It may sound far-fetched, but a blockchain-enabled mortgage has already happened, and it could be the beginning of the end for traditional mortgages backed by legacy banks.
Blockchains, cryptocurrencies, and NFTs have been dominating news headlines lately. The impact that a new class of decentralized financial products, known as DeFi, will have on the real estate industry remains unknown, but many believe that the sector is poised for explosive growth. Decentralized finance is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments.
So how would a bank-less mortgage work? First you'll need another form of collateral, as there will no longer be a bank that is loaning you the money with the threat of foreclosure and repossession of your home in case of non-payment. Enter cryptocurrencies. There are an increasing number of companies and protocols in DeFi that allow you to borrow against your crypto assets in 'over-collateralized' loans.
Many crypto users see one major benefit: The IRS now considers cryptocurrency as property, which is taxable based on capital gains. If you borrow against your crypto instead of selling it when you need liquidity, you don't trigger a taxable event plus you still hold the upside of potential price increases in the value of your collateral.
For example, you would need to lock up at least $150,000 worth of crypto in order to get a loan for $100,000 at a given rate. Your home can't be repossessed, but your collateral could be liquidated if its value swings below the required threshold and you don't quickly add more to 'guarantee' your loan.
But long-term financial planning requires fixed rates at fixed terms in order to have the stability of a long-term payment plan that something like a home purchase requires. Traditionally, in this very young industry, crypto means volatile price swings and thus volatile rate swings for borrowing and lending.
Notional Finance aims to solve this issue with their automated market maker algorithm that connects borrowers and lenders via smart contracts at fixed market rates on the Ethereum blockchain. It's almost like a peer-to-peer marketplace where lenders can lend out their crypto at a fixed rate, and others can borrow crypto (which can easily be converted into cash for real-world purchases), backed by liquidity providers who lock up and pool their crypto together in exchange for a cut of the platform's transaction fees.
Currently, the longest duration you can lock in is 3 months, but with a $10 million Series A fund raise recently announced, the team aims to expand the offerings and extend the time durations possible for borrowers.
Even with this short duration (which you can easily rollover at the next prevailing rate), at least one Notional user with significant crypto assets already went ahead and made the leap to borrow against his crypto, pay off his mortgage in full, and move his debt from the traditional financial system to Notional. Other benefits: No more credit history checks, threat of repossession or income requirements that you'd need in a traditional loan application. With a new version launching imminently, the protocol will soon support longer term fixed rate durations, but for now that is a stumbling block.
My take as a Realtor: I see this as a very positive move. We have so many buyers in situations where another avenue of financing a property would be advantageous. Credit, job certifications, appraiser mistakes and other municipal setbacks can totally implode our buyer's plans. A transaction facilitated with a situation like Notional may solve some of these thorny issues.
We are always hoping for more tools in our toolbox to make things work that otherwise would not. Having this option for our buyers may work in their favor. It would definitely not be for everyone. Solving problems is what people pay us the big dollars for and it would be a great thing to help make one person’s purchase a reality if the situation presents itself. I am happy to learn more and hope we can offer such an option!
Sue Long is the Principal Broker (owner-operator) of Keller Williams Realty Mid-Willamette
. Co-authored by Kyle Long, Head of Marketing at Notional Finance