#12 Distributed Ledger & Fractional Ownership of Mortgage

Last week I joined a Tech Mortgage Meetup and of course, Distributed Ledgers were mentioned.

Would it be nice if anyone in the world can participate to lend money to people who have to purchase a property?

Clearly, there are Pros and Cons. Let's talk about it and I would like to hear from you. There are a lot of unknown situations that would be nice to talk about like, what happens if the owner of the mortgage can't pay anymore the monthly payment? what happens if the property needs to be repossessed by someone? Who does the calculation of the interest rate?

Well, let's start.

Distributed Ledgers, also known as blockchain technology, have the potential to revolutionize the mortgage market by enabling fractional ownership of mortgages. This, potentially, would allow investors to buy and sell shares of a mortgage, increasing liquidity and making it easier for investors to participate in the market.

Traditionally, mortgages have been owned by a single entity, typically a bank or other financial institution. This limits the pool of potential investors to those with the capital to purchase an entire mortgage. Fractional ownership changes that, allowing investors to purchase a portion of a mortgage and share in the benefits and risks of the investment.

Distributed ledgers could provide the perfect platform for fractional ownership of mortgages. Using blockchain technology, a mortgage can be divided into shares, each represented by a digital token. These tokens can be bought and sold on a secure, decentralized platform, allowing investors to easily buy and sell shares of the mortgage without the need for intermediaries.

Fractional ownership of mortgages offers several benefits to investors. First, it increases liquidity in the market. Allowing investors to buy and sell shares of a mortgage makes it easier for them to enter and exit the market. This, in turn, can increase competition and potentially lead to better pricing for borrowers.

Second, fractional ownership allows investors to diversify their portfolios. By investing in shares of multiple mortgages, investors can spread their risk and potentially earn higher returns than they would by investing in a single mortgage.

Third, fractional ownership can democratize the mortgage market. By opening up the market to a broader pool of investors, it can provide access to investment opportunities that were previously only available to a select few. This can increase competition, reduce the cost of capital, and potentially benefit borrowers.

Finally, fractional ownership can provide greater transparency and accountability. Because all transactions are recorded on a distributed ledger, investors can see exactly who owns what and when. This can reduce the risk of fraud and increase trust in the market.

Of course, there are also risks associated with fractional ownership of mortgages. For example, investors may not have the same level of control over the mortgage as they would if they owned it outright. Additionally, the value of the investment may be affected by factors outside of the investor’s control, such as changes in interest rates or economic conditions.

Perhaps if the borrower defaults on their payments, the investors who own shares of the mortgage would still have the right to foreclose on the property and recover their portion of the amount owed but, there is a but, the platform may have to appoint a third-party servicer to manage the foreclosure process and distribute the proceeds among the investors.

Despite these risks, the potential benefits of fractional ownership of mortgages are significant. By leveraging distributed ledgers, investors can participate in the mortgage market in new and innovative ways, potentially leading to greater efficiency, transparency, and liquidity.

Tell us what you think, we will happy to hear from you.

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Alessio