The non-fungible tokens NFTs are being used for ownership of everything, including music albums, digital artworks, and posts on Twitter.
An NFT is essentially a certificate of ownership for an asset that – unlike money – is unique and cannot be replaced like-for-like.
As well as a piece of music or an online avatar image, this could arguably also apply to a home – and it is with that in mind that US mortgage lender LoanSnap has minted the very first NFT mortgages.
Some properties that were mortgaged through LoanSnap’s NFT platform ‘Bacon Coin ‘
NFTs are being used for the first time in physical assets.
It is at a very early stage – only eight mortgages have been minted so far – but if the concept took off, it would mean that anyone who could buy cryptocurrency could own a share in someone’s mortgage.
“There’s been a lot of criticism about cryptocurrencies such as Bitcoin. People are now asking: What are its use cases? And what can they do with them in practice?” Martha Reyes from Bequant, the Head of Research on Cryptocurrency Trading Platform Bequant.
“But NFTs are more than just coins in public imagination. There is this concept of the democratisation of finance, and of art – and there are clearly other areas we haven’t yet considered.
“It’s granting access to items that are difficult to get to.”
NFT mortgages in Britain are still in their infancy, but they’re not available yet in the US. Given the volatility and potential for fraud in cryptocurrency, it would be unwise to borrow this way.
This is Money examines the possible pitfalls and how they could be used.
What is the secret to it?
A NFT grants the rights to the owners of music or artworks, allowing them to distribute it, resell or license it however they wish.
The investor will purchase a portion of a property as a lien or share of a lien to buy a home.
LoanSnap has so far issued eight NFT mortgages totaling $2.7 million
If the mortgage holder is unable to repay their debt, the lender can take possession of the home.
LoanSnap currently has eight mortgage liens wrapped into NFTs totaling $2.7 million. This is what it calls ‘eggs.
These eight eggs are located in California, Washington and Iowa, respectively.
Investors can also access the NFTs, which contain secure stored information on the borrower and property.
At this time, it’s a remortgage program for those who own some part of their house and allow them to borrow equity.
The loan amount is decided by the borrower. An ‘automated marketplace maker’ sets the interest rate. We explain this below.
The technical aspect of the process involves LoanSnap’s ‘Bacon Protocol’: A set of lending rules that are built with smart contracts on Ethereum.
Colloquially, the project is known as “Bacon Coin”, derived from the phrase “Bringing Home the Bacon”.
Where do crypto investors come into it?
LoanSnap provided funding to fund the eight initial mortgages, in order for us to evaluate the idea.
In the future, however, lending funds will be provided by crypto investors who purchase a stablecoin called “bHome”, which gives them a share in NFTs.
Stablecoin refers to a cryptocurrency that is tied to an asset.
Multi-buyer crypto buyers can fund one mortgage loan. This means the barriers to entry are lower than those of a rent-to-own landlord.
‘People can access it on both sides of the equation – as a homeowner or investor – if they have a little amount of money to spare,’ says Reyes.
As a means of selling music or art that is unique, NFTs are widely used.
The bHome token’s value increases as the homeowner makes mortgage payment to the lender or when the property becomes more valuable.
It generates an equivalent return to the bank’s mortgage loan. A single bHome coins is currently worth $1.02.
Smart contracts can pool funds and mint the bHome Coin to fund loans matching certain criteria.
The Bacon Coin website reads: ‘Mortgages have been a cornerstone of our financial systems. In order to earn money safely, the banks, government, and insurance companies all buy trillions upon trillions dollars in mortgages annually.
The Bacon Protocol is a novel type of centralized mortgage loan. This makes mortgages more affordable, quicker, and flexible for homeowners.
“It has the same power as mortgages and gives governments and financial institutions the ability to buy cryptocurrency.
The Cryptocurrency Market: Now buyers can invest in mortgages with a stablecoin called BHome
LoanSnap has said it wants as much of the process to happen online as possible – but as a house is a real-world asset, there are some things that need to be checked on in person.
