Why are mortgage transactions taking so long? Plus would new technology such as blockchain, help speed things up?

Why are transactions taking so long to go through?  Demand is making mortgage companies particularly slow at the moment, and what’s also apparent, is mortgage products are not as favourable as compared to 12 months ago.  

First-time buyers normally make up most purchasers in the market, but bizarrely this has started to fall recently for the first time in many years. 

First-time-buyer products have massively reduced, and the amount of capital first-time buyers need has increased, or the amount they need to be earning has increased. 

What first-time buyers, and all buyers in actual fact, are hoping for, is that mortgage lenders will pull their socks-up in the not too distant future and realise this is something to take advantage of, and the increased demand, while it is here, is a great time to actually expand their offerings for buyers. 

We cannot predict now what will happen in the housing market by 2021.  Many of the predictions for Q3 and Q4, earlier in 2020, as we entered lockdown, were way off the mark, with Savills suggesting the housing market would be 10% down.   

Will some of these housing market downturn predictions be deferred to 2021?  It’s almost impossible to know at this stage, and any predictions being made now will unlikely be right on the button for next year. 

Schemes such as “Help to Buy” will end by 28th February 2021, with a deadline for the legal completion by 31st March 2021 – some cases even being stretched till May 2021.

The somewhat unexpected, but very welcomed Stamp Duty Land Tax Holiday is also due to come to an end on 31st March 2021. Could this be extended?  It’s plausible, but again not worth betting on.

Would new technologies, such as blockchain, be the answer to modernise the mortgage industry?

Blockchain has been dubbed ‘the future of transactions’ and expected to have a substantial economic impact – even comparable to the impact the internet has had over the last two decades. 

Also Read: What is Blockchain?

With that thought in mind, Blockchain technology could be a game-changer for the mortgage industry for several reasons and benefits. It can speed up transaction time, making settlements happen more quickly.  Record creation can be more accurate and make the process more affordable for all parties. 

• More precise record-keeping
• Lower costs for the home buyer
• Easier to confirm the chain of title
• Use of Smart Contracts 

Mortgages using the standard process and parties can take 40-days to two months normally.  This timeframe is dependent on the busyness and the volume of people buying a home with the aid of a mortgage. 

The experience in Q3 and Q4 2020, given the impact of the pandemic, the governments Stamp Duty holiday, and also knowing the Help to Buy scheme will be withdrawn early 2021, is really impacting the mortgage industry and causing quite a back-log.   

With the current mortgage process, there are several steps involved.

• The first stage is the prequalification, whereby the lender looks at the buyer’s credit/credit score and gives them a quote. 
• The next part of the process is the application, where the buyer will complete an application form which details employment history, income, assets etc. This application has been even deeper since (26 April) 2014, when lenders brought in rules to look in detail at every expenditure of all applicants. Nonetheless once the relevant information is collated, it’s there for the lender to approve, or deny the application. 
• Next step, upon successful application is processing and checking all the information, which includes an independent valuation to confirm the price of the property. 
• After processing the information and various checks are done, it all goes to an underwriter, and it’s the underwriter that finally decides whether the buyer is too risky or gets the stamp of approval. 
• Last stage is settlement (or closing) and after this the mortgage finalises and the new homeowner moves in.

The difference between blockchain and other record keeping? 

The key feature with blockchain is its decentralised.  Whereas most databases and ledgers operate by a centralised hub. E.g. a credit company or a bank, and it’s only this centralised authority that allows the transaction.

“Blockchain has the potential to increase transparency and accountability, and positively enhance our social and economic systems.”

Blockchain has a central node.  Every computer or node in the Blockchain network has a copy of the blockchain ledger.  If someone adds new information or transactions every node needs to add to their copy of the ledger.  What works well is every node has agreed in advance the rules of the blockchain. Identities of the people are not public but all records in the blockchain are public. 

Blockchain technology and blockchain accelerators aren’t yet standard in the mortgage industry but they do show promise. 

How Blockchain technology could work for mortgages

Imagine the buyer(s) have found a home and they are already prequalified for a mortgage. They complete the mortgage application – this becomes the ‘block’.

All parties involved in processing the mortgage, get access to the block and application information gets verified almost instantly. 

After the lender loan approval, the buyer receives an encrypted key to sign the offer.  This digital signature becomes another record and a unique block in the chain. 

Following this the next block is created, which is transferring the loan funds to the buyer and then another block is the transfer of the deed. 

The process of a buyer getting a mortgage approved and settling on a loan can take a couple of weeks instead of one to two months using blockchain technology. 

ALSO READ: Why Blockchain Technology could positively impact the Mortgage Industry?

If blockchain technology is so revolutionary, why aren’t all mortgage service companies using it?

• Everyone in the process must be on board for the technology to work, from the buyer, seller to the lender and surveyors. 
• Blockchain, even though more secure in many ways, savvy hackers could hack the system and gain access to private records and money.  Many variables have impact on how secure a blockchain is, including, number of parties involved, number of nodes in the blockchain system.
• Blockchain technology remains unregulated, without a define industry standard for mortgage processing.  This is good news for some people, but not for others. 

Blockchain technology and blockchain accelerators aren’t yet standard in the mortgage industry but they definitely show promise.