The how and why of crypto coming into the mortgage market
The topic of cryptocurrency in mortgage lending has continued to grow since news broke last June that Fannie Mae and Freddie Mac would begin counting it as an asset in mortgage applications.
Federal Housing Finance Agency (FHFA) director Bill Pulte said last summer that the government-sponsored enterprises (GSEs) should begin the practice straight away, describing the move as “effective immediately” and to be implemented “as soon as reasonably practical.”
Since then, several lenders, including Newrez and Rate, have begun recognizing certain digital currencies as an asset in the mortgage qualification process. In both cases, any crypto assets must be converted to dollars before being used for down payments.
With digital currencies popular among younger homebuyers, many mortgage brokers may not have had a borrower come into their office with a crypto portfolio. Understanding how lenders are assessing these assets could be key to getting deals closed with the next generation of buyers.
Leslie Gillin (pictured top), chief commercial officer at Newrez, said the growing crypto market made this move a no-brainer for Newrez.
“Industry data shows the global crypto market has grown to more than $2 trillion in market capitalization, up from roughly $1 trillion in early 2023,” Gillin told Mortgage Professional America. “At the same time, about 45% of Gen Z and Millennial investors, many of whom are future homebuyers, hold crypto assets. That level of adoption makes it increasingly important for mortgage lending to reflect how people actually build and hold wealth today.”
What brokers need to know
Each lender that allows borrowers to use crypto as part of the qualification process will likely assess its value in different ways. Each must be mindful of potential volatility swings in value when considering how to value the asset properly.
“To account for the inherent volatility of digital assets, eligible crypto holdings will receive an adjusted market valuation, or a ‘haircut,’” Gillin said. “While we are not disclosing these adjusted values at this time, they are based on each asset’s historical market behavior and applied in accordance with prudent lending standards.”
Lenders may also decide to rate crypto assets at a different quality than stocks and bonds held by the potential borrower, although Gillin noted that Newrez isn’t putting a restriction on the mix of assets presented by the customer.
“There are no restrictions on asset mix,” Gillin said. “Each loan is assessed individually based on a borrower’s ability to qualify under our underwriting guidelines, which include crypto as a qualifying asset alongside stocks and bonds.
“Our goal with incorporating crypto into mortgage qualification is to bring digital assets more in line with how traditional assets like stocks and bonds are used during this process. By incorporating crypto assets into the mortgage approval process, we’re broadening pathways to homeownership and empowering consumers to maintain control of their investments.”
One other consideration unique to crypto, compared to stocks and bonds, is understanding how the borrower acquired the asset. Lenders will need safeguards in place to make sure the digital currency isn’t tied to illicit activity.
“Eligible crypto assets need to be held with US-regulated crypto exchanges and retail fintech apps, SEC/FINRA-regulated brokerages, or nationally chartered banks under OCC oversight,” Gillin said. “In addition, we have a robust AML compliance program to ensure assets are not tied to illicit activities.”
The future of crypto
Cryptocurrency usage in mortgages will likely depend on Fannie and Freddie adoption and volatility levels of the currency itself, although more non-QM lenders will likely expand offerings in the meantime.
Bitcoin, which peaked at over $125,000 in October, has since fallen to just over $74,000. That type of volatility could give some lenders, mortgage brokers, and customers pause before jumping into the space.
Non-traditional crypto mortgage providers, like Miami-based fintech company Milo, also continue to carve out space in the market. Milo surpassed $100 million in total loan origination in February. It allows customers to use crypto in mortgage lending without converting the asset, and then the customer gets the asset back when the loan is paid off.
Josip Rupena, CEO of Milo, told Mortgage Professional America last April that many borrowers who amassed crypto when the value was low are now looking to cash in on its increased value.
“There are a lot of clients who have amassed Bitcoin wealth from over 10 years ago, when Bitcoin was trading at $100,” Rupena said. “It's become a significant portion of their net worth, and they don't want to sell it. As they have moved on to a different stage of life and are looking to buy homes and diversify their wealth, they're looking at the ability to get a home.”
For more traditional lenders, the hope is that by allowing digital assets to count toward overall assets available, it will open up homebuying to a new sector of first-time buyers.
“By incorporating eligible crypto assets into the mortgage qualification process, we’re opening additional pathways to homeownership for borrowers whose financial profiles may not be fully represented by traditional models alone,” Gillin said. “Our goal is to treat digital assets more in line with how established assets like stocks and bonds are recognized, and over time, we believe it’s inevitable that more lenders will move in this direction as digital assets continue to mature and gain further acceptance.”
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