Crypto Mortgages Let Homebuyers Keep Bitcoin, Put Down Nothing
April 27, 2022 - This article was provided by Bloomberg News.
It took Vincent Burniske months to get a seven-figure loan to buy two small apartment buildings in a coveted Miami neighborhood. The sports-media consultant had money — but much of it was tied up in crypto.
Digital wealth meant little to banks when it came to a mortgage. And Burniske, 63, wanted to keep his coins rather than trade them for dollars.
"If you cash out, you have to pay sizable tax and you're leaving a lot of upside on the table because you're getting out early," he said.
Then came an option that wasn't available when Burniske found the properties late last year: a 30-year fixed-rate mortgage secured by part of his Bitcoin and Ethereum holdings. He nailed down the loan from Milo Credit, a Miami-based startup that's seeking to tap into the burgeoning pool of crypto loyalists who want to diversify their wealth while hanging on to their tokens.
Crypto mortgages are the latest example of the deepening role of digital coins in the U.S. real estate market, with property buyers and lenders alike embracing the volatile currencies to underpin deals for hard assets. Last year, Fannie Mae started allowing borrowers to use crypto for their down payments. New buildings going up in tech hot spots like Miami are accepting digital tokens for deposits on condos. A house in Tampa, Florida, even sold as an NFT earlier this year.
The home loans offered by Milo represent a new twist. Instead of simply paying for property with tokens, borrowers pledge their digital holdings as collateral, with no down payments necessary. That enables the holders to keep their coins, avoiding taxes on capital gains and theoretically benefiting from rising values for both the tokens and the real estate. It also heightens risk by using a volatile asset to finance purchases at a time the heated U.S. property market faces a slowdown from the fastest jump in borrowing costs in decades.
Milo wants to make such loans a big business by pooling them and selling them to banks, asset managers and insurance companies, maybe even offering them as bonds in a securitization, according to founder Josip Rupena.
Wall Street's financial engine is already looking at the novel mortgages.
"We've advised on several matters involving the origination of loans backed by crypto and NFTs for eventual securitization and similar concepts, said Steve Blevit, a partner at law firm Sidley Austin, who specializes in financing esoteric assets. "We see a lot of interest in this area and expect it will develop into a new asset class."
Until now, those with large crypto holdings who didn't want to sell were turning to companies like BlockFi, which offers collateralized loans that can be used to buy property. There's also Austin, Texas-based Unchained Capital, which offers three-year loans with up to 14% interest rates.
Milo, which started originating home loans in 2019 for non-U.S. citizens, is offering a product that looks more like a traditional mortgage. If its wait list of more than 8,000 people ready to buy property in states such as Texas, California and New York is any indication, the company's crypto offering may dwarf its $100 million of foreign national loans.
The company has issued pre-approval letters on $340 million of mortgages in the last 30 days. Milo recently received $17 million in Series A funding led by venture-capital firm M13 to help fuel growth.
"Were going to refine this and get it bigger," said Rupena, 38. "Milo will be looking to provide other long-term solutions to those with crypto wealth — not just mortgages."
It's the type of lofty ambition rippling through the crypto economy and Milo's hometown of Miami, where the culture of decentralized finance is fast taking root. In the city's Wynwood neighborhood, Bored Ape NFTs, which grew in mainstream popularity with the help of Snoop Dogg and Justin Bieber, hang out on building facades and telephone poles. Cranes dot the skyline in between old warehouses about to be inundated by employees of Blockchain.com and MoonPay.
Even as the value of digital assets has exploded over the last decade, standing now at about $2 trillion, it's a big challenge to cross into the decades-old, highly regulated mortgage industry. Skeptics point to cryptocurrencies' volatility: Bitcoin infamously soared 305% in 2020 but is down more than 40% from an all-time high. Ether and other altcoins have also suffered steep declines. Crypto has also attracted attention from government officials who have expressed concern about the lack of regulatory oversight and surveillance which can come with fraud and other problems.
"There are always early adopters out there trying new things," said David Lykken, president of Transformational Mortgage Solutions, a consulting and advisory firm. "Cryptocurrency doesn't have enough stability or the confidence of the broader investor community. Certainly not now — maybe never."
Supporters remain steadfast, arguing the tokens will prove their worth in time. Bitcoin has still gained almost 500% since the end of 2019.
Milo is lending as much as $10 million on homes, and digitizing the process so closing takes two to three weeks. Borrowers must pledge at least the amount of the property, and the coins get transferred to a custodian for safe keeping.
The property seller gets paid in dollars funded by Milo. Borrowers can then make their monthly payments in either crypto or traditional cash. Rates are generally between 3.95% and 5.95%, which is in line with the average borrowing costs for a traditional 30-year mortgage.
To account for the volatility, Milo will ask the borrower to put up more crypto or cash if the crypto-to-loan amount drops below 65%. If that figure drops below 30%, the company liquidates the assets and stores them in U.S. dollars.
It's an especially big risk to take for an asset as personal as a home, said John Kerschner, head of U.S. securitized products for Janus Henderson Investors.
"A crypto mortgage seems inefficient given the volatility," he said. "People think Bitcoin will go to the moon but nobody thought the great financial crisis or Covid was coming. These things happen."
Burniske, who used his mortgage to buy investment properties, already has tenants living in his four units, nestled between a 1920s Venetian pool and the Biltmore Hotel in what's known as Golden Triangle of Coral Gables. For him, the crypto mortgage is just another example of a concept that quickly turns real.
"I was convinced I was going down the conventional loan path," he said. "It's comfortable. It's what we know. But at any given moment there are better financing options and you really need to pay attention."
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