Coinbase Enters the Mortgage World. A Partner in Its Loan Product? Fannie Mae.

The Better Home mortgage company and Coinbase have announced a new collaboration. They’re coming out with a way to link cryptocurrency with down payments for conventional loans.

Wait, don’t rush off to find this online. This product isn’t available yet. But it will be, quite soon. Better Home’s website is already collecting contact information from prospective customers.

Once it launches, borrowers will be able to use their Bitcoin or USDC (a dollar-pegged stablecoin issued by Circle) to back a separate loan for the down payment. The borrower need not actually move the crypto assets to offer them as collateral.

The loans will have Fannie Mae’s backing. The combination of Coinbase and Fannie Mae signals a landmark moment for crypto.

Fannie Mae’s Crypto History So Far

Our regular readers may recall how, five years ago, Fannie Mae was working with borrowers who wanted their cryptocurrency to count for down payments. To qualify for a conventional mortgage loan, crypto holders would have to withdraw those assets, and turn them into dollars.

If they did sell to get dollars, they’d have to pay taxes on any capital gains they’d earned. And they’d miss out on any gains that their crypto wallets might have accumulated if they hadn’t sold. You get the picture. Many crypto holders would much rather use their crypto as collateral without having to sell it. 

The Federal Housing Finance Agency (FHFA) directs Fannie Mae, as well as the other conventional loan backer, Freddie Mac. Last June, the Agency instructed Fannie and Freddie to develop a policy for working with crypto holders who want conventional mortgages. The agency wanted applicants to be able to use their actual crypto—without having to turn it into cash.

That opened the door for the news we’re writing about today. Crypto was becoming normalized. The lenders must adjust.

All that said…

Bitcoin Is Still Considered High-Risk

The value of a bitcoin has stayed within a 60-70K range for months on end. So, isn’t it known as a reasonably sturdy asset by now? Well, a loan backer might still have questions about bitcoin. Maybe a few questions:

• Bitcoin once was worth a lot more. Remember October, when it touched $126K? What’s stopping it from future droops?

• Is it more or less likely that bitcoin could lose much of its value in a sudden “black swan” event?

• Bitcoin has been in use for less than two decades. Are we all sure of its staying power? Or could mortgage lenders’ foray into crypto backfire spectacularly?

There have also been questions about the tech industry’s history of funding politicians, and whether that serves the customers best interests or not. But that’s another conversation.

Q & A: How Will This New Loan Product Work?

Q. What’s the story behind this lender?

A.  Better Home & Finance Holding Co. (“Better Home”) is a ten-year-old company. It defines itself as the “leading AI-native” mortgage company. The company uses the Tinman® AI tools and an “AI assistant” feature called Betsy™.

Q. What can the customer expect?

A. This system lets applicants (who can live in any state) check out their rates in advance, get a pre-approval quickly, and lock in an interest rate. It’s possible for the customer to get to closing in just three weeks, the company says.

Q. Who will be servicing the loans for these borrowers?

A. Better Home will issue the loans, and act as the servicer for the borrowers’ accounts.

Q. Who are the potential customers?

A. Coinbase considers younger generations the key target market. These are the hopeful buyers in the Gen Z and Millennial generations.

Q. Are these only for people with standard employment situations?

A. No. Many younger mortgage applicants are self-employed or otherwise don’t have W2 forms to show the mortgage lender. While they might lack ready cash for a down payment, they might have significant value in their crypto accounts. Better Home will accept their loan applications.

Q. How will Fannie Mae treat these loans?

A. According to Better Home, Fannie Mae will handle these loans as they handle other mortgage loans. Crypto-backed down payments conform to the same set of Fannie Mae guidelines. The interest rates will not be higher.

Q. If no crypto has to be liquidated, then where’s the asset that secures the loan?

A. The borrower pledges the value of the bitcoin or Circle coin through tokenization. With tokenization, an applicant won’t need to make their entire crypto account available as collateral. Specific amounts of crypto can be staked (tokenized) in the transaction. Coinbase Prime, part of Coinbase, will have custody of the tokenized value throughout the loan term.

Q. What if the value of the bitcoin pledged by the mortgage borrower crashes?

A. Any financial assets are risky. Most any store of value can lose its worth in certain startling events. What if bitcoin does? If the crypto market loses value, the Better Home mortgage stays in place. The terms don’t change. There’s no need to pledge any more collateral.

Q. Beyond market ups and downs, are there any known cybersecurity or safety concerns about crypto?

A. Quantum computers apply quantum physics to computing. This involves applying mathematical techniques that computing never used before. This poses no immediate threat. Yet the rate of progress in quantum computing is taking researchers by surprise. So it’s important to watch for future implications of quantum computing on the security of the cryptocurrency code known as the blockchain.

Q. What if the borrower becomes unable to make a payment or two?

A. If the borrower falls behind by 60 days, the lender can liquidate the collateral. This is parallel to regular mortgages.

Q. Are there any incentives applicants will want to ask about?

A. Coinbase One members who select these mortgages have access to rebates from Better Home, equal to 1% of the loans, to help cover closing costs. 

Q. Is this a taxable event?

A. No crypto is liquidated for these loans assuming they’re faithfully repaid. Nevertheless, crypto pledges can have tax impacts. It’s important for hopeful mortgage borrowers to speak with a tax pro who understands digital assets.

Q. Don’t crypto-backed mortgages already exist?

A. Yes, but Better Home is specifically working with the down payment financing. The primary mortgage goes through separate underwriting, with a conventional, Fannie Mae-backed loan.

All things considered, the true milestone here is the integration of crypto into the structure of a government-backed entity, Fannie Mae, for the first time.