US 'crypto mortgage' draws bank interest — and political pushback

A so-called crypto mortgage — in which borrowers pledge digital assets as collateral to raise the cash needed for a home purchase without selling them — is drawing growing attention in the United States. Major banks have expressed interest in buying the related loan instruments, while lawmakers and consumer groups are pushing back, warning that the volatility of digital assets could be passed on to the housing market and taxpayers. The lender behind the product plans to expand eligible collateral beyond bitcoin and stablecoins to include tokenized stocks.

According to Forbes on Monday, reactions from the banking sector and politicians have been divided over a digital asset-backed home loan jointly launched by US mortgage lender Better Home & Finance (Better) and Coinbase, the largest virtual asset exchange in the United States.

Vishal Garg, Better's CEO, said banks — including some of the largest in the United States — are "lining up" to buy and fund the loans. He said the loans qualify as assets banks can hold on their books and predicted the product would serve as "a gateway for digital assets to enter the banking system."

Better currently accepts bitcoin and the dollar-pegged stablecoin USDC as collateral, with plans to add Ethereum and Solana. Garg also named tokenized stocks of the top 50 companies — including SpaceX, Tesla, Coinbase, Apple and Amazon — as candidates for eligible collateral. The company plans to expand the program to assets with sufficient liquidity and institutional investor interest, excluding memecoins.

Garg also floated the idea of parents using their retirement accounts as collateral to help their children buy homes. Forbes noted the concept aligns with a broader trend of growing market interest in incorporating digital assets into retirement accounts.

The institutional barriers to investing in digital assets through retirement accounts have indeed been falling in the United States. The Labor Department withdrew its guidance from May last year that had called for "extreme caution" over including digital assets in 401(k) plans, and in March proposed criteria for reviewing alternative assets, covering returns, fees and liquidity.

The company also proposed a feature in which an AI agent calculates a buyer's maximum bid after they photograph a home. Garg said a longer-term residential model in which individuals own partial stakes in multiple homes and move between them could also become viable. "The only reason that doesn't exist today is friction in the transaction process," he added.

A comparison from Better showing how a traditional home purchase stacks up against a bitcoin-backed loan for raising a down payment. Better says pledging $100,000 in bitcoin as collateral allows a borrower to obtain a $40,000 down payment loan without selling their bitcoin, reducing the cash burden. [Screen capture from Better website]

Better and Coinbase announced the loan product in March, allowing borrowers to use bitcoin or USDC as collateral to raise the cash down payment needed to buy a home. Borrowers take out two loans simultaneously: a primary mortgage that meets the guidelines of Fannie Mae, the US government-sponsored mortgage agency, and a separate loan to cover the down payment. The second loan is secured by the borrower's pledged digital assets and a second lien on the property. Both loans are originated by Better, and the pledged digital assets are held in a custodial account in Better's name on the Coinbase platform until the loan is repaid.

The first crypto mortgage closed in June in Ann Arbor, Michigan, where a couple in their early 30s bought a home using bitcoin as collateral. Ahead of a nationwide rollout, Better estimated that potential loan demand from its waitlist had reached approximately $250 million. Among Better's pre-approved customers, 41 percent met income and credit requirements but lacked the cash needed to buy a home. Forbes, citing a Redfin survey, said 12.7 percent of young people who recently purchased homes used digital assets to fund their initial down payment.

The bar to qualify is not low. Borrowers must pledge digital assets exceeding the loan amount. Bitcoin requires collateral equal to 250 percent of the loan — meaning a borrower seeking $100,000 must pledge $250,000 worth of bitcoin. USDC requires 125 percent, or $125,000. There are no margin calls or additional collateral requirements if digital asset prices fall, but the pledged assets can be liquidated if the borrower is more than 60 days delinquent.

US lawmakers have warned the structure could introduce new risks to the housing finance market. Seven senators, including Dick Durbin and Elizabeth Warren, sent a letter to Federal Housing Finance Agency Director Bill Pulte in April urging him to rescind the relevant approval. They argued that Fannie Mae and Freddie Mac should not take on digital asset-related risk by purchasing crypto-backed mortgages. The senators said the 250 percent collateral requirement for bitcoin itself signals the asset's riskiness, and that borrowers would be burdened with interest payments on two loans simultaneously.

The senators estimated that the combined interest rate on the two loans could run up to 1.5 percentage points higher than a standard Fannie Mae mortgage. They also warned that if digital asset prices drop sharply and collateral values fall, borrowers who default could pass losses on to taxpayers.

The National Consumer Law Center and Consumer Federation of America jointly warned in June that the product could revive the "piggyback loans" of the 2008 financial crisis. A piggyback mortgage refers to the practice of taking out a primary mortgage alongside a smaller second mortgage simultaneously, allowing buyers to cover a shortfall in their down payment while avoiding private mortgage insurance.

"People who take out mortgages backed by digital assets are more exposed to the risk of default and forced sale," the groups said, warning that "the federal government is at risk of repeating the mistakes that caused the 2008 mortgage crisis."

kyoung@heraldcorp.com