It all comes down to licensed and regulated originators who are the company’s ‘only connection to the real thing’
They conduct checks on both the homeowner and borrower and create a lien.
NFT mortgages remain in infancy.
This may all sound a bit far-fetched, but so was shopping on the internet twenty or so years ago
Angus Stewart, mortgage broker
Some experts however believe that the system could have benefits for homeowners as well as investors.
Angus Stewart is the chief executive officer of Property Master, an online mortgage broker that offers buy-to-let services. Although it may sound a little farfetched, this was actually how shopping on the Internet twenty years ago.
“What we see emerging is a cyber-financial marketplace.”
The Bacon Coin project attracted some important backers such as Richard Branson’s Virgin; Mantis (the venture fund managed by The Chainsmokers); and Joe Montana’s L2 ventures, an ex-American football player.
Thomvest Ventures, True Ventures and Baseline Ventures are also backing it.
Transact faster and more securely
NFT mortgages may be attractive for investors. But what about homeowners?
LoanSnap claims that the process being done via smart contracts will mean fewer administrative headaches when sorting out a mortgage – as well as lower costs.
There are many middlemen involved when you take out a mortgage. This can lead to high costs as well. Reyes says that if you could make the process easier, it would be appreciated.
NFT mortgages in general could offer more security because the transaction is done on blockchain – a way of digitally storing information which is guaranteed to be secure.
Digitally stored information makes it paperless. This means homeowners will have less paperwork when applying for an NFT mortgage than they would with traditional ones.
Stewart says that blockchain technology could be used to ensure transactional security when buyers and sellers are brought together.
“Both sides could access all data necessary to make decisions immediately, making the process much faster and more efficient with an automated and more convenient approach to closing the deal.
The homeowner could move and pay the lender the mortgage using the proceeds of the sale of the home. This is similar to a traditional mortgage.
Some fear, however, that NFTs’ unique nature and multiple parties in a transaction could cause more administrative problems for the borrowers.
Nicholas Mendes (broker John Charcol’s mortgage technical manager), said that he is open to new schemes and ingenious ideas.
“But we’ve seen the unmobtgage program, where a lender was matched with money from a pool, there are limitations that must be jumped through.
Some people are concerned about the control of and access to data regarding their homes. LoanSnap however insists that it uses only information available to the public.
Concerns are raised about who controls the data and how they can be accessed. Stewart states that this could make it very dangerous and that there must be adequate controls over who can access and has ownership of the data.
“Regulation is going to have to catch up with new technologies.”
The Bacon Protocol stores only data already available publicly in the LoanSnap case. The smart contracts were subject to an audit by BlockHunters blockchain auditors and earned the highest rating.
Who are you lending your mortgage money?
NFTs have the potential to open up more lenders for borrowers than currently exist.
The concept could grow and they would have access not only to banks, but other investors like pension funds as well as investors who are retail investors around the world,
Reyes states that it is good for the borrower as it allows them to borrow money from anywhere in the world. “At this time, it’s not possible to do that on the mortgage market.
The homeowner might not be aware of who their mortgage is being funded. This is not likely to be an issue for most borrowers, according to experts.
Stewart states, “Assuming the funds remain available, it doesn’t matter who their lender may be,” There are many ways to show that funds are in fact available using blockchain.
‘The issue might be how easy the mortgages are to deal with in terms of servicing – but that is increasingly outsourced, even on mainstream mortgages.’
Is it possible that the cryptosphere could be more accessible than banks for borrowing money?
It is not yet clear what the NFT Mortgage market will look like, but crypto investors do not have to conform to banks’ lending standards when it comes down to customer credit scores and loan-to value ratios.
LoanSnap is currently playing safe. It only accepts loans which meet the Fannie Mae and Freddie Mac Conforming Loan guidelines – a standard set of rules about things like maximum loan-to-value ratios and the credit scores of borrowers. It has stated that it could alter this later.
NFT mortgage platforms are not advised to go too far in high-leveraged lending. However, they may be open to taking on slightly more risk because each lender or institution is only responsible for one mortgage.
