Updated: Jun 25, 2019
The global residential mortgage market is estimated to be worth $31 trillion. 66 percent of all Americans have a mortgage on their house while in the UK and China it’s as high as 70%. It’s a segment of the financial markets that hits close to home for a large portion of the global population.
The average mortgage closing costs would typically vary between 2 and 5 percent of the price of the property, including broker fees, loan origination fees, underwriting fees, surveyor fees, legal fees, and title fees. That means on a house of $250,000, the buyer can expect to pay anything between $5,000 and $12,500 just to obtain a mortgage.
The mortgage process is heavily centralized and permeated with middlemen who each add their own markup to the overall costs, a perfect target for blockchain.
According to a PWC report: “Blockchain technology may radically alter the process through which consumers buy a home, as well as the way financial institutions handle mortgages. Specifically, the technology could remove cost and friction from the process, create transaction records that are infallible and incorruptible, and facilitate near-instantaneous settlement.”
Moody’s suggests that the annual cost-savings as a result of blockchain-based application processes could be as high as $1.7 billion and ex-Barclays boss, Antony Jenkins, believes the time savings could be equally significant:
"Over time what you could see, for example, is a mortgage being granted in 10 minutes, you could see a letter of credit being granted in two minutes, those types of things.”'
But how realistic are these claims and exactly where would the blockchain impact be?
The typical mortgage application process
The current mortgage application process is heavily paper-based, labor intensive, time-consuming, and expensive. This is in most part due to a long line of 3rd party service providers that all have an input into the process, such as surveyors, solicitors, credit agencies, and title deed offices.
When a buyer and seller agree to transact on a property, the buyer will apply for a mortgage from their bank, which includes providing several items of documentation such as bank statements, proof of income, existing loan information (if applicable), and consent for a credit report to be compiled by an external credit reporting company.
To determine an estimated loan amount, the bank would also approach a surveyor to conduct a preliminary property evaluation, after which it can start the credit approval process based on the information obtained from the buyer and the various 3rd parties.
Next, the bank would confirm the property ownership with land registry offices as stated by the seller. A final property valuation will then be requested from a surveyor so that it can be cross checked with the approved amount of credit.
The bank can then notify the buyer and solicitors of its decision, after which arrangements are made for the signing of the mortgage loan agreement and mortgage deed. Once the documents are s
igned, the bank can initiate the drawdown of funds and land registry offices can be informed to update title deeds. In the US, this application process can take anywhere from 30 to 60 days to complete.