buy a house with
as collateral, soon to be possible as crypto startups try to crack the $2.6 trillion mortgage market.
A startup called Milo began offering 30-year cryptocurrency-backed mortgages in March. The company is working with more than 700 potential borrowers on pre-approvals and has provided loans of $5 million to $10 million, CEO Josip Rupena said in an interview with Barron’s.
“This is a living product and we are 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.
That is not the only unconventional aspect of a crypto loan. Milo says that he will give credit for up to 100% of the purchase price if someone has enough cryptocurrency. Someone looking to buy a house for $500,000, for example, might pledge $500,000 worth of Bitcoin as collateral to Milo, who would then provide the cash to close the deal with the seller.
Their 30-year mortgage rates range from 3.95% to 5.95% and the loan can be repaid to Milo in crypto or dollars.
Other startups looking to offer crypto-backed mortgages include Figure and Ledn, both of which say they have waiting lists for loans.
Figure charges rates from 5.99% to 6.018% for 30-year fixed-rate mortgages and says borrowers can get up to $20 million in a loan. Ledn says the terms of her mortgage will be for two years, after which the loan can be renewed or reassessed. Rates vary.
“If you hold $1 million of Bitcoin or Ether in custody, we will loan you $1 million,” says Daniel Wallace, general manager of Figure Lending. “That means you’re not financing a loan out of pocket, there’s no down payment.”
Banks, of course, rarely offer financing for 100% of the purchase price. They usually require a down payment of at least 20%. However, some banks and brokerage houses will accept securities as collateral, potentially for up to 100% of the purchase price for low-risk borrowers.
However, crypto loans 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 a lot 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 home purchase in cryptocurrencies may sound risky for any lender, of course, given the high volatility of Bitcoin and the crypto markets in general. Crypto lenders say they can make it work by essentially using both the digital asset and the home equity as collateral for the loan.
“We take the house as collateral and the crypto as collateral,” says Wallace. 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 loan payments.
“We would have two assets on our books, $1 million in crypto and a house,” he says. “We can automatically liquidate Bitcoin to make mortgage payments, taxes, insurance, if necessary.”
Rupena says the collateral would have to drop 65% in value before the business would require more collateral or a loan modification.
“In a typical real estate transaction, you underwrite the borrower, and if they don’t make the payments, their first line of defense is foreclosure,” he says. “With this, there is a liquid asset: cryptocurrencies. It is volatile, but the levels we are asking for would support a significant drawdown.”
The demand for cryptocurrency-backed mortgages may be increasing. According to a recent survey of
red fin, Some 12% of first-time homebuyers said they had sold some cryptocurrency for a down payment in Q4 2021. That was up from 8.8% in Q3 2020 and 4.6% in Q3 2021. in the third quarter of 2019, Redfin saying.
Borrowers may have various reasons for offering cryptocurrencies as collateral. They may be sitting on capital gains and should be taxed on a sale. They may be betting on price gains and may not want to withdraw money to finance a mortgage. And their cryptocurrency may not be helpful in qualifying for a mortgage with a bank or other traditional lender, leaving borrowers crypto-rich and cash-poor.
Crypto mortgages probably won’t make a dent in the $2. 6 billion in estimated mortgage issuance this year, including refinancing. Lending in general is under pressure now due to a rise in rates, which recently hit 5% on a 30-year mortgage. Mortgage volumes are projected to decline 35% from 2021.
Crypto lending is trying to break through in 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 to
fannie mae either
freddy mac. Those 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, these may be the initial rounds of a merger between crypto and traditional mortgage financing. The figure has already made a negotiate with private equity firm
Apollo Global Management (ticker: APO), selling the company a package of “eNote” mortgages and transferring ownership of the notes via a blockchain.
“We think there is a market for securitization of crypto loans,” says Rupena, who started Milo to provide mortgages to non-US citizens.
Write Daren Fonda at [email protected]