Crypto expansion may be beneficial to those who are having difficulty getting a mortgage for their homes.
They could offer assistance to people who have difficulty getting a conventional home loan.
These include first-time buyers who have small deposits and the self-employed or people who are unable to pay banks’ loan-to income ratios.
Mendes states that a borrower’s eligibility is currently limited by the lender. It may be impossible to move up the property ladder.
“But we can see the development of technology, reliance, and acceptance in the future, so the buying process could develop.”
He believes that NFT-based lenders may offer loans to such borrowers in the future based on an evaluation of their individual circumstances. However, they would need to determine if their interest rates are appropriate to justify that risk.
“A click away”: Remortgaging
An NFT mortgage may be more flexible than regular ones because it doesn’t follow the same rules as banks.
Reyes states that it is flexible and can be adjusted to reflect market fluctuations. The interest rate can be adjusted as the market changes. There is no penalty for late repayment.
LoanSnap is a system that allows homeowners to only make monthly interest payments. They can also pay off any portion of their loan at anytime they want. There are no penalties for early repayment.
It also claimed that it made remortgaging simpler, explaining: “The loans can easily be refinanced with a single button.
“When interest rates fall, the borrower may see that their monthly payments can be reduced and can decide to repay the loan by taking out a new loan at the lowest rate.
How are rates determined?
LoanSnap uses an automated market maker to set rates. When there is lots of money waiting to be lent, rates will fall to entice in borrowers – but when there is little, rates will rise to entice in lenders.
According to the article, the interest rate will also be determined based on the loan amount.
According to it, “The Bacon MMM creates an easy supply-demand curve that incentivizes both borrowers and liquidity providers when they need to be part of the system.”
The algorithm that sets the rates on LoanSnap NFT mortgage platforms is used to determine the rate. However, if there was a mature market for lenders, they could offer better rates and start competing with each other.
They offer a lower interest rate than average.
Coin Telegraph reported that NFT mortgages have interest rates ranging from 1.5 to 3.0 percent. However, the average 30-year fixed-rate mortgage rate was 2.98% earlier in this month according to Freddie Mac.
For now, the rates on LoanSnap mortgages have been fixed. Stewart said that if Stewart’s NFT concept for mortgages developed, Stewart could envision different lenders on the market offering lower rates to borrower.
Even more, he sees the future in which individual lenders might ‘bid’ to purchase a portion of borrowers’ mortgages.
Stewart states that Stewart could see customers seeking a mortgage finding more lenders interested in their company.
‘[Investors]They aren’t the ones who make the investment decisions. The algorithm determines the interest rates.
Martha Reyes is head of research for crypto trading platform Bequant
“In the instance of portfolio landlords, I can see lenders bidding on their entire portfolio in one transaction.
“The lender is less of an asset and borrower retains more control.
It can be thought of as a reverse auction. It will result in more choice for consumers, lower operating costs, and pricing that is closer to the risk profile.
There are some concerns about a computer picking investments and setting rates, however – especially when it comes to ensuring that housing market mistakes of the past are not repeated.
Reyes says that the big question is whether they can meet the Hera Test. This refers to the Housing and Economic Recovery Act, which was created to increase accountability for the mortgage industry after the 2008 subprime crisis.
‘[Investors]They aren’t the ones who make the investment decisions. The algorithm decides the interest rate.
It will take off.
The first mortgages have just been issued, so it won’t be long before homeowners even hear of NFT mortgages.
Some believe the idea may be popular with younger homeowners who distrust big finance but are investing in crypto.
Reyes states that “Banks are getting more stringent with younger people.” They are priced out of market, or going somewhere else.
Some of them may buy crypto. [to fund their home purchase] instead. The banks are not trusted by young people.
However, US investors learnt hard lessons from subprime mortgage crises, and any market shake-up should be treated with caution.
Mendes says that he has seen the high returns of new investment strategies to access the secure market. But, we don’t want to see 2008 again.