WHY THIS MATTERS IN BRIEF
The $17 Trillion mortgage industry hasn’t been disrupted in centuries, but things are changing …
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The hottest Non-Fungible Token (NFT) on the market may not be art, a cartoon ape or a tweet but your mortgage. Indeed, mortgage lender LoanSnap recently announced they had minted the first NFT mortgages in existence, using their Bacon Protocol to wrap seven mortgage liens into tokens collectively worth $1.5 million.
The benefits of such tokens, according to LoanSnap, are lower mortgage rates, faster loan approvals, and greater flexibility around repayment terms. The explanation being that as the blockchain can permanently record information like applicant credit score, debt-to-income ratio, and home value, the need for verification through middlemen is eliminated – in turn reducing the cost and time involved in the lending process.
While these potential benefits are indeed significant, the largest beneficiaries of this innovation are almost certainly retail investors who for the first time are gaining access to the highly-coveted $17 trillion mortgage industry.
For those unfamiliar, financial regulation and capital requirements have historically made it virtually impossible for everyday citizens to get involved in mortgage lending. This has left large financial institutions and the government to soak up all of what’s considered to be one of the lowest-risk and consistent yielding asset classes available. Tokenizing housing debt eliminates many of these barriers to entry making it theoretically possible for anyone with a DeFi wallet to own a fractional share of a mortgage.
“What we’re basically able to do is take out all the middle people that are involved in those transactions so that the lender gets the lion’s share of the return,” says LoanSnap CEO and Bacon Protocol co-founder Karl Jacob. “This is great for people and allows them to invest in an asset class that was previously only available directly to governments and large financial institutions.”
On a technical level, what LoanSnap has done is mint NFTs tied to individual mortgage liens – the property ownership rights that collateralize mortgage loans – and then used those non-fungible assets to back their stablecoin, known as the bHOME token. As payments are made towards the mortgage, or the underlying property appreciates, the bHOME token grows in equal value – generating a return similar to what a bank would receive as a mortgage lender.
With such a historically well understood asset like housing underlying their stablecoin, bHOME aims to have an increase in transparency over other stablecoins, notably Tether, which have been notoriously opaque in publishing the contents of their reserve assets. And by appreciating their coin value in line with the underlying real estate, bHOME in theory gives investment upside over other stablecoins – the Bacon Protocol whitepaper dubs it a ‘Stable+’ coin.
Currently the Bacon Protocol only accepts loans that meet the Fannie Mae and Freddie Mac Conforming Loan guidelines. However as the protocol expands, it will be theoretically possible to mint additional tokens on the Bacon Protocol each with a specific set of criteria—for instance liens on homes in a given metro area, or only homes worth more than $1M. This enables investors to get exposure to real estate in a given region that may be experiencing a boom without needing to invest in any one specific home.
The idea is that as protocol grows, the network will decentralize such that any qualified lender could match with a homeowner on the Bacon Protocol and exchange tokenized liens for loans under the criteria that suits them.
“So when we think about our platform, we have multiple lenders…We’ve got Wells Fargo and Chase and Fannie Mae and Freddie Mac and all these different lenders. It’s basically a marketplace,” describes Jacob. “What we do [on the Bacon protocol] is collect all the information we need to satisfy that lender, that can be income statements, tax returns…a whole bunch of stuff—and then at the end of that process, we have the opportunity to sell that loan to one of the investors.’
The idea, while promising, is certainly nascent. At the moment less than 100 wallets are holding bHOME tokens, and the market cap is just over $1 million. In the seven mortgage NFTs minted to date, LoanSnap has acted as both mortgage originator and protocol owner, making the current endeavour more a proof of concept than a streamlined innovation in home loans.
Although ambitious, proofs of concept are not uncommon in the crypto world with many tokens reaching fruition way beyond popular expectations. While a full fledged NFT mortgage marketplace is likely years away, and likely longer, investors looking to get in on both the housing boom and the NFT craze may be interested in it.