Weiss analysts are wary of using volatile crypto assets as collateral for long-term real estate loans.
Florida-based rating and research firm Weiss Ratings has issued a warning about the risks of crypto mortgages amid the current economic climate in the United States.
The company has given particular attention to Milo, a Miami-based digital banking startup that offers 30-year mortgages backed by bitcoin (BTC), ether (ETH), or stablecoins as collateral. The company does not require initial contributions, and its lending rates range from 3.95% to 5.95%.
On Tuesday, Weiss analyst John D. Markman urged caution on such mortgages, citing the poor performance of equities and cryptocurrencies this year, the U.S. housing bubble, rising interest rates and upcoming Federal Reserve policy changes.
“The product appears to be a win-win assuming real estate and cryptocurrency prices continue to rise […] unless there are indications that both bets are unlikely to be winning in the near future. Bitcoin has fallen 40% since hitting $66,000 in November 2021.”
“And U.S. home prices are now facing headwinds due to Fed policy changes and higher mortgage rates,” he added.
Markman concluded that not all crypto risks are bad, but they can be in the real estate sector, before adding, “No matter what the markets do, the potential for success in cryptocurrencies is real.”
Many crypto and stock investors are negative about the potential impact of a major rate hike on the market this year as the Fed seeks to fuel inflation.
With both markets suffering weak results due to multiple factors, macro analysts such as Alex Krueger boldly assumed that the Fed’s latest announcements this week would “determine the fate of the market.”
Leaving the housing market out of the equation, if the price of BTC or ETH drops significantly over the next few months, Milo users seem to have some leeway.
According to the terms of the mortgage, the price of the collateralized crypto assets “may decrease in value without consequences until it decreases to 35% of the total loan amount.” To avoid liquidation, users must top up their deposit within 48 hours of reaching the minimum percentage. While stablecoins can also be used during times of market volatility.
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Milo raised $17 million in Series A funding in March and plans to continue developing its mortgage products to meet growing demand while increasing headcount.
However, Markman also expressed concern that Miloš’s “bigger plan is to pool cryptocurrency-backed home loans and offer them as bonds to asset managers and insurance companies,” comparing this to the behavior that led to the housing market crash in 2009.
“This is an interesting strategy […] but given the current market conditions, investors should be skeptical, especially in regards to finances. All this should sound familiar to you. Pooling risky mortgages and then selling them off to unsuspecting money managers was the recipe for the Great Recession of 2009.”