Crypto Mortgages Gain Traction, but Experts See 3 Big Risks

Cryptocurrency has been slowly making inroads into mainstream finance, and housing could be the next frontier.

Last week, the head of the Federal Housing Finance Agency ordered Fannie Mae and Freddie Mac to draw up proposals to begin counting crypto as an asset in mortgage lending assessments. Crypto holdings would be added to the list of traditional assets, such as cash, bank accounts, and stocks, that borrowers can claim when applying for a loan that would fit the mold of those purchased by Fannie and Freddie.

Crypto owners would be able to count their holdings toward a mortgage without needing to liquidate them into cash. While some private lenders already consider crypto in mortgage evaluations, the broader mortgage market, including government-backed loans, has yet to follow suit.

Cory Klippsten, CEO of the bitcoin financial services company Swan Bitcoin, is excited about the development. Qualifying for a mortgage has been “the number one issue” for bitcoin holders for a long time, in his opinion. He’s seen cases of bitcoin holders with portfolios worth eight figures who couldn’t qualify for a mortgage.

“How do you unlock enough liquidity to put your family in a home? Right now, that causes a lot of forced selling,” Klippsten said.

However, Klippsten thinks guardrails are important when it comes to new legislation. Others tell BI they think crypto mortgages are a flat-out bad idea.

Here’s what they say are key issues.

Cryptocurrencies are volatile

Much of the concern about crypto mortgages stems from their volatility.

“We see huge intraday swings in the price of cryptocurrencies,” Amanda Fischer, policy director and chief operating officer of nonprofit Better Markets, said. “If we are determining someone’s creditworthiness based on how much crypto they hold, that estimate may not be true six hours from the time the determination is made.”

Fischer’s also concerned about the safety of crypto assets. While the FHFA proposal states that only cryptocurrencies “evidenced and stored on US-centralized exchanges” can be considered, Fischer points out even centralized exchanges are susceptible to security breaches. For example, Coinbase was just hacked in May.

Klippsten believes regulators should limit the list of eligible cryptos to those with over $100 billion in market cap over the last 24 months, excluding more volatile assets like meme coins.

“If I were a mortgage lender, I wouldn’t underwrite that,” Klippsten said of smaller cryptocurrencies, “but I absolutely would underwrite bitcoin.”

Richard Bernstein, CEO and CIO of Richard Bernstein Advisors, thinks crypto mortgages are a highly risky move that would inject even more volatility into the housing market.

Bernstein said that while some may argue bitcoin is a more trusted and established cryptocurrency, many crypto assets tend to move in the same direction at the same time, with a 70% correlation with the top token.

“Of course, for a mortgage, the collateral is the real estate itself, so allowing crypto to pass as an underlying credible asset simply compounds the risk of the mortgage,” Bernstein said.

Taxpayer risk

Another key source of concern about crypto mortgages is the fact that Fannie Mae and Freddie Mac are government-sponsored enterprises, and the mortgage-backed securities they issue have an implicit government guarantee. That means that American taxpayers could ultimately shoulder the burden if riskier lending led to more defaults.

This was evident during the 2008 financial crisis, when the government was forced to bail out both GSEs, ultimately taking them over to prevent a wider systemic crisis.

“Taxpayers have already lost billions and billions of dollars on Freddie Mac and Fannie Mae. I think they should be on the more conservative side,” Fischer said of the GSEs.

Counting crypto as mortgage assets could have benefits, such as expanding homeownership to those who may not qualify under traditional asset criteria, but Fischer believes Fannie Mae and Freddie Mac should have more stringent underwriting criteria.

“I’m not saying there aren’t any pros. Maybe more people can get mortgages who otherwise wouldn’t get them,” Fischer added. “I just don’t think the government should be on the hook for crypto-backed mortgages.”