Compared to other sectors of the wider economy, the housing and mortgage industries have traditionally been slower to embrace cutting-edge technologies and digital solutions. A myriad of reasons explain this pokey response to evolving change, ranging from the sector’s conservative risk tolerance to a lack of standardization in many evolving technologies.
One ongoing area where this lethargy is on display involves cryptocurrency. In many ways, the housing and mortgage industries can be excused for being late to this game — these industries are heavily regulated and the federal regulatory agencies tasked with their oversight are historically even further behind the proverbial curve than the industries they oversee.
Cyrptocurrency’s role within the housing and mortgage space can be divided into the minimal blips from the past and a rich promise of the future. Anyone looking for the present day will mostly find a void.
The Early Days: Cryptocurrency first permeated this environment during the mid-to-late 2010s in isolated incidents. One of the earliest documented transactions took place in 2014 when a home in Lake Tahoe, California, sold for 2,739 Bitcoins BTC/USD, the equivalent of $1.6 million at the time.
Other Bitcoin-fueled home purchases began to occur in California shortly afterward; these were direct buyer-seller transactions that did not require mortgage financing.
In 2017, a buyer seeking to purchase a $4 million residence in California contacted BitPay, an Atlanta-based Bitcoin payment service, to facilitate his transaction in Bitcoin.
The buyer secured $4 million in Bitcoin at a time it was worth approximately $750 on the global Bitcoin exchange market, but when the final payment on the property was made, Bitcoin’s value increased to $1,160. As a result, the buyer scored a $1.3 million profit on the currency exchange rate.
“The buyer actually ended up making about 25% in the currency exchange rate, essentially, in the appreciation,” said Sonny Singh, chief commercial officer at BitPay, at the time of the transaction. “He got a house for pretty much 25% cheaper.”
In 2018, Glen Oaks Escrow, a Los Angeles-based independent escrow company serving the Southern California region, announced it would use BitPay to accept Bitcoin payments. Joe Curtis, chief operating officer at Glen Oaks Escrow, said at the time that “blockchain and cryptocurrencies have the potential to become a bigger part of real estate transactions, and this is one step to be ahead of the curve and enable transactions to happen through this vehicle.”
Here And Now: Fast-forward a few years and cryptocurrency is still something of a novelty element in this area, and in one significant breakthrough the opportunity involved investors rather than homebuyers.
Last September, RedSwan CRE, a tokenization platform focused on the leading commercial real estate sector, issued a statement that it was accepting Dogecoin DOGE/USD as one of its payment options for investment in two multifamily properties, a 270-unit luxury multifamily development near downtown Oakland, California, and a 251-unit complex in suburban Seattle.
“Accredited investors will be able to use Dogecoin to purchase fractionalized ownership in the buildings, which can be later traded like stocks,” said the company on its website. “This will be the first time a major real estate asset will be available to a specific crypto community.”
But on the residential real estate side, the situation was still focused on very occasional direct buyer-seller transactions that did not involve mortgage financing. A high-profile example of this was the January news announcement that a Miami condominium sold for $6.94 million in Ethereum ETH — although the buyer converted their Ethereum into the USDC stable coin linked to the U.S. dollar.
A possible breakthrough involving cryptocurrency and home loan financing occurred last August when United Wholesale Mortgage UWMC announced it was conducting a pilot program on cryptocurrency mortgage payments.
“We've evaluated the feasibility, and we're looking forward to being the first mortgage company in America to accept cryptocurrency to satisfy mortgage payments,” said President and CEO Mat Ishbia at the launch of the pilot.
One UWM payment occurred in September and five were transacted before in October before the company abruptly canceled the endeavor. Ishbia said that while the pilot program was designed to determine if cryptocurrency could bring greater speed and efficiency to the payment process, its termination was “due to the current combination of incremental costs and regulatory uncertainty in the crypto space.”
Ishbia added his company would monitor the industry’s acceptance of cryptocurrency in mortgage transactions before determining whether to the effort another go-round. To date, UWM has not revisited the subject.
The Next Big Thing? But where UWM paused, the Miami-based fintech Milo is ready to move ahead. In January, Milo launched a 30-year crypto mortgage product. According to CEO Josip Rupena, this mortgage is specifically designed for homebuyers with significant digital assets.
“A conventional mortgage is driven around standards that are set by either banks or Fannie Mae and Freddie Mac,” Rupena said. “That means they require you to have tax returns, income assets, be conformed to certain ratios and certain guidelines. This is a challenge for individuals that have crypto, because a lot of their wealth is tied up in digital assets that are not being recognized fully by those institutions.
“So, for us to be able to launch a crypto mortgage, it entails us to really think outside of the box and look at their overall financial picture to be able to make an underwriting decision,” Rupena added. “We have different criteria set to be able to underwrite them, and we have technology to be able to assess what is sort of our risk to the transaction and to the borrower. We're coming up with new ways of underwriting the consumer.”
