A Big Warning about Crypto Mortgages

Written by C, Fiona

Last updated: 2022-05-07

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Given the current financial environment, an analyst from Weiss Ratings warns that the value of property — and major cryptocurrencies could fall in the near term.

Investors should be “skeptical” of crypto mortgages – and analysts warn that current market conditions mean they are risky.

Jon D. Markman from Weiss Ratings pointed to the digital banks racing to offer home loans backed by assets such as Bitcoin.

A number of Florida-based companies — including Milo and XBTO — are beginning to woo investors who may be crypto rich but cash poor.

Markman claims that some of these lenders have a larger plan of pooling these home loans and offering them as bonds to asset managers. Striking a note of caution, he wrote:

“All of this should sound familiar. Pooling risky home loans, then selling them to unsuspecting asset managers, was the recipe for the Great Recession of 2009.”

He noted that while this was a winning strategy as long as house prices continued to climb, millions of people with low credit scores ended up defaulting when the property market imploded.

The analyst claims there are now parallels with the current financial landscape, explaining:

“Inflation is running at the highest rate in 40 years. Several years of cheap money policies at the Federal Reserve helped too many homebuyers chase too few new homes.”

And with the Fed set to increase interest rates this week — causing the cost of mortgages to spiral — Markman fears we’ll soon see “fewer buyers and lower home prices” as the property market begins to cool.

Attempting to read the tea leaves of what comes next, he gave his view on Milo’s offering:

“The product seems to be like a win-win, assuming real estate and crypto prices keep rising … except there are signs both bets are unlikely to be winners in the near term.”

Get to Understand Crypto Mortgages

XBTO is a provider of crypto-backed mortgages, which is only offering these home loans in Florida on properties worth more than $1 million — says the rates it offers for 15 and 30-year deals are comparable to traditional mortgages.

XBTO’s CEO Philippe Bekhazi said that investors shouldn’t have to sell their Bitcoin and incur a tax hit in order to get on the housing ladder.

We also asked him what would happen to those with crypto mortgages if the value of the Bitcoin they used as collateral fell to $20,000 — and the impact this would have. He explained:

“What would happen is we would stay very close to our customers and let them know the loan to value is getting close to a place where we may have to liquidate some Bitcoin to make up for that collateral. We’d ask them to basically supplement that collateral with more Bitcoin so it doesn’t create a selling event.”

On the other hand, Bekhazi stresses that if the value of the world’s largest cryptocurrency rises, the amount of BTC needed as collateral will decrease.