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The crypto mortgage is the new kid on the block

LoanSnap and other innovative startups are bringing digital blockchain financing to the real world of housing

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A rising player in the world of crypto-mortgages and blockchain-enabled financing, LoanSnap, plans to expand its reach in the market by opening its lending platform to licensed mortgage brokers across the country in the near future.

Karl Jacob, CEO and co-founder of LoanSnap, said the cyrpto-mortgage system his company has developed can originate more than just loans that LoanSnap mints. In addition to crypto-mortgages, LoanSnap is a full-stack mortgage company that originates traditional mortgages as well.

“Our system I think is good enough that it can do not just the loans that we originate, but [loans originated by] other people,” Jacob said. “It’s an open platform. As long as the loans pass the Fannie Mae and Freddie Mac test, which is one of the requirements, we would certainly look at those loans. So, it’s not just our loans supplying into this ecosystem … it could be any originator.”

Jacob added that LoanSnap, which currently employs about 40 people, has “literally just started” creating a broker network and is planning a formal announcement of the effort soon.

“You’re probably one of the first people in the industry that I’m talking to about it,” he added. “…It’s all been organic so far, [so] it’s nascent today, but I expect it to grow quite quickly.”

LoanSnap is a mortgage company that employs artificial intelligence (AI) technology to originate loans more efficiently and faster. It offers a 15-day loan-closing window and to date has originated “billions of dollars” worth of traditional mortgages dubbed “smart loans” by the company, according to Jacob, who was one of the original strategic advisors to Facebook when it was in its startup phase.

“We saved our customers more than $80 million last year,” he said. “We’re not huge, but we’re not small either.”

In addition to originating traditional mortgage loans employing artificial intelligence (AI) technology to create efficiencies and to speed up the origination process, LoanSnap has launched an innovative crypto-mortgage program that relies on AI technology, cryptocurrency and linking a real-world mortgage lien to a digital NFT — a nonfungible token. 

Essentially, through the so-called Bacon Protocol — a set of smart contracts and programming that exists on the Ethereum blockchain platform — investors can purchase stable coins, which are a form of “stable” cryptocurrency pegged to the value of the U.S. dollar. Those stable coin investments are then pooled to fund digital, AI-enabled mortgages, and the mortgage liens are then indelibly linked to an NFT, which in turn serves as a form of collateral for the stable coins funding the transaction. 

“So, the process is basically [that] the money [from the mortgage payment] flows back to the people who participate in originating and servicing that loan,” Jacob said. “But the lion’s share of that money goes back to the stable coin holders — the people who lent the money to that borrower through the coin. As far as a borrower is concerned, they just have a home loan, and they make a payment just like they normally would from their bank account, or they also can make it from their crypto [currency] wallet.”

Jacob is not alone in seeing the potential upside for crypto-mortgages and AI-enabled traditional loans. To date, LoanSnap has attracted about $53 million in venture capital investment

The crypto-mortgages originated by LoanSnap so far are more akin to home-equity loans as opposed to home-purchase or rate-and-term refinance loans. The liens linked to NFTs represent a portion of a home’s value as a result. 

To date, LoanSnap has originated about $7.3 million in crypto-loans across 27 homes that have a total value of $43 million. The annual percentage yield for holders of LoanSnap’s stable coin used to fund the mortgages, called bHome, as of this week was 3.434%.

On the high end, one bHome-funded crypto-mortgage involves an $820,000 mortgage and lien on a California home valued at $20 million. Another transaction, on the low end, involves a $30,000 NFT-backed mortgage loan and lien for a home in Vancouver, Washington, valued at $432,000, according to the Bacon Coin website.

“It’s significant,” Jacob said. “It’s getting to be a big project.”

Jacob added that he was an advisor to Facebook “when it was six guys in a house in Palo Alto [California],” so he has some receipts in making winning bets on emerging markets.

“A lot of people when we started the stable coin stuff thought, you know, we’re [crazy], it’s small, but that’s exactly what they told us at Facebook,” Jacob recalled. “I’ll never forget the moments when we were pitching it [Facebook] as an investment, and the most common feedback we got was, ‘You guys are screwed because MySpace has 100 million users, and you will never catch them.’”

Facebook is now approaching 3 billion users worldwide. By one estimate, the global cryptocurrency market, although volatile, is valued today at around $1.8 trillion and is projected to exceed $32 trillion in value by 2027. 

“When we’re talking about the crypto stuff, we don’t need [warehouse lenders] because warehouse lines are really a creation of the industry to solve a problem, which is that funders can’t fund fast enough. And we don’t have that problem with blockchain because it funds [loans] in minutes,” Jacob said.

“I do think on the correspondent side and beyond, there’s definitely an opportunity, even for existing mortgage companies that are really good at the sales and marketing side, but maybe not so good at the back-end processing and all that. That’s what we built our system to do [for crypto and traditional mortgages].”

