Bitcoin-backed mortgages are coming. Here’s what that means for buyers.

buy a house with


Bitcoin

As a guarantee that may soon be possible as crypto startups attempt to penetrate the $2.6 trillion mortgage market.

A startup called Milo started offering 30-year mortgage loans backed by cryptocurrency in March. CEO Josip Rupena said in an interview with Josip Rupena, the company’s CEO, that the company has been working with more than 700 potential borrowers on pre-approvals and has provided $5-10 million in loans. Baron.

“This is a live product and we are breaking up with it,” he said.

Borrowers can use Bitcoin,


ether,

Or stablecoins as collateral for a loan. Stable coins are digital currencies designed to maintain a fixed price of $1. Milo will accept a file


USD currency,

Robina said, Gemini Dollars, and Terra stablecoins.

This is not the only unconventional aspect of a cryptocurrency loan. Milo says he will give a credit of up to 100% of the purchase price if someone has enough crypto. Anyone aiming to buy a house for $500,000, for example, could pledge $500,000 of bitcoin as collateral to Milo, which would then provide funds to close the deal with the seller.

Mortgage rates for 30 years range from 3.95% to 5.95% and the loan to Milo can be paid in cryptocurrency or dollars.

Other startups aiming to offer crypto-backed mortgage loans include Figure and Ledn, both of which it says have waiting lists for loans.

Figure fee rates from 5.99% to 6.018% for 30-year fixed rate mortgages, and it says borrowers can get a loan of up to $20 million. Leiden says the terms of the mortgage will be for two years, after which the loan can be renewed or reassessed. Prices vary.

“If you keep $1 million in bitcoin or ether, we will give you a $1 million loan,” says Daniel Wallace, general manager of Figure Lending. “This means that you are not financing a loan out of your pocket – there is no down payment.”

Banks, of course, rarely offer 100% financing of the purchase price. It usually requires a down payment of at least 20%. However, some banks and brokerages accept securities as collateral, potentially up to 100% of the purchase price for low-risk borrowers.

However, cryptocurrency loans may be simpler. Milo says he can close on a loan in two to three weeks, and it doesn’t require a FICO credit check, or a lot of documentation. The company says its main requirements are to verify identity and the source of funds to comply with KYC and anti-money laundering rules.

Financing 100% of a home purchase in cryptocurrency would seem risky to any lender, of course, given the extreme volatility of the Bitcoin and cryptocurrency markets more broadly. Cryptocurrency lenders say they can essentially make it work by using both digital assets and home value as loan backing.

“We take home as collateral and cryptocurrency as collateral,” Wallace says. If the cryptocurrency market price drops below a certain threshold, the format may require the borrower to provide more collateral, or it may automatically liquidate the cryptocurrency to make loan payments.

“We will have two assets on our books, a million dollars in cryptocurrency and a house,” he says. “We can automatically liquidate Bitcoin for mortgage, tax and insurance payments, if necessary.”

Robina says the collateral must fall 65% in value before the company can ask for more collateral or modify the loan.

“In a typical real estate transaction, you guarantee to the borrower, and if they don’t make the payments, your first line of defense is foreclosure,” he says. “With this, there is a liquid asset – cryptocurrency. It is volatile, but the levels we are asking for will maintain a significant pullback.”

The demand for crypto-backed mortgages may be on the rise. According to a recent survey

Redfin
And

About 12% of first-time homebuyers said they sold some cryptocurrency for a down payment in the last quarter of 2021. Redfin said this is up from 8.8% in the third quarter of 2020 and 4.6% in the third quarter of 2019.

Borrowers may have several reasons to put up cryptocurrencies as collateral. They may be sitting on capital gains and will owe tax on the sale. They may rely on price gains and don’t want to cash in on mortgage financing. And their cryptocurrency might not be useful for qualifying for a mortgage from a bank or other traditional lender — leaving borrowers rich in crypto and cash poor.

Cryptocurrency mortgages likely won’t affect $2. $6 trillion in estimated mortgage issuance this year, including refinancing. Gross lending is now under pressure due to higher interest rates – recently reaching 5% on a 30-year mortgage. Mortgage volumes are expected to decline 35% from 2021.

Cryptocurrency loans are trying to exit in a tough market. And while they may be attractive to some borrowers, they don’t seem to offer a better deal on rates than conventional financing.

One reason that loans have higher rates is that they cannot be sold

Fannie Mae

or

Freddy Mac
.

These government agencies have strict underwriting criteria for “matching” loans. They buy the vast majority of mortgages, then combine them into mortgage-backed securities.

However, these could be the opening rounds of a merger between cryptocurrency and traditional mortgage finance. Figure has already made a deal with the private equity company

Apollo Global Management

(Stock ticker: APO), sells the company a set of “eNote” mortgages and transfers ownership of the banknotes via the blockchain.

“We think there is a market for crypto loan securitization,” says Rubina, who founded Milo to offer mortgages to non-US citizens.

Write to Darn Fonda at daren.fonda@barrons.com

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