Despite criticism, controversies and talk of stringent regulations, cryptocurrency doesn't appear to be going anywhere, but exactly where it ends up landing in the mortgage ecosystem is still a question mark.
While a handful of mortgage businesses, including established nonbank lenders, hopped on the crypto craze in the past few years only to subsequently backtrack, newer startups have moved into the spacesince early 2022, even expanding their digital-currency-backed products in recent months. But for the time being, the role of cryptocurrency in home finance, whether used as payment or collateral, looks like a specialized niche, geared toward investment purchases.
Even with a large, passionate following, digital currencies won't ever grab a significant share in mortgage lending given the way the cryptocurrency market currently operates, according to Christopher Odinet, a professor at the University of Iowa College of Law.
With no clear rules behind digital currencies, "It's not really clear that there's a path to scale and significant profitability," he said.
"There's no political will to create a regulatory regime or some kind of legal regime that will really bring this mainstream," he added.
Government-sponsored agencies, whose decisions instigate changes in the industry, have expressed no willingness to move the needle either. Policies prohibit consideration of crypto income in underwriting, while also specifying that any digital currencies must be converted into U.S dollars if used for down payments or fee remittances.
Along with lack of regulation, most consumers' limited understanding about how the notoriously volatile assets can be used in the mortgage origination process means the challenge of issuing them would outweigh the effort lenders would need to put in.
"We feel that extreme volatility and risk is something that we cannot work with," said Desh Weragoda, chief technology officer at Mbanc, the California-based lender specializing in non-QM and other offerings not guaranteed by GSEs. Mbanc first began offering a crypto product in mid 2021 before discontinuing it a year later.
Crypto mortgages are limited to a handful of people "and does not service the issue that most people are experiencing right now — home affordability," Weragoda said.
A small but focused marketplace
But that's not to say no demand or opportunity exists for the use of digital assets in real estate transactions — or entrepreneurs who want to provide the opportunity.
While the particular slice of the mortgage-industry pie might be small and restricted to a specific subset of consumers, it's large enough for at least two South Florida-based companies to introduce loan products allowing crypto investors to use their assets as collateral backing a property purchase. And the offerings rolled out despite recent failures of crypto trading exchanges failing and drops in value.
Milo Credit first announced its bitcoin-backed purchase mortgage in early 2022, with production since its launch now totaling over $10 million, the company claims. Milo followed it up with a refinance product last fall and collateralized personal loans in January. It has also opened up offerings to ether and USDC stablecoin holders.
In April, Moon Mortgage similarly began originating mortgages backed by the same three digital currencies for both residential and investor properties, in addition to a trade-and-borrow product allowing clients to finance loans tied to their cryptocurrency values. A savvy, strong borrower base who wants to tap into the value of assets without unloading them supports the case for these types of offerings, according to the company's leadership.
"I'd say most of our consumers at this point are the early adopters of bitcoin and ethereum. They've made a lot of their wealth through this space and built in this space," said Moon Mortgage CEO Aaron Nevin.
"These are individuals who have no interest in selling their bitcoin and ethereum. They're long-term believers and want to hold it."
The investor preference to hold on to their digital assets is also likely behind the lack of traction for acceptance in mortgage transactions. After unveiling plans to accept bitcoin for mortgage payments in 2021, United Wholesale Mortgage, dropped the program just weeks later, citing limited interest and demand from its clients.
The particular idiosyncrasies of crypto investors means the product will likely only remain a niche offering. "If you understand the general home buyer, they don't have the crypto necessary to participate in the product," Weragoda said.
Volatility and controversy seem to make no difference
Advocates of crypto lending also don't seem deterred by headlines of the past year documenting the bankruptcies of exchanges like Celsius Networks and FTX or the wild swings the assets take. For their customers, volatility might be the draw.
"Most of our clients that are in the crypto mortgage side, they tend to be more affluent from a crypto network perspective," said Milo Credit CEO Josip Rupena.
"So the volatility — they understand. You can say that the reason why they've made that wealth is because of volatility, and they understand it cuts both ways," he added. Despite the swings in value over the past year, Rupena says none of his crypto mortgage customers have been margin called to up their collateral, and they have paid as expected.
In May 2022, bitcoin was valued at approximately $35,000 per coin just weeks before news of trouble at Celsius Networks emerged over the summer. Two months later, the digital currency was trading in the $19,000 to $21,000 range, where it largely wavered until scandals involving FTX and its CEO Sam Bankman-Fried began landing in news cycles in November. Bitcoin hit a low of $15,760, in the middle of that month, losing over half its value in a little over six months.
But despite the public relations hit the cryptocurrency industry took, the value of bitcoin has recovered from $16,640 at the beginning of the year to its current level of $28,929, rising close to 75%.
Ethereum experienced similar swings, trading from over $2,500 a year ago to under $1,000 two months later. Since early January, its value has risen 60% from $1,200 to $1,918.
The underlying reasons behind industry scandals had more to do with poor leadership than inherent flaws of investing in cryptocurrency investing, according to Nevins.
"Most of these issues that have come about in the last year — these were really ego problems. They were not crypto problems, and so we think we'll, in due time, return to the traditional volatility that we see in the crypto markets and that this sector is only going to grow," Nevins said.
The road ahead depends on regulators
But given limited current regulation, the utilization of cryptocurrency in mortgage lending appears relegated primarily to serve investment real estate buyers unless a change in policy happens, according to Odinet.
"This is a very small segment of the population who are going to finance real estate or use real estate to finance something else," he said.
But it isn't stopping mortgage companies from testing its potential in the residential marketplace. Moon's residential product became available in three states on launch, and while Milo focused on investment properties for much of the mortgage's first year of existence, data from customers shows growing interest in using digital assets for primary home purchases, Rupena said.
Despite digital currencies' history and reputation as being lawless, some regulation from the likes of the Federal Reserve or other government agencies are welcome by some in the space, as it might strengthen the industry.
"I think that the government needs to do more on a federal level to essentially create a rule basket for everyone so we can all move on a more unified front," Nevins said.
For lenders of crypto-collateralized mortgages, specifically, greater federal regulation would ease licensing requirements open up growth opportunities, encouraging innovation and potentially more product offerings, compared to the current way of doing business.
"Unless the Fed kind of gets a move on with taking a leadership stance on regulation, I think there's a high likelihood it ends up falling to the states, and we just have a repeat of every other licensing hassle on a state-by-state level which makes entrepreneurship that much harder," Nevins said.
In a congressional hearing, top officials from the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said no new rules will be adopted or proposed this year.
The Federal Housing Administration wants to make it easier for mortgage applicants to use rental income received from boarders in the underwriting process.
