Despite Volatility, Crypto-Backed Mortgages see Bright Future

The Biden administration increasingly has crypto assets in the regulatory hotseat, but that isn’t putting a damper on the interest in trading and investing Bitcoin and other digital assets. As growth in the crypto user base continues, businesses are finding new use cases, and the mortgage and real estate industry is no exception.

A recent survey from Pew shows that 86% of Americans have heard of cryptocurrencies, with 16% reporting using, investing or trading one. The intersecting demographic growth of crypto users and young homebuyers can also explain a drive to innovate in the mortgage space.

Using Crypto To Back A Mortgage

Millennials aged 22-40 make up the largest share of home buyers at 37%, according to a 2021 report by the National Association of Realtors. Likewise, cryptocurrency itself is most popular with that same demographic. 31% of people ages 18 to 29 report having used it, and 21% of people ages 30 to 49 also report using crypto. In contrast, only 8% of adults 50 to 64 and 3% of people aged 65 or over report using it.

Enter a new Miami-based company, Milo, which plans to allow crypto holders to use their Bitcoin as collateral to lock up a 30-year mortgage. The move would also open up increased investment possibilities to non-US citizens or those who lack a traditional credit history.

“Clients will be able to finance 100% of their purchase…and do this faster than a conventional mortgage,” the company said in a press release. “By combining the security of real estate with the liquidity of digital assets, Milo is able to bridge both the crypto and real world.”

The company is currently accepting signups with a waiting list (currently 5k+ deep) and expects to roll out the service to everyone in soon. While it is being hailed as the first of its kind, decentralized finance (DeFi) users have been using fixed rate borrowing and lending providers for more than a year to enable a different type of crypto ‘mortgage’.

As reported in the Defiant, one Australian engineer used a fixed-rate DeFi protocol, Notional Finance, to ‘unbank’ themselves, and become their own mortgage provider. In short, they used their (substantial) crypto assets as collateral to secure an over-collateralized fixed rate loan in USDC (a stablecoin) to pay off the traditional $500k mortgage in full. The loan payments were then made to the Ethereum-based protocol, as opposed to the bank providing the mortgage.

While the 6% borrowing rate paid at the time was more than the comparable rates offered via a traditional mortgage, crypto enthusiasts, and Milo, argue that the difference can be worth it in the potential upside. “Instead of selling your crypto for a down payment to qualify for a mortgage, a crypto mortgage lets you leverage your crypto to invest in real estate,” the Milo website states. Users also don’t trigger a taxable event by not selling the asset to fund a down payment.

Challenges Remain For Crypto Mortgages

As the example above shows, crypto-backed mortgages are a reality. Nonetheless, there is still much to be done to enable more widespread uptake. For example, no DeFi application currently offers loans with a maturity longer than one year – a hurdle for borrowers who want certainty for the length of a traditional mortgage. Additionally, with no home to repossess in a DeFi ‘mortgage’, the amount of collateral needs to exceed the entire loan amount, by about 150% generally.

Crypto mortgage holders would also need to have the ability to provide more collateral if the value of the crypto backing the loan falls too far. This renders the solution out of reach for typical homebuyers who rely on creditworthiness and the ability to forfeit the property if they find themselves underwater.

While these challenges currently stand in the way of mainstream adoption, it’s clear there’s no shortage of innovation in the space. If the trends continue with the rise of crypto adoption, the growth in blockchain-enabled advancements in the mortgage industry looks like a sure bet.