Are Crypto-Backed Mortgages as Bananas as They Sound?
It’s only risk piled on top of risk, at a particularly risky time.
If you entered a contest to see who could design a financial instrument to lose the most money the fastest, you would struggle to come up with a better idea than taking home mortgages backed by crypto, slicing them into mortgage-backed securities and selling them at the moment the global financial system is being bludgeoned by pandemic, war and Jerome Powell.
And yet here we are: Bloomberg News reports the hot new thing in finance is the nouveau crypto riche putting up their expensive digital assets as collateral to buy expensive houses using a more-or-less traditional mortgage, but with no dead-tree dollars down. The brainchild of a company called Milo Credit — based in America's Crypto Capital, Miami — this offering goes a little further than what we've seen so far, which has included the use of crypto for home down-payments and apartment deposits and the occasional crib selling as an NFT.
Naturally the world's MBS sausage-makers want in. “We see a lot of interest in this area and expect it will develop into a new asset class,” a Sidley Austin lawyer tells Bloomberg.
For sure! But each one of these things should be sold with a pair of asbestos gloves to handle them, given the layers of red-hot risk being piled on at every step.
First you've got the collateralization with crypto, a famously stable asset that rose 305% in 2020 and has plunged 40% lately. This helps crypto owners avoid cashing out and paying taxes to raise dollars. But the loan terms subject them to possible capital calls or even property seizure if the “crypto-to-loan amount” — a series of words if ever there was one — crosses certain thresholds. Those thresholds seem pretty steep — a 65% drop in collateral value, for example. But given how much crypto can swing in an hour or a day, it will be interesting to see how these terms are applied, and by “interesting” I mean “like being held at gunpoint in a convenience store.”
Then you've got housing, which is a more reliably stable asset class, until it isn't. It's on shaky ground now that the Fed and a panicky credit market are raising interest rates. And by now we all know the deal with mortgage-backed securities. They are a fine and reliable product, aside from that one time when they weren't. We are once again finding esoteric new ways to stress-test them.
Milo's loan process takes only a few weeks and requires little of those tedious stacks of paperwork that traditional mortgage lenders make you sign. The company's CEO recently told Barron's you don't even need a FICO credit check. This is not quite the “fog a mirror, buy a house” days of the pre-crisis housing bubble, given the existence of real crypto wealth. But what if that all turns into so much fog?
This could just be cowardly naysaying. Crypto may well keep going to the moon. Home prices may never truly swoon again like they did 15 years ago. How much would you like your pension fund to bet on it?
Mark Gongloff is an editor with Bloomberg Opinion. He previously was a managing editor of Fortune.com, ran the Huffington Post's business and technology coverage, and was a columnist, reporter and editor for the Wall Street Journal.