RE Lending: Between Bureaucratic Gatekeeping and Asset-limited Lending
The primary commodity of financial markets is debt, yet access to it remains restricted for the majority.
The Problem with Traditional Lending Models
Banks have become increasingly bureaucratic, relying on rigid, standardized processes to evaluate financing applications. Rather than assessing projects based on their intrinsic value, lending decisions are dictated by predefined checklists, failing to consider critical factors like location and cash flow potential, which are essential for investment success.
1. Increased Bureaucracy and Standardization
Loan approvals follow rigid, box-ticking procedures, where applicants must fit predefined financial templates.
This approach ignores the individual merits of projects, preventing well-structured investments from accessing financing.
Lack of flexibility limits adaptability, making it difficult for borrowers to secure capital even when their projects demonstrate strong fundamentals.
2. Shift in Evaluation Priorities
Historically, banks evaluated the intrinsic value of a project, considering factors such as market demand, location, and revenue potential.
Today, the focus has shifted almost entirely to the borrower's financial profile, particularly income stability and debt-to-income ratios.
Even high-potential projects can be rejected if the borrower does not meet arbitrary solvency thresholds, disregarding the actual profitability of the investment.
3. De-Responsibilization of Decision-Making
Loan officers increasingly rely on automated decision-making systems, removing human discretion from lending assessments.
Standardized procedures prevent banking professionals from approving projects that fall outside rigid financial models, even when they present strong economic potential.
This lack of accountability and adaptability leads to missed opportunities for financing viable but unconventional investments.
4. A System Misaligned with Real-World Needs
Banks prioritize individual borrowing capacity over project sustainability, making it difficult for businesses and investors to leverage real estate efficiently.
Mortgage lending is slow, bureaucratic, and exclusionary, preventing investors from capitalizing on time-sensitive opportunities.
Traditional banking models fail to align with asset-backed financing, prioritizing personal creditworthiness over real estate profitability.
5. The Evolution of Banking: From Judgment to Compliance
Banks once played an active role in evaluating and supporting economic growth by assessing each project’s unique characteristics.
Today, compliance-driven frameworks now prioritize risk minimization above all else, rather than objective risk assessment, resulting in rigid lending criteria that fail to reflect real-world investment dynamics.
This shift has removed flexibility and innovation from lending decisions, limiting financial access for those who don’t fit standard risk profiles.
In summary, modern banking has become overly bureaucratic and risk-averse, prioritizing regulatory compliance over economic potential. This exclusionary model creates significant barriers for borrowers pursuing high-value projects but unconventional profiles, particularly in real estate and rental markets.
A Decentralized Alternative: Asset-Based Lending in DeFi
Unlike traditional banks, DeFi lending models focus on collateralized assets rather than borrower profiles, eliminating the subjective financial gatekeeping of traditional credit systems. However, while DeFi removes many of the inefficiencies of TradFi, it fails to optimize collateral usage, limiting its impact on real-world financing.
Over-Collateralization as a Crutch
DeFi protocols do not rely on borrower credit history; instead, they assess the underlying value of token. This model removes the need for arbitrary credit scores, making capital more accessible to a broader range of borrowers.
But lending requires borrowers to provide collateral worth more than the loan itself. This reliance on over-collateralization limits accessibility and undermines the potential for assessing the true value of collateral.
Indeed, DeFi currently treats collateral as a static financial asset, focusing solely on its market price at a given moment rather than its economic productivity or cash flow potential.
Collateral valuation is purely market-driven, meaning it does not enable intelligent leverage on productive assets—borrowers must over-collateralize to secure funding.
This lack of project-level evaluation prevents DeFi from unlocking credit efficiently, forcing borrowers into over-collateralized loans that limit capital efficiency and increase liquidation risks.
Margin Calls Over Intrinsic Value
DeFi lending protocols depend on automated margin calls to manage risk. When collateral value drops below a certain threshold, liquidation occurs.
This approach prioritizes short-term risk management over deeper analysis of collateral fundamentals.
Heavy reliance on over-collateralization and margin calls makes DeFi systems vulnerable to cascading liquidations during market downturns. This amplifies volatility and can destabilize entire ecosystems.
In summary, while DeFi has revolutionized finance in many ways, its dependence on over-collateralization and margin calls highlights a critical flaw: the failure to prioritize intrinsic value assessment. By not emphasizing intrinsic value analysis, DeFi misses the chance to create a more robust and sustainable lending model that could better support long-term projects and real-world use cases.
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