LoanSnap is not alone in seeing future opportunity in the crypto-mortgage market.

LauraMac is a software as a service, or SaaS, firm that provides due-diligence automation tools for the secondary market. Its technology is used by third-party due diligence firms that assess mortgage pools in securitization transactions in the private label market. 

Bob Fulton, CEO of LauraMac, said he is seeing increased interest in including comprehensive loan information in secured blockchain-enabled mortgage transactions. “That would really be a value-add because the lien alone doesn’t tell you much, other than who owns the property,” he said. 

“In any one of those transactions, especially as it relates to mortgage, there is going to be the need for validation of data that gets put into that blockchain, and we do believe that there’s a role for LauraMac to help facilitate the validation of that information,” Fulton added. “It would still be done through one of our [client] third-party review firms [using our platform], but we do see that as an opportunity for us to participate in that market.”

LoanSnap and LauraMac are far from alone in seeking to tap into the emerging blockchain and cryptocurrency lending markets. Other active players include Propy, Figure and Milo — as well as three companies backed by specialty housing-finance company Redwood Trust’s venture investment arm, RWT Horizons. They are Vesta EquityOasis Pro Markets and Liquid Mortgage.

  • Propy’s platform is supported by blockchain technology and designed to simplify the home-purchasing process and facilitate a complete blockchain-protected real estate deal online. The company’s first transaction allowed the borrower to use an NFT linked to a limited liability corporation, or LLC, to which the owner of the property transferred ownership. In that way, when the NFT ownership is transferred, so is the ownership of the LLC that owns the property. The financing for the initial deal was handled through a cryptocurrency lender called Helio Lending. Buyers bid online for properties and transactions are handled via smart contracts and other secure signing and payment services offered through Propy, which has since offered at least two additional NFT-backed home sales.
  • Milo allows borrowers to pledge cryptocurrency to finance up to 100 percent of the property purchase price. This allows homebuyers to keep their crypto while acquiring property and still benefit from price appreciation in both assets. Plus, it allows for 100% financing with no cash down-payment. The company started rolling out the product this year.
  • Vesta Equity is a marketplace for home equity investments using blockchain and tokenization, with the tokens, or NFTs, backed by verified real-word real estate — like LoanSnap’s process. The transactions are conducted in stable coin that can be converted into U.S. dollars or another government-backed currency — known as fiat. Vesta, however, does not make loans, but rather allows homeowners to sell a percentage of their equity to investors in exchange for funds they can use as they wish while retaining full rights to their property. Upon sale of the home, the percentage of the equity acquired by investors is disbursed to them through Vesta Equity.
  • Oasis Pro Markets is a U.S.-regulated alternative trading system that allows subscribers to issue and trade blockchain-protected digital securities and make payments in digital cash like stable coin or fiat. Redwood sees its investment in the platform as potentially a way to trade/distribute its own residential home loans and business-purpose rental-property mortgages and securities, creating a new loan distribution channel for the real estate investment trust (REIT).
  • Liquid Mortgage is a fintech firm that creates loan-backed digital assets on a blockchain-powered platform. It then tracks documents, payments and transaction data during the life of the loan. It recently inked a deal with Canopy Financial Technology Partners that will allow Liquid Mortgage to integrate Canopy’s due-diligence review product into Liquid’s digital-asset management system via the blockchain. That due-diligence reporting will follow the digital assets in a clear and verifiable format throughout the life of the underlying loan and provide investors with timely loan-performance data. 

As promising as the crypto-mortgage market might be, it is attracting the attention of regulators like the U.S. Securities and Exchange Commission (SEC), which is examining NFTs and crypto exchanges to determine if some nonfungible tokens should be treated as regulated securities. LoanSnap and companies offering similar NFT investments are not out of the woods yet in terms of potential SEC scrutiny, then, but Jacob seems confident that his company’s product can withstand the scrutiny.

One long-standing test in U.S. law for determining if an instrument is a security focuses on whether it can be deemed a passive-income investment vehicle — in which investor return is dependent on the efforts of others to increase value. An NFT secured by a mortgage loan seems to be a different kind of product than a speculative security because its value is based on a loan covenant secured by a hard asset — not the hope that some artist’s NFT will increase in value after he or she pens a hit song in the future.

“They [the bHome stable-coin buyers] all understand how a mortgage loan works, and they all know that homeowners are going to pay that loan back no matter what. That’s the first check that they write,” Jacob said. “So, investing in something backed by that is a no-brainer, compared to magic internet money and a bunch of this other stuff [speculative cryptocurrency].”

Still, the emerging crypto market remains very nuanced and in flux on many fronts, and the shot callers on questions of regulation will be U.S. regulators ultimately, not LoanSnap or other companies now looking to build out this brave new market. 

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