Cryptocurrency-backed mortgages are repleted with risks akin to those responsible for the 2009 recession, said the US-based rating company Weiss Ratings. Referring to Miami startup Milo, a digital bank that offers crypto-backed home loans, the firm noted that the plans “are fraught with warning signs.”
Milo Home Loans With Digital Assets as Collateral
Milo helps customers buy US real estate by pledging digital assets as collateral. According to its website, the project has processed over 1,200 applications from 63 countries and financed $300 million. The business is based on a model where crypto-backed home loans are sold as bonds to asset managers and other financial sector investors.
“It’s an interesting strategy … but given current market conditions, investors should be skeptical, especially with financial stocks,” the Weiss report reads, suggesting that this exactly was the “recipe” for the Great Recession of 2009.
When the housing prices were on the rise, homebuyers were able to refinance thanks to easy credit and insufficient regulation. The strategy worked fine with everyone, including the bondholders, getting paid.
But when the housing prices crashed, lending to the real estate sector became unviable, and the refinancing was not as easy as before. This forced millions of borrowers to default on their mortgage loans, leading to a global financial crisis.
The Weiss Rating report noted that Milo offering digital-assets-backed mortgages that even forego the down-payment sounds familiar to the pre-2009 situation.
“Many economists see parallels … and investors need to see the bigger picture of how this impacts the financial industry as a whole,” it reads.
Mortgage Rates All Set to Rise
Homebuyers have been paying high prices, thanks to the Fed Reserve’s cheap money policies over the past several years. This trend has continued in the face of fewer new homes than the number of homebuyers. This trend is unsustainable, especially because of the high inflation rate that the US economy is witnessing, the Weiss Report said.
However, the Fed is gearing up to arrest the high inflationary trend by increasing the interest rate. In fact, the Weiss report opened with a note of caution, saying that mortgage rates are rising quickly in the US.
When the interest rate increases, homebuyers’ monthly installments will rise by hundreds of dollars. It will result in a fall in home prices as the number of home buyers will drop. And this is when the Milo strategy might meet with the most serious challenge.
The Milo plans seem to be a perfect win-win for both the firm and its investors as long as real estate and crypto prices are rising. But that seems unlikely, the Weiss report suggested.
“Bitcoin is off by 40% since it reached $66,000 in November 2021. And U.S. property prices now face headwinds from a change in Fed policy and rising mortgage rates,” it says.
More Players in Crypto-Backed Mortgages
In December last year, Toronto-based savings and credit platform Ledn announced the launch of bitcoin-backed mortgage products, using a mix of bitcoin and real estate as collateral. The advantage of digital assets-backed mortgages is that the hodlers will not have to sell their coins but only pledge them in real estate that is relatively less volatile than bitcoin, the company said.
However, not everyone seems to be convinced about integrating digital assets into mainstream financial products. In October last year, United Wholesale Mortgage (UWM) stopped accepting cryptocurrency payments two months after greenlighting the initiative.