Design of a Hybrid Mortgage Lending System

Abstract

Traditional financial companies play a central role in ensuring financial stability and reliability. However, these companies face institutional problems due to inefficiencies, lack of transparency and limited innovation. For this reason, the use of distributed ledger technology, or blockchain, has been explored as an alternative and its integration into traditional finance towards a 'hybrid' approach. The Dutch mortgage market was chosen as the focus of this research and is further analyzed due to its high transaction costs, including the high cost of trust. This led to the research objective of designing a Hybrid Mortgage Lending System (HMLS) that reduces the cost of trust.

A design science research methodology was used for this research where two interwoven artefacts were developed. The first artefact was a contextualized trust model based on three trustworthiness factors: integrity, ability and benevolence. The second artefact was a demonstration for the HMLS using a technological model.

The trust model was validated through expert interviews and enriched with additional information. Based on the feedback from the expert interviews, nine meta-requirements for the technological model were developed. The proposed solution for the design of the HMLS is to automatically distribute fractional ownership of mortgages via Non-Fungible Tokens (NFTs) through an ecosystem with the traditional finance company as originator and public investors as lenders. The ownership of the NFTs is transparently tracked via the blockchain to monitor the fractional ownership of a home. These NFTs exist in mixed token pools and are controlled by the traditional finance companies. These pools are supplemented with other digital assets to create different risk profiles to suit different types of investors. A demonstration of these token pools is shown, with an overview of the architecture explaining the mortgage application and transaction processes through the different layers. Finally, a stakeholder map is shown and their roles within the ecosystem are explained. The research provided new insights by making the second model dependent on the first. The findings highlight new challenges for further research, such as prototyping or improving the versatility of the model.