FHFA Directs Fannie Mae Freddie Mac to Evaluate Cryptocurrency in Mortgages

Bill Pulte, Director of the U.S. Federal Housing Finance Agency (FHFA), has announced a significant shift in mortgage policy by directing Fannie Mae and Freddie Mac to evaluate cryptocurrency holdings in mortgage applications. This move aims to include assets like Bitcoin and Ethereum stored on U.S.-regulated exchanges, potentially expanding the role of cryptocurrencies in traditional finance.

The directive emphasizes the need to consider market volatility and associated risks. While no specific funding is attached, industry participants view this as a crucial step in broadening the credibility of cryptocurrencies in mainstream finance. As the policy progresses, it could significantly impact assets like Bitcoin and Ethereum, shaping how they are perceived in financial applications.

This initiative marks a novel shift in U.S. mortgage policy, previously limited by conventional financial frameworks. Eligibility for including cryptocurrencies in mortgage applications will hinge on their storage at U.S.-regulated centralized exchanges. The FHFA's move follows a period where digital assets were traditionally excluded from mortgage qualifications, indicating a notable shift towards mainstream acceptance.

Industry experts have expressed mixed reactions to the news. Some analysts have drawn comparisons to the 2007 housing market crash, likening cryptocurrencies to 'poker chips' and questioning the stability of these digital assets. Critics argue that including cryptocurrencies in mortgage assessments could lead to similar risks as those seen in the subprime mortgage crisis, where lax lending standards contributed to a flood of foreclosures.

Christopher Whalen, chairman of a consulting firm, described the proposal as a "really bad idea," stating that cryptocurrencies like Bitcoin are not considered assets under generally accepted accounting principles and are more akin to gaming instruments. He also noted that stablecoins, which are pegged to the dollar, may be slightly better but still not suitable for mortgage applications.

Jim Parrott, a nonresident fellow at The Urban Institute, questioned the rationale behind the proposal, suggesting that it does not address a major problem in getting Bitcoin owners into homeownership. He also raised concerns about the risk involved in using cryptocurrencies as an asset class in mortgage assessments, stating that it would require a significant haircut given the volatility of these assets.

The Mortgage Bankers Association (MBA) welcomed the initiative as part of a collective industry effort to modernize the mortgage underwriting process. The MBA emphasized the need to assess all operational, regulatory, and market risks before implementing any changes. They also highlighted the potential for other impactful approaches to rethinking the underwriting of mortgage risk.

LoanLogics, a mortgage loan quality automation provider, sees this order as a way to potentially expand access to homeownership for those with nontraditional income or assets. Roby Robertson, executive vice president at LoanLogics, described the change as "the latest expansion of non-qualified mortgages," which have grown in popularity with more homebuyers having nontraditional income streams and assets.

The FHFA's directive signals a growing acceptance of digital assets in the housing market. By considering cryptocurrencies as part of a borrower's financial profile, the agency aims to provide more flexible lending options and potentially increase access to homeownership for a broader range of individuals. However, the risks and volatility associated with cryptocurrencies remain a concern, and the industry will need to carefully navigate these challenges as it moves forward with this initiative.