property is broken down into multiple assets, each asset comprising a non-fungible token or NFT. Mortgage buyers investing in an NFT will essentially own a fractional lien as per the proportions of the property value. The NFT is a legal binder between the home/property owner and the mortgage buyer. It indicates that an external investor has some stake in the property, and all the data is recorded in an accountable and transparent manner on the blockchain.
One could question the need for NFTs in mortgage in the first place. On the surface, there is no immediate cost-benefit, and investors will not gain from snowballing crypto-asset values. As per Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage was approximately 2.98% in November 2021, while the interest rate for NFT mortgages was somewhere between 1.5%-3.1%, which is equally conservative.
But on an operational and systemic level, NFTs in mortgage signal a revolutionary shift.
The Potential Benefits of NFTs in Mortgage
NFTs in the mortgage sector allows you to:
- Secure transactions and prevent fraud – The NFT acts as a certificate of ownership for the mortgage holder. Every stakeholder involved will be able to track ownership activity and maintain records, even if the mortgage holder decides to be anonymous. This would go a long way towards minimizing fraud risk.
- Simplify mortgage refinancing – Homeowners struggling to refinance their mortgage can turn to the NFT marketplace. Granted that such opportunities are several years, if not decades, away, but NFTs could provide a viable alternative to traditional banks and financial institutions when it comes to obtaining refinancing.
- Open up the housing market to a new generation of buyers – Fluctuating housing prices are locking a sizable portion of the population (particularly millennials and Gen Z) out of home ownership. Research shows that potential buyers in the 25-40 age group are continuing to rent due to lack of suitable financing. Once again, NFTs offer an alternative to traditional channels.
- Fundamentally democratize the mortgage industry – Today, mortgages as an asset class primarily benefit banks, financial institutions, governments, and other large investors. NFTs in mortgage would take these benefits to anyone eligible to invest in cryptocurrency, which could one day encompass the entire global population.
What Are the Prerequisites for NFTs in Mortgage?
NFTs in mortgages are still at a proof-of-concept stage. There are a few companies making in-roads. Credit platform Ledn has announced that it intends to launch a bitcoin-backed mortgage product, similar but not identical to NFTs. Vera is a blockchain platform for NFT rentals, real estate investments, and mortgage buying. Aqarchain.io has unveiled an experimental platform that will offer fractional NFT investments for mortgage rights.
The most prominent example is perhaps LoanSnap, a company that actually managed to mortgage Liens in eight homes across California, Washington, Iowa, and Alabama as NFTs collectively worth $2.7 million. This suggests that NFTs in mortgage could be less far away than we expect. Here are the prerequisites that organizations should be keeping in mind:
- End-to-end process digitalization – Siloed processes and reliance on manual effort will make it difficult to implement blockchain and NFTs. Mortgage businesses must first address their siloed infrastructure and process frameworks, transitioning into a paperless and 100% digital world.
- Acquisition of new skills – NFTs in mortgage is a highly sophisticated technology and will require specialized expertise. Mortgage businesses cannot hold onto only in-house teams and limited technical competencies. It will be important to partner with mortgage tech specialists who are conversant with all things digital, from AI and automation to the cloud.
- Process agility in the face of regulatory change – The laws and regulations around blockchain and NFT in mortgage are still a work in progress. Papers like this one published by the UNESCO Housing Chair are exploring this issue and its ramifications. In the meantime, businesses must ensure that their processes are agile and adaptive, so that a single regulatory chain does not require end-to-end uprooting of processes.
- A strong customer service function – Businesses interacting with this new generation of home buyers will be expected to provide exemplary standards of customer service. This customer demographic will demand transparency, flexibility, and responsiveness and may not be as tolerant of delays as previous generations. Strong customer service will protect the business against churn in a competitive and open market.
Are NFTs the Future of Mortgage?
Given the recent spate of startup activity in this space, NFTs in mortgage are already here. There are few questions yet to be ironed out – for example, if a mortgage buyer owns enough NFTs, could they force homeowners to sell the property? These questions will be answered with time and with gradual regulations, but for now, in 2022, the global infrastructural system necessary for NFTs is firmly in place.
Where do you stand on this digital maturity curve? Speak with tech gurus to assess today.