The next frontier for cryptocurrency may be housing, as it has been gradually gaining traction in mainstream finance.
Last Monday, the chairman of the Federal Housing Finance Agency directed Fannie Mae and Freddie Mac to develop recommendations to begin include cryptocurrency as an asset in mortgage lending evaluations. Crypto holdings would be added to the list of traditional assets, such as cash, bank accounts, and equities, that borrowers might use to apply for a loan similar to those bought by Fannie and Freddie.
Without having to convert their assets into cash, cryptocurrency owners would be able to use them as collateral for a mortgage. The larger mortgage market, including government-backed loans, has not yet adopted the practice of taking cryptocurrency into account when evaluating mortgages, but some private lenders have already done so.
The discovery excites Cory Klippsten, CEO of Swan Bitcoin, a bitcoin financial services startup. He believes that for a long time, getting a mortgage has been “the number one issue” for bitcoin owners. He has witnessed instances where bitcoin owners with eight-figure holdings were denied mortgage approval.
“How do you achieve sufficient money to purchase a home for your family? “A lot of forced selling is caused by that at the moment,” Klippsten stated.
When it comes to new laws, Klippsten believes that safeguards are crucial. Others tell that they honestly believe cryptocurrency mortgages are a terrible idea.
These are the main concerns, according to them.
The value of cryptocurrencies fluctuates
Crypto mortgages are a source of much anxiety because of their unpredictability.
Amanda Fischer, the chief executive officer and policy director of the charity Better Markets, stated that the price of cryptocurrencies fluctuates significantly within a single day. The estimation of someone’s creditworthiness based on the amount of cryptocurrency they own could not be accurate six hours after the decision is made.
Fischer is also worried about how secure cryptocurrency holdings are. According to the FHFA plan, only cryptocurrencies “evidenced and stored on US-centralized exchanges” are eligible for consideration; nevertheless, Fischer notes that even centralized exchanges are vulnerable to security lapses. In May, for instance, Coinbase was hacked.
According to Klippsten, authorities ought to restrict the list of qualified cryptocurrencies to those that have amassed more than $100 billion in market value in the previous 24 months, excluding volatile assets such as meme coins.
Regarding lesser cryptocurrencies, Klippsten stated, “I would definitely underwrite bitcoin if I were a mortgage lender, but I wouldn’t underwrite that.”
According to Richard Bernstein, the CEO and CIO of Richard Bernstein Advisors, cryptocurrency mortgages are an extremely dangerous option that would cause the housing market to become even more volatile.
While some could contend that bitcoin is a more reputable and well-established cryptocurrency, Bernstein said that there is a 70% link between the top token and numerous cryptocurrency assets that move in the same direction at the same time.
Of all, the collateral for a mortgage is real estate, so enabling cryptocurrency to pass as an underlying reliable asset just adds to the mortgage’s risk, according to Bernstein.
Taxpayer Risk
Another major cause of worry concerning crypto mortgages is that Fannie Mae and Freddie Mac are government-sponsored firms, and the mortgage-backed securities they issue have an implicit government guarantee. That implies that if riskier lending results in more defaults, American taxpayers may bear the expense in the long run.
In order to avoid a more widespread systemic disaster, the government had to take control of both GSEs after being forced to bail them out during the 2008 financial crisis.
Billions of dollars have already been lost by taxpayers as a result of Freddie Mac and Fannie Mae. About the GSEs, Fischer stated, “I believe they should be on the more conservative side.”
Counting cryptocurrency as mortgage assets may offer advantages, such as expanding homeownership to individuals who do not meet standard asset criteria, but Fischer believes Fannie Mae and Freddie Mac should have stricter screening requirements.
“I’m not suggesting there aren’t positives. “Maybe more people will be able to get mortgages who would not have gotten them otherwise,” Fischer said. “I just don’t think the government should be on the hook for crypto-backed mortgages.”
