Through cryptocurrencies Secured mortgages are fraught with risks similar to those responsible for the 2009 recession, US-based ratings agency Weiss Ratings said. Referring to Miami startup Milo, a digital bank that offers crypto-backed home loans, the company noted that the plans are “riddled with red flags.”
Milo home loans with digital assets as collateral
Milo helps clients 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 funded $300 million. The deal 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, particularly in financials,” the Weiss report says, suggesting that it was precisely the “recipe” for the Great Recession of 2009.
As house prices rose, easy borrowing and insufficient regulation allowed homebuyers to refinance. The strategy worked well for everyone, including the bondholders who got paid.
But as house prices plummeted, lending to the real estate sector became unprofitable and refinancing wasn’t 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, which offers mortgages backed by digital assets that even waive the down payment, looks familiar from the pre-2009 situation.
“Many economists see parallels … and investors need to see the bigger picture of how this is affecting the financial industry as a whole,” it says.
All mortgage rates will go up
Homebuyers have paid high prices in recent years thanks to the Fed’s easy-money policies. This trend has continued with fewer new homes than the number of homebuyers. This trend is unsustainable, particularly because of the high rate of inflation the US economy is experiencing, according to the Weiss report.
However, the Fed is preparing to stem the high inflation trend by raising interest rates. In fact, the Weiss report began with a warning that US mortgage rates are rising rapidly.
When the interest rate goes up, homebuyers’ monthly payments go up by hundreds of dollars. This will cause home prices to fall as the number of homebuyers will decrease. And this is where Milo’s strategy may run into its biggest challenge.
The Milo plans appear to be a perfect win-win for both the company and its investors as long as real estate and crypto prices rise. But that seems unlikely, according to the Weiss report.
“Bitcoin is down 40% since hitting $66,000 in November 2021. And US house prices are now facing headwinds from a change in Fed policy and rising mortgage rates.
More players in crypto-backed mortgages
Last December, Toronto-based savings and lending platform Ledn announced the launch of bitcoin-backed mortgage products that use a mix of bitcoin and real estate as collateral. The benefit of digital asset-backed mortgages is that hodlers don’t have to sell their coins, just pledging them in properties that are relatively less volatile than bitcoin, the company said.
However, not everyone seems convinced of integrating digital assets into mainstream financial products. In October of last year, United Wholesale Mortgage (UWM) stopped accepting cryptocurrency payments, two months after giving the initiative the green light.
Source: Crypto News Deutsch