Weiss Ratings Voiced Concern Over Crypto-Backed Mortgages Amid Market Uncertainty 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 allows customers to buy US real property by offering digital assets as collateral. It claims that the project has received over 1,200 applications and funded $300 million. It is based on the concept that crypto-backed home loans can be sold as bonds to asset managers or 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. Easy credit and lack of regulation allowed homebuyers to refinance when housing prices rose. It worked well for everyone, including bondholders. However, when housing prices crashed, lending to this sector was no longer viable and refinancing was more difficult than ever. The global financial crisis was triggered by the default of millions of mortgage borrowers. 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.
All Mortgage Rates Set to Increase
Homebuyers have been paying high prices, thanks to the Fed Reserve’s cheap money policies over the past several years. This trend continues despite the fact that there are fewer homebuyers than new homes. The Weiss Report stated this trend cannot be sustained, especially considering the high rate of inflation in the US. However, the Fed is working to stop the high inflationary trend and increase the interest rates. The Weiss report began with a cautionary note, stating that US mortgage rates are on the rise. When the interest rate increases, homebuyers’ monthly installments will rise by hundreds of dollars. This will cause a drop in home prices due to a decrease in the number of homebuyers. The Milo strategy may face its greatest challenge. As long as crypto and real estate prices rise, the Milo plans appear to be a win-win situation for both investors and the firm. However, this seems unlikely, as 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.
Crypto-Backed Mortgages: More Participants
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 benefit of digital assets-backed loans is that hodlers don’t have to sell their coins and can instead pledge them in real estate, which is more volatile than bitcoin. However, not all seem to be convinced by the integration of digital assets into mainstream financial products. United Wholesale Mortgage (UWM), which had greenlit the initiative, stopped accepting cryptocurrency payments last October.