Buying a house with
as collateral may soon be possible as crypto startups try to crack the $2.6 trillion mortgage market.
A start-up called Milo started offering 30-year mortgages backed by cryptocurrencies in March. The company is working with more than 700 potential borrowers on pre-approvals and has made $5 million to $10 million in loans, CEO Josip Rupena said in an interview with Barron’s.
“This is a live product and we’re breaking away,” he said.
Borrowers can use Bitcoin,
or stablecoins as collateral for a loan. Stablecoins are digital currencies designed to maintain a fixed $1 price. Milo will accept the
Gemini Dollar, and Terra stablecoins, Rupena said.
That isn’t the only unconventional aspect of a crypto loan. Milo says it will extend credit for up to 100% of the purchase price if someone has enough cryptocurrency. Someone aiming to buy a house for $500,000, for instance, could pledge $500,000 worth of Bitcoin as collateral to Milo, which would then provide the cash to close the deal with the seller.
Rates for its 30-year mortgages range from 3.95% to 5.95% and the loan may be repaid to Milo in crypto or dollars.
Other startups aiming to offer crypto-backed mortgages include Figure and Ledn, both of which say they have waiting lists for loans.
Figure charges rates of 5.99% to 6.018% for 30-year fixed-rate mortgages, and says that borrowers can get up to $20 million in a loan. Ledn says its mortgage terms will be for two-years, after which the loan may be renewed or reassessed. Rates vary.
“If you custody $1 million of Bitcoin or ether, we’ll give you $1 million in a loan,” 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 a purchase price. They typically require a down payment of at least 20%. However, some banks and brokerages will accept securities as collateral, potentially for up to 100% of a purchase price for low-risk borrowers.
Crypto loans may be far more streamlined, though. Milo says it can close on a loan in two to three weeks, doesn’t require a FICO credit check, or much 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 house purchase in crypto might sound risky for any lender, of course, given the steep volatility of Bitcoin and crypto markets more broadly. The crypto lenders say they can make it work by essentially using both the digital asset and home value as backing 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 that the borrower put up more collateral, or may automatically liquidate the crypto to make payments on the loan.
“We would have two assets on our books, $1 million of crypto and a house,” he says. “We can automatically liquidate the Bitcoin to make payments on the mortgage, taxes, insurance, if necessary.”
Rupena says that collateral would have to fall by 65% in value before the company would require more collateral or a loan modification.
“In a typical real estate transaction, you underwrite the borrower and if they don’t make payments, your first line of defense is foreclosure,” he says. “With this, there’s a liquid asset—the crypto. It is volatile, but the levels we’re asking for would sustain a significant drawdown.”
Demand for crypto-backed mortgages may be percolating. According to a recent survey by
Redfin, about12% of first-time home buyers said they had sold some crypto for a down payment in the fourth quarter of 2021. That was up from 8.8% in the third quarter of 2020 and 4.6% in the third quarter of 2019, Redfin said.
Borrowers may have several reasons to put up crypto as collateral. They may be sitting on capital gains and would owe tax on a sale. They may be banking on price gains and don’t want to cash out to finance a mortgage. And their crypto may not be useful to qualify for a mortgage with a bank or other traditional lender—leaving borrowers crypto-rich and cash-poor.
Crypto mortgages probably won’t dent the $2. 6 trillion in estimated mortgage issuance this year, including refinancing. Overall lending is under pressure now due to a surge in rates—hitting 5% recently on a 30-year mortgage. Mortgage volumes are projected to decline 35% from 2021.
Crypto loans are trying to break out in a tough market. And while perhaps appealing to some borrowers, they don’t appear to offer a better deal on rates than conventional financing.
One reason is the loans have higher rates is that they can’t be sold to
Fannie Mae or
Freddie Mac. Those government agencies have strict underwriting standards for “conforming” loans. They buy the vast majority of mortgages, and then package them into mortgage-backed securities.
Still, this may be the opening rounds of a merger between crypto and traditional mortgage financing. Figure has already done a deal with the private-equity firm
Apollo Global Management (ticker: APO), selling the firm a bundle of “eNote” mortgages and transferring ownership of the notes via a blockchain.
“We believe there’s a market for securitizing crypto loans,” says Rupena, who started Milo to provide mortgages to non-U. S. citizens.
Write to Daren Fonda at [email protected]