Bill Pulte, director of the Federal Housing Finance Agency, recently announced on X that he has ordered government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac “to prepare their businesses to count cryptocurrency as an asset for a mortgage.”
A draft order Pulte shared on the social media site states that “cryptocurrency is an emerging asset class that may offer an opportunity to build wealth outside of the stock and bond markets” and that “cryptocurrency has not typically been considered in the mortgage risk assessment process for mortgage loans delivered to the enterprises, without converting the cryptocurrency to U.S. dollars prior to loan closing.”
The order further states that the “FHFA has now determined that the consideration of additional borrower assets in the enterprises’ single-family mortgage loan risk assessments may enable the enterprises to assess the full spectrum of asset information available for reserves and to facilitate sustainable homeownership to creditworthy borrowers.”
The order direct the GSEs to “prepare a proposal for consideration of cryptocurrency as an asset for reserves in their respective single-family mortgage loan risk assessments, without conversion of said cryptocurrency to U.S. dollars.”
“Each enterprise is directed to consider only cryptocurrency assets that can be evidenced and stored on a U.S.-regulated centralized exchange subject to all applicable laws,” the order states. “Additionally, each enterprise is directed to consider additional risk mitigants per their own assessment, including adjustments for market volatility and ensuring sufficient risk-based adjustments to the share of reserves comprised of cryptocurrency. Prior to implementing any changes, each enterprise must submit and receive approval from its board of directors prior to submitting to U.S. Federal Housing FHA for review.”
So what are the risks to the GSEs and lenders if crypto is considered when underwriting mortgage loans? According to Roby Robertson, executive vice president of LoanLogics, which offers mortgage loan quality technology, “market volatility and compliance risk – specifically KYC (know your customer) – are both risks – but with adequate integration into cryptocurrency exchanges and valuation platforms to track ongoing account history and market volatility, lenders can verify the origin and valuation of borrower assets.”
As Robertson explains to MortgageOrb in a recent interview, the proposal could bring significant benefits to both the GSEs and lenders.
“Modern cryptocurrency platforms combine KYC and accounting mechanisms that parallel most FDIC insured financial institutions such as tracking deposit origin and account activity, in addition to valuation systems on par with traditional investment exchanges which track volumes, valuations, trading, etc.,” Robertson explains. “Collectively, these modern platforms provide lenders with the regulatory controls and account history they need to dynamically verify the borrower’s assets at time of application and on an ongoing basis. So, in many ways, these systems provide deeper and broader visibility into the borrower’s assets and ability to repay than traditional bank accounts.”
So, how would this shake out in terms of the secondary market? Would these loans be in their own separate class like non-QM?
“In my opinion, loans securitized by cryptocurrency and NFTs are fundamentally identical to some asset-based Non-QM deals closed today, because the borrower is putting up a portion of their assets to be used as either collateral or repayment in order to qualify for the loan,” Robertson says. “The difference, of course, is that important technology integrations need to be put in place for upfront and ongoing valuation of the underlying asset(s).”
So what will the underwriting guidelines be like for these loans – when considering the volatility of crypto as an asset class?
“Cryptocurrencies, like traditional stocks and bonds, do experience some volatility, but temporary swings in market conditions do not correlate to the long-term value of the portfolio,” Robertson says. “For example, over the past seven years – the same time frame as the average age of a mortgage – Bitcoin, through its volatility, has increased overall by 3,500 percent. This growth rate outstripped the S&P (141%) and traditional savings account (20%) in the same time frame, which shows that although there is some inherent volatility to a growing market, ultimately the value of that asset is likely to grow over a long enough timeline.”
“That said, lenders will likely need to develop tracking tools and stop-loss tactics which trigger when underlying portfolios drop below an expected threshold for a given period,” he adds. “For example, if the value of the underlying portfolio drops by more than 20 percent for longer than two months then the borrower will be required to either put up more collateral or perform some form of repayment to stabilize the credit risk.”
“There is precedent for this type of valuation in commercial banking when company inventories – which fluctuate in value – are used as collateral for lending,” Robertson says. “Applying a similar lending model for cryptocurrencies shouldn’t be much of a stretch.”
Photo: Pierre Borthiry