“Crypto-Mortgage” – Do the Benefits Outweigh the Risks? | Bilzin Sumberg

Cryptocurrency continues to gain traction as a means of payment for goods and services. It recently got its start in the mortgage industry, when the concept of “crypto mortgage” came to life. A Miami-based financial technology company, Milo, recently announced the issuance of this new digital loan product designed to make it easier for crypto investors to purchase real estate. According to Milo, his clients can pledge their bitcoin to buy real estate and qualify for a 30-year crypto mortgage with a low interest rate and no down payment. When the mortgage is fully paid off, the bitcoin is returned.

This new digital product is touted as having advantages that include the absence of adverse tax consequences for the crypto investor/borrower. Additionally, unlike traditional loans, the mortgage would be issued based on a crypto wealth assessment instead of a borrower’s tax returns or FICO scores. This makes mortgages more accessible to borrowers who otherwise would not have the financial background required to qualify for these loans. Getting a crypto mortgage should also be faster than getting a conventional loan. These benefits no doubt look attractive to crypto investors – but one must consider the resulting costs to them – and potentially to the mortgage industry.

Original mortgages based on crypto wealth raise some concerns. It is well known that the value of cryptocurrency fluctuates wildly. For this reason alone, using bitcoin (or other digital currency) to secure a mortgage is risky, even if a lien is also placed on the mortgaged property as additional security for the loan. Eliminating traditional underwriting practices, such as income verification, to assess a borrower’s ability to repay the loan has also proven historically dangerous. Mortgage originators and aggregators know only too well what happened in 2007-2008 when the housing market crashed due, in large part, to the creation and widespread adoption during previous years of subprime loan products requiring little or no documentation of borrowers’ income and assets. to get loans. This financial crisis should be a cautionary tale.

Currently, neither Freddie Mac nor Fannie Mae recognizes cryptocurrency as an eligible source of funds in the lending process. In December 2021, Freddie Mac updated its guidance, via Bulletin 2021-36, to address the use of cryptocurrency in mortgage loan originations. The Bulletin provides that income paid to the borrower in cryptocurrency cannot be used to qualify for a mortgage. It also indicates that types of income that require proof of sufficient continuing assets, such as trust income, may not be in the form of cryptocurrency. Cryptocurrency may also not be included in the calculation of a borrower’s assets. The Bulletin further states that monthly payments on cryptocurrency-backed debt should be included in the borrower’s debt-to-income ratio and that cryptocurrency should be converted into dollars if funds are needed for reserves. , or payable at closing. For now, these guidelines make sense. Due to the volatility of cryptocurrency, it is extremely difficult for lenders to assess the level of risk involved in granting a loan to a borrower for whom bitcoin or another digital currency constitutes a large part. reported income and/or assets.

Last year, Fannie Mae, on the other hand, began allowing borrowers to use cryptocurrency for their down payment with proper documentation proving that the borrower owned the cryptocurrency. Additionally, the funds must be deposited in an eligible asset account and remain there for at least two months.

It will be interesting to assess over time whether Fannie’s or Freddie’s current approach proves wiser. For now, enthusiasm for this significant step in mortgage origination activity must be tempered by concern over the potential for exposure to significant losses for crypto mortgage holders.

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