Cryptocurrency-backed mortgages are repleted with risks akin to those responsible for the 2009 recession, said the US-based rating company Weiss Ratings. The firm referred to Milo, a Miami-based digital bank that offers cryptobacked home loans. It noted that these plans are “frightening signs.”
Milo Home Loans with Digital Assets as Collateral
Milo is a digital asset pledge that allows customers to purchase US real estate. 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.
The Weiss report states that “It’s an intriguing strategy… but given current market conditions investors should be skeptical, particularly with financial stocks.” This suggests that this was exactly the “recipe” for the Great Recession in 2009.
Easy credit and lack of regulation allowed homebuyers to refinance when housing prices rose. This strategy was well received by everyone, even bondholders.
The housing market crashed and made it impossible to lend money. Refinancing was difficult. 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.
It states that “many economists see parallels… investors need to see how this impacts all of the financial industries,”
All Mortgage Rates Set to Increase
Due to the Fed Reserve’s low money policies, homebuyers have been paying high prices over the last several years. This trend continues despite the fact that there are fewer homebuyers than new homes. The Weiss Report stated that this trend is not sustainable, particularly given the high inflation rate the US economy is experiencing.
The Fed is preparing to reverse the rising inflation by raising the interest rate. The Weiss report began with a cautionary note, stating that US mortgage rates are on the rise.
The interest rate will increase, and homebuyers’ monthly payments will go up by hundreds of dollars. As a result, home prices will fall as fewer homebuyers will be available. This is where the Milo strategy could face the 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. The Weiss report suggests that this is unlikely.
Since November 2021, Bitcoin has fallen 40% to $66,000. It also states that U.S. property values are now facing headwinds due to a change of Fed policy and rising interest rates.
Crypto-Backed Mortgages: More Participants
Ledn, a Toronto-based savings and credit platform, announced in December that it had launched bitcoin-backed mortgage products. These products use a combination of real estate and bitcoin as collateral. The company stated that digital assets-backed mortgages have the advantage that hodlers won’t need to sell their coins, but can only pledge them in real property that is less volatile than bitcoin.
But not everyone is convinced that digital assets should be integrated into mainstream financial products. United Wholesale Mortgage (UWM), two months after it had been approved, stopped accepting cryptocurrency payments in October 2017.
Marla Brooks – Financial Analysis
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