The traditional mortgage industry with its high cost entry and illiquidity is discouraging to smaller players trying to break into the market.
However, with the introduction of blockchain technology, tokenization is poised to revolutionize how mortgages work by Improving the liquidity and transparency of these assets while creating the opportunities that investors are looking for.
On that note, let’s take a look at the role tokenization plays in streamlining the mortgage process.
What is Tokenization?
Tokenization simply involves establishing a virtual token that represents the ownership of an asset. It is essentially the act of “digitizing ownership” through the use of blockchain technology backed by smart contracts.
Tokenization makes ownership of assets highly flexible by breaking it down into smaller transferable units that can be traded on the blockchain. This creates transparency as all transactions done on blockchain are recorded and can be viewed by anyone.
Tokens serve as proof of ownership of an asset and entitlement to interests and profits accruing from a working asset.
Tokenization and mortgages
The mortgage industry consisting of lenders like Sofi provides home loans to individuals looking to purchase new properties.
It is one of the largest financial industries but it is difficult to break into because of the high stakes involved.
The mortgage industry is still mainly controlled by big firms and investors and there’s little to no room for any new players.
This is because the mortgage industry requires a considerable amount of capital to get started. However, with the introduction of tokenization a solution has risen to the challenges facing the traditional mortgage process.
Tokenization offers a solution to the heavy cost that serves to bar entry into the market.
These costs are removed as mortgage assets can now be broken down into smaller transferable units so instead of having to own the entirety of a mortgage loan individuals and companies can now own tokens that serve to represent their ownership stake in the mortgage, entitling them to any interest or profits accruing from the loan.
This also introduces liquidity to the mortgage industry as tokens can easily be traded on the blockchain.
For instance, if you have 50% of ownership in a mortgage loan in form of tokens and you need to get liquid quickly, instead of searching for a big lender to buy you out of your position you can sell your tokens to multiple individuals, thus reducing your ownership stake and getting the cash you need without completely letting go of your entire position.
Advantages of Tokenization in the Mortgage Process
One of the roles tokens play in the mortgage process is reducing the high processing costs and time.
Since information is permanently on the blockchain, tokenization eradicates the element of the middleman, reducing how much money and time you would spend during these processes.
Tokenization creates faster loan approvals since documentation is safe and secure in the blockchain.
The blockchain and smart contracts allow redundant or time-consuming tasks such as compliance checks, listing of verified investors, and sharing of dividends to become automated saving time in the mortgage process.
Tokenization of the mortgage process also provides end users with lower rates due to the large amounts of investors and the liquidity in token assets. This provides more flexibility regarding loan terms, such as payment structure.
There is also a reduction in fraudulent dealings with mortgage contracts since information on the blockchain cannot be changed or manipulated.
For many experts in the real estate and mortgage industry, tokenization is a bright future to look ahead. The world of real estate could see a massive shift and a more extensive inclusion with the possibilities of fractional ownership and liquid assets in tokens.
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