Mortgage Loans

Fixed Term Instruments

The instrument instantiation for mortgage loans would be similar to that of an individual creditline, with the main difference in the loan origination/closure process. The underlying collateral that is underwritten is the same risky asset(i.e NFTs, long-tail assets) but instead of the borrower providing the risky asset as collateral, he would escrow the underlying asset(i.e ETH, USDC) to the instrument contract, where the escrowed underlying + borrowed underlying from RAMM's vault would be used to buy the risky asset(through an arbitrageur).

At maturity(or anytime before), the borrower would perform either one of the two actions

1. He would sell his risk asset, repay his (debt + interest), and regain his underlying asset + profit or loss. (This would be akin to a leveraged trade on the risky asset)

2. He would pay back his debt + interest, and gain custody of the risky asset.

The risky asset would be purchased from an arbitrageur, who can flash loan the underlying, buy the risky asset from the cheapest marketplace, and sell it to the contract. Similarly, it could be sold to an arbitrageur who can sell the asset on behalf of the contract to the marketplace offering the highest bids.

At maturity, when the borrower has not paid back his debt, the same liquidation procedure(dutch auction) would occur as in the creditline instance.

Summary: Borrowers would be able to request a mortgage loan for any asset. The managers are responsible for assessing the risk of the collateral in relation to the implied LTV.

Borrowers would be able to either a) take a leveraged bet on any risky asset such as NFTs or b) repay the loan in full at a later date to claim the risky asset.

Example: A borrower has 1ETH and would like to buy an NFT worth 2ETH.

He would first propose to borrow 1ETH from the protocol, and if the loan is approved, he would escrow his 1ETH to the instrument contract, where the extra 1ETH would be supplied by RAMM's vaults.

The instrument contract would then buy the NFT from an arbitrageur for 2ETH and escrow it to the instrument contract until maturity.

At maturity, the borrower would be able to repay his 1ETH + interest to reclaim, or he could also sell the NFT.

If the price of NFT he sold it at is 3ETH, he would have made a 3ETH - 2ETH = 1ETH profit. If the price of NFT he sold it at is 1ETH, he would lose all his escrowed capital. If the price of NFT he sold it as is 0.3ETH, the 0.7ETH would be socialized by the managers first(since they provide first-loss capital, after which the vault holders will start to incur loss).