FHFA Proposes Crypto for Mortgages Amid Volatility Concerns

In a significant policy shift, the U.S. Federal Housing Finance Agency has proposed that borrowers may soon be able to use crypto investments to qualify for mortgages. This move has sparked both excitement and concern among industry experts and consumers alike. Michael Saylor, a prominent figure in the crypto community, expressed enthusiasm about the proposal, describing it as a "defining moment for collateral recognition." However, the potential risks and implications of this policy change are substantial and warrant careful consideration.

The volatility of Bitcoin, which has seen dramatic price swings in recent years, is a major concern. For instance, Bitcoin's value surged from $61,000 to $107,000 over the past 12 months, but it also plummeted from $68,000 to $16,000 in 2022. Using crypto as collateral for mortgages could mean that homeowners' digital assets could be liquidated during a sudden market downturn, leading to potential financial ruin. This would require constant monitoring of crypto prices to avoid margin calls, adding an unnecessary layer of stress for homeowners.

Additionally, digital assets are impractical for funding a house purchase. Traditional mortgages often require a 5% to 10% cash deposit, allowing borrowers to finance the rest through monthly repayments. In contrast, most crypto mortgage providers demand 100% collateralization. This means that for a $300,000 house, a borrower would need to pledge $300,000 worth of crypto. Furthermore, lenders typically accept only Bitcoin and Ethereum, excluding other popular cryptocurrencies like Dogecoin from the application process.

Critics have raised concerns that integrating crypto into the housing market could lead to a financial crisis similar to the 2008 recession, where high-risk mortgages defaulted and triggered a global economic downturn. Given that the U.S. government implicitly guarantees home loans issued by Fannie Mae and Freddie Mac, a collapse in Bitcoin's value could result in significant financial losses for taxpayers.

Despite these risks, there are valid points to consider. Crypto investors often face challenges when trying to secure mortgages, as some lenders penalize applicants with crypto transactions on their statements. This outdated mindset needs to change, as it unfairly discriminates against a growing segment of the population. Additionally, banks are often inflexible when considering income sources, particularly for self-employed individuals, who may face lower borrowing limits compared to full-time employees with identical salaries.

Some crypto investors have amassed significant wealth over the years and do not want to sell their digital assets to finance a down payment. For example, data from Redfin revealed that about 12% of first-time buyers were selling crypto to fund their down payments. Given the substantial rise in Bitcoin's value since then, these investors would have missed out on considerable profits. Josip Rupena, CEO of the crypto mortgage firm Milo, highlighted this issue, stating that many clients with long-term Bitcoin holdings do not want to sell their assets.

While it is unacceptable for crypto investors to be treated as pariahs by lenders, the proposed guidelines by the FHFA could endanger these investors and put the economy at risk by further intertwining digital assets and traditional finance. Although Bitcoin's value is currently high, the next bear market could see an 80% crash, posing significant risks for homeowners who rely on their crypto stash to maintain their homes. This policy change requires thorough evaluation to ensure the stability and security of both homeowners and the broader economy.