Bitcoin may soon be used as collateral for home purchases as crypto startups try to crack the $2.6 trillion mortgage market.
In March, a startup company called Milo offered mortgages backed by cryptocurrency. CEO Josip Rupena told Barron’s that the company has pre-approved more than 700 potential borrowers and made between $5 million to $10 million in loans.
“This is a live product and we’re breaking away,” he said.
Bitcoin, ether, or stablecoins can be used as collateral for loans. Stablecoins are digital currencies designed to keep the price constant at $1. According to Rupena, Milo will accept USD Coin, Gemini Dollar, and Terra stablecoins.
Those who have enough cryptocurrency can receive credit for up to 100% of the purchase price from Milo. For instance, a buyer of a $500,000 house could pledge $500,000 worth of bitcoin as collateral to Milo, which would then provide the money to close the transaction.
Milo offers 30-year mortgages at rates between 3.95% to 5.95% and the loan can be repaid in crypto or dollars. Figure and Ledn are two other startups offering crypto-backed mortgages, both of which claim to have waiting lists for loans.
Rates range from 5.99% to 6.018% for 30-year fixed-rate mortgages, and borrowers can borrow up to $20 million. According to Ledn, its mortgage terms will be two years, after which the loan may be renewed or reassessed. The interest rate may varies.
“If you custody $1 million of Bitcoin or ether, we’ll give you $1 million in a loan,” says Daniel Wallace, general manager of Figure Lending. “That means you’re not financing a loan out of pocket—there’s no down payment.”
It is rare for banks to finance 100% of a purchase price. Banks usually require a 20% down payment. For low-risk borrowers, some banks and brokerages will accept securities as collateral, up to 100% of the purchase price.
Milo brings closings within two to three weeks, does not require a FICO credit check, and does not require much documentation. To comply with anti-money laundering and know your customer regulations, the company’s primary requirements are to verify identity and source of funds.
Due to the steep volatility of Bitcoin and crypto markets more broadly, it might seem risky for any lender to finance 100% of a house purchase with crypto. Crypto lenders claim that they can back the loan both by digital assets and a home’s value.
“We take the house as collateral and the crypto as collateral,” says Wallace. The borrower may need to put up more collateral if the market price of the cryptocurrency drops below a certain threshold, or Figure may automatically liquidate the crypto to repay the loan.
“We would have two assets on our books, $1 million of crypto and a house,” he says. “We can automatically liquidate the Bitcoin to make payments on the mortgage, taxes, insurance, if necessary.”
For the company to require more collateral or modify the loan, collateral would have to decrease by 65% in value.
“In a typical real estate transaction, you underwrite the borrower and if they don’t make payments, your first line of defense is foreclosure,” he says. “With this, there’s a liquid asset—the crypto. It is volatile, but the levels we’re asking for would sustain a significant drawdown.”
Crypto loans are trying to break out of a difficult market. However, they don’t appear to be a better deal on rates than conventional financing, even if they may appeal to some borrowers..
“We believe there’s a market for securitizing crypto loans,” says Rupena, who started Milo to provide mortgages to non-U. S. citizens.