Empowering the Credit Unworthy
Homeownership is one of the biggest highlights in many people's life. Having a parcel of land to call your own is still considered a major accomplishment and milestone. However, with time, homeownership has become inaccessible to the average person.
In the US, it has almost been a decade since the recession, yet victims of the subprime mortgage crisis are still trying to recover. Millennials, who are now the largest generation in the workforce, have been given the short end of the stick financially. Timing was not on their side as many graduated college around the time of the financial crisis when jobs were scarce. All the while, they had debts to contend with as soon as they graduated. Today, 6 million Americans have over $50,000 in student loan debt and so, for most of them, opportunities to build wealth have been quite scarce.
Now, a large number of millennials are getting to the stage of their lives where they are trying to establish families and settle down, a stage they call "adulting". While homeownership is beneficial to family life, it remains out of reach to a lot of people. Many are deemed credit-unworthy to get home mortgages due to low credit scores or existing student loan balances. The problem is, credit scores don’t really paint an accurate picture of a person’s financial standing. They only show how well a person manages to pay back money they owe. Potential borrowers might actually be financially capable enough to take out new loans but they just don’t have the history or score required by most lenders.
This, however, may soon change as developments in financial technology are opening more options for financing even big-ticket purchases like real estate. There are peer-to-peer (P2P) lending platforms now allowing loanable amounts that are large enough to be used to settle deposits for homes. Technologies like blockchain are also emerging to disrupt both the real estate and lending markets. Millennials, the digital natives, are quite comfortable resorting to these channels as viable alternatives to traditional lenders.
Homeownership through Blockchain
Several blockchain projects are working to change the way the people get access to real estate. Atlant, for example, is a pioneering project that tokenizes real estate. This allows investors to fractionally own properties traded on the platform. Another project, Bee Token, aims to become the blockchain-driven version of Airbnb through a transparent home sharing platform.
Homeownership, however, requires larger investments that are often only available through mortgages. The Homelend platform currently in development seeks to use blockchain to make home mortgages accessible especially to those denied by traditional lenders. The platform uses P2P lending to allow prospective homeowners to crowdfund their mortgage and takes advantage of blockchain smart contracts to make this possible. The loan process is guided by smart contracts to ensure that the home purchase is successfully funded, that the borrower will be able to pay back investors, and that the property can be recovered in the case of default. By using blockchain, the platform takes away the need to involve intermediaries such as banks and escrow agents, making the loan process quicker and more affordable.
In addition, instead of just looking at a person’s credit score, Homelend takes into consideration a broader range of factors including the educational background, profession, and even social network activity of the applicant. The system uses artificial intelligence and machine learning to process all these criteria to determine a borrower’s creditworthiness. By doing so, the platform provides better financial inclusion giving those who may not have traditional high credit scores but are otherwise financially capable access to home mortgages.
Building an Ecosystem
The availability of these lending and real estate platforms offers a head start towards an ecosystem that could offer better avenues towards homeownership. Blockchain can have several other applications including home listings. The technology’s transparency can be applied to encourage sellers to price their properties fairly. The lack of intermediaries could also help keep prices competitive and still give sellers fair margins.
What is crucial to the success of such ventures is for peers to participate as investors and fund home purchases. By establishing a viable token economy that is low-risk but rewarding, platforms could help encourage even ordinary investors to enter the space. There is a growing population of cypto rich individuals who feel comfortable in the blockchain space and might be willing to help such projects get off the ground, which would have a stabilizing effect allowing further investors to come into the space.
Applicable regulations and laws would also help normalize blockchain mortgages. Several territories now recognize blockchain records as admissible, which means that even when it comes to the event of transactional disputes, blockchain records could be used as evidence in court. This should provide an added layer of security especially for transactions involving significant value like real estate.
All these developments point towards blockchain mortgages becoming a viable option for prospective homeowners who are disenfranchised by traditional financial systems. Millennials are likely to explore these alternative financing options without much reservation so these services have the chance to succeed and flourish as new alternatives. Once the practice becomes established, crypto mortgages may eventually become a viable financing option for everyone regardless of age or status.