Will Crypto Assets collateral loans pose risks to the US real estate market?

The average home price in the United States is around 400,000 USD, and for most Americans, they need to rely on mortgages to afford a house. The approval of loans depends on the bank's detailed review of the borrower's financial situation, where banks carefully examine the borrower's salary, account balance, retirement accounts, and so on. However, a new government guideline may change some established lending rules. The Federal Housing Finance Agency has included Crypto Assets as part of the assessment of assets, providing more opportunities for the public to obtain mortgages. However, the new guideline has not received full support; the majority of Republicans support it, while Elizabeth Warren and several Democrats oppose it, leading to a politicized discussion. This article is excerpted from CNBC reporting, compiled and translated.

The new mortgage policy in the United States opens the door for digital asset collateral loans.

In June 2023, the Federal Housing Finance Agency (FHFA) of the United States issued a new directive regarding mortgages, requiring Fannie Mae and Freddie Mac, the two government-sponsored enterprises, to consider incorporating encryption into mortgage risk assessments. This initiative marks the formal entry of crypto assets into the traditional financial system of the United States, providing new opportunities for cryptocurrency holders, especially those who view their digital assets as a reserve of wealth.

FHFA Director Bill Pulte emphasized that this policy aligns with President Trump's vision of making the United States the global center for Crypto Assets. He pointed out that despite the significant volatility and regulatory uncertainty surrounding Crypto Assets, the FHFA believes that normalizing Crypto Assets will help enhance affordability for the public, especially in the housing loan market. It is important to note that the Crypto Assets referred to by Bill Pulte specifically pertain to Bitcoin BTC, rather than other Crypto Assets.

Senator Cynthia Lummis, chair of the Senate Banking Committee's Digital Assets Subcommittee, expressed support for a plan that allows federal housing loan agencies to use Crypto Assets for mortgage underwriting. On July 29, she introduced a bill titled “21st Century Mortgages,” which would require the government to support businesses in considering Crypto Assets when assessing eligibility for single-family residential mortgages, directing Fannie Mae and Freddie Mac to include digital assets recorded on decentralized digital systems as part of their mortgage risk assessment, and the bill would prohibit the forced conversion of these assets into dollars.

Senator Cynthia Lummis stated that considering the increasing number of young Americans owning digital assets, the vast majority of those who own digital assets are also first-time homebuyers. In this environment, even though the cost of homeownership is almost prohibitively high, by listing their digital assets as assets on their balance sheets, they have this portion of net worth to demonstrate their eligibility for a home mortgage.

New guidelines face challenges and voices of doubt.

However, the new policy has also sparked widespread discussion and skepticism. Supporters believe that as more and more Americans, especially the younger generation, own digital assets, including them as part of mortgageable assets can help increase their eligibility for home purchases. Pulte also stated that although Crypto Assets are volatile, some traditional assets (such as stocks) also carry risks, so considering Crypto Assets is not unfeasible.

However, this transformation is not without resistance. The high volatility of digital assets has raised concerns among some experts that incorporating them into mortgage risk assessments may increase instability in the financial markets. Democratic senators, particularly Elizabeth Warren, have expressed concern that this could pose risks similar to those of the 2008 financial crisis. They have called on the Federal Housing Finance Agency (FHFA) to clarify the specifics of this directive and emphasized the need for more guidelines to ensure that risks are effectively managed.

The rules for reviewing home loans will change.

If this new policy is fully implemented, it will change the review process for housing loans in the United States. According to the new guidelines, when applying for a loan, banks will not only review traditional assets such as cash, stocks, and bonds, but also need to consider the crypto assets owned by borrowers. For borrowers, this means they will need to provide proof of how long they have held the crypto assets and their value, and they may need to convert these assets into calculable credit limits.

Policies cannot guarantee bank lending.

However, not all lending institutions will automatically accept Crypto Assets. Each bank and lending institution will still decide whether to accept Crypto Assets as collateral based on its own risk tolerance. Poort notes that while he cannot force the entire industry to accept this change, the participation of large institutions like Fannie Mae and Freddie Mac will have a significant impact on the market.

Risk control becomes key

Experts generally believe that risk control will be key to the successful implementation of this policy. Although the volatility of Crypto Assets may pose challenges for some borrowers, there is also a viewpoint that such reforms may bring new opportunities, especially for buyers who are fully committed to the digital asset market. Some Crypto Assets supporters believe that this policy will allow their assets to be recognized in a broader financial system and further enhance their ability to purchase homes.

Nevertheless, experts still emphasize that the nationwide adoption of this new regulation depends on the acceptance level of major banks and lending institutions. The volatility of the Crypto Assets market and the exchange risk with fiat currencies will be the main issues to be addressed in the near future.

As cryptocurrency gradually gains more recognition worldwide, this new policy, if implemented, will become one of the significant reforms in the U.S. mortgage market. For buyers who already own digital assets, this is undoubtedly good news. However, the long-term impact of this reform, especially the challenges to market stability, will require time to observe. In any case, further exploration of cryptocurrency as mortgage assets will undoubtedly have a profound effect on the future landscape of the financial market.

Does cryptocurrency collateralized lending pose risks to the US real estate market? Originally appeared on Chain News ABMedia.