Bitcoin-backed mortgages are coming. Here’s what that means for buyers.
Buy a house with
as collateral may soon be possible as crypto startups attempt to crack the $2.6 trillion mortgage market.
A startup called Milo started offering 30-year cryptocurrency-backed mortgages in March. The company is working with more than 700 potential borrowers on pre-approvals and has issued loans of $5 million to $10 million, CEO Josip Rupena said in an interview with Barrons.
“It’s a living product and we’re parting ways,” he said.
Borrowers can use Bitcoin,
or stablecoins as collateral for a loan. Stablecoins are digital currencies designed to maintain a fixed price of $1. Milo will accept the
Gemini Dollar and Terra stablecoins, Rupena said.
This is not the only unconventional aspect of a crypto loan. Milo says he will extend the credit up to 100% of the purchase price if someone has enough cryptocurrency. Someone aiming to buy a house for $500,000, for example, could pledge $500,000 worth of Bitcoin as collateral to Milo, who would then provide the money to close the deal with the seller.
The rates on his 30-year mortgages range from 3.95% to 5.95% and the loan can be paid back to Milo in crypto or dollars.
Other startups aiming to offer crypto mortgages include Figure and Ledn, both of which claim to have waiting lists for loans.
The figure charges rates of 5.99% to 6.018% for 30-year fixed-rate mortgages and indicates that borrowers can get up to $20 million in loans. Ledn says its mortgage terms will be for two years, after which the loan can be renewed or re-evaluated. Rates vary.
“If you hold $1 million worth of Bitcoin or Ether, we’ll loan you $1 million,” says Daniel Wallace, chief executive of Figure Lending. “That means you’re not funding a loan out of pocket – there’s no down payment.”
Of course, banks rarely offer 100% financing of the purchase price. They usually require a down payment of at least 20%. However, some banks and brokerages will accept securities as collateral, potentially up to 100% of the purchase price for low-risk borrowers.
Crypto loans, however, can be much more streamlined. Milo says he can close a loan in two to three weeks, doesn’t require a FICO credit check or lots of documentation. The company says its main requirements are verification of identity and source of funds to comply with know-your-customer and anti-money laundering rules.
Financing 100% of a crypto home purchase can seem risky for any lender, of course, given the high volatility in the Bitcoin and crypto markets more broadly. Crypto lenders say they can make it work by essentially using both the digital asset and the home’s value as collateral for the loan.
“We take the house as collateral and the crypto as collateral,” Wallace explains. If the market price of the crypto falls below a certain threshold, Figure may require the borrower to post more collateral, or may automatically liquidate the crypto to make payments on the loan.
“We would have two assets on our books, $1 million worth of crypto and a house,” he says. “We can automatically liquidate Bitcoin to make payments on mortgage, taxes, insurance, if needed.”
Rupena says the value of the collateral would need to fall by 65% before the company requires more collateral or a loan modification.
“In a typical real estate transaction, you guarantee the borrower and if they don’t make payments, your first line of defense is foreclosure,” he says. “With this, there is a liquid asset – crypto. It is volatile, but the levels we are asking for would support a significant decline.”
Demand for crypto mortgages could be percolating. According to a recent survey by
around 12% of first-time buyers reported selling crypto for a down payment in Q4 2021. This was up from 8.8% in Q3 2020 and 4.6% in Q3 2019, Redfin mentioned.
Borrowers may have several reasons for pledging crypto as collateral. They may be sitting on capital gains and would have to pay tax on a sale. They may be betting on price gains and not wanting to cash in to fund a mortgage. And their crypto may not be helpful in qualifying for a mortgage from a bank or other traditional lender, leaving borrowers crypto-rich and cash-poor.
Crypto mortgages are unlikely to lower the $2. 6 trillion in mortgage issuance estimated this year, including refinancing. Overall, lending is currently under pressure due to soaring rates, which recently hit 5% on a 30-year mortgage. Mortgage volumes are expected to decline by 35% from 2021.
Crypto lending is trying to break into a tough market. And while they may appeal to some borrowers, they don’t seem to offer a better deal on rates than conventional financing.
One of the reasons loans have higher rates is that they cannot be sold at
These government agencies have strict underwriting standards for “compliant” loans. They buy the vast majority of mortgages and then package them into mortgage-backed securities.
Still, this could be the first round of a merger between crypto and traditional mortgage financing. Figure has already made a deal with the private equity firm
Global Apollo Management
(symbol: APO), selling the company a set of “eNote” mortgages and transferring ownership of the notes via a blockchain.
“We believe there is a market for crypto loan securitization,” says Rupena, who launched Milo to provide mortgages to non-US citizens.
Write to Daren Fonda at [email protected]