Rupena said he had a waiting list of 7,400 potential borrowers eager to take advantage of his product. Earlier this month, the company announced the completion of a $17-million Series A funding round led by California-based venture capital firm M13 with additional participation from QED Investors and MetaProp, who were also investors in the previous seed round.
“With this new capital coming into this into the company, it's allowing us to continue to build more technology continue to really scale out this crypto mortgage, which we see as a very big opportunity for us, and quite frankly, a big portion of the direction of the company going forward,” Rupena said. “We wanted to go out and raise additional capital to really go out and accelerate these efforts.”
Potholes Up Ahead: Are crypto mortgages ever going to become as prevalent as a FHA loans? Dr. Anthony B. Sanders, distinguished professor of real estate finance at George Mason University and former director and former head of asset-backed and mortgage-backed securities research at Deutsche Bank AG DB, predicts crypto mortgages could be “the wave of the future,” although he warned that the biggest obstacle to their future success lies in the policies of the government-sponsored enterprises Fannie Mae FNMA and Freddie Mac FMCC, which buy mortgages and package them for secondary market sale as mortgage-backed securities.
At the moment, neither Fannie Mae nor Freddie Mac view cryptocurrency as an eligible source of funds in the loan origination process, which is holding back lenders who would rather package their mortgages for sale in the secondary market than keep the loans in their portfolio.
“Freddie Mac and Fannie Mae are still the 1,000-pound gorilla in the room,” Dr. Sanders said. “When Freddie Mac and Fannie Mae give the green light to do it, then you'll see all the lenders going through and making loans accepting it, just as you're seeing Bitcoin machines that are sort of like ATMs.”
Cryptocurrency is already playing something of a role in the homebuying process. In January, the brokerage Redfin RDFN released a survey that found roughly one in nine first-time homebuyers (11.6%) said selling cryptocurrency during the fourth quarter of 2021 helped them save for a down payment. This percentage is up from 8.8% in the third quarter of 2020 and 4.6% in the third quarter of 2019.
But on the other hand, Taylor Marr, deputy chief economist at Redfin, is not convinced cryptocurrencies will be used for direct purchases in the near future.
“I don't see a very big trend in any cryptocurrency right now in the real estate market,” he said. “This has been something that we’ve followed for years now — we've been tracking and keeping an eye on it, and we ask our agents about it occasionally. We'll even do searches to see how many listings even mentioned Bitcoin or are willing to accept Bitcoin.
“At the peak of the Bitcoin bubble a few years ago, we did see a lot of home sellers saying they'll accept Bitcoin,” he added. “Maybe that was a marketing thing. But overall, cryptocurrency is extremely rare in housing.”
Marr also predicted that lenders will not be comfortable in the risk factor involved in digital assets.
“It's just too volatile that for such a large transaction,” he said. “It's not a viable means of managing the finances that are going through closing, so you need to price the additional hedge risk of that volatility. If there's even a 10% chance that the cryptocurrency could drop between when an offer is agreed upon and when the funds are transferred, that risk has to be priced in — we don't face that same risk in a typical dollar exchange.”
Onward, Crypto Pioneers: While established lenders are keeping crypto at arm’s length several newer companies are exploring this new world. These include the blockchain lending startup Figure Technologies, which is planning a pair of crypto mortgage products that allows users to borrow against their Bitcoin or Ethereum to finance their home purchases; Ledn Inc., a digital asset savings and credit platform that is creating a product that can blend equal amounts of Bitcoin and property collateral as part of the mortgage loan; and BlockFi, which offers crypto collateralized loans for homebuying.
Desh Weragoda, chief technology officer with the mortgage lender MBANC, predicted crypto mortgages will be more prevalent when digital assets circulate into a wider consumer audience — according to the Pew Research Center, only 16% of Americans said they’ve invested in, traded or used cryptocurrency.
“The immediate thing that comes to mind is people don't trust it right now,” he said. “And even if people did trust it, exchanging crypto is a bit difficult. Think about the processes you have to go through just to take money and turn it into some type of crypto — it's kind of intimidating and it's a big hurdle.”
Yet Weragoda said this obstacle will ultimately be overcome as more companies enter this space. He also recalled how another digital financial platform slowly but surely found its place in the daily ebb and flow.
“I would give you a great example with PayPal PYPL,” he said. “PayPal was easy to use, but a lot of people had difficulty and mass adoption took several years. I would say it would probably take that much time, but I don't think crypto is at that point.”
Yet Milo’s Rupena disagrees that the promise of crypto mortgages is years away.
“We're going to be doing lots and lots of loans this year,” he said of his company’s crypto mortgage. “We're going to be continuing to enhance the product, continuing to add other digital assets, and continue to iterate on it and ultimately try to add as much value as we can for international consumers as well as crypto consumers. Because I know that we have a lot of work to do there, and we expect to be the pioneers in the space working with crypto consumers.”
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