Crypto Mortgages
Originally a thread on X/Twitter:
A crypto mortgage? Is it possible?
Web3’s potential has been building for years as it aims to correct major flaws with web2 constructs.
But for many ideas, web3 Founders might have to build web2.5 versions first.
Crypto mortgages fall into this camp:
The mortgage market is one of the largest and most important markets in the world. When managed responsibly, the asset class is safe and secure due to collateral requirements and highly structured financial instruments.
But the mortgage industry has always revolved around the needs of the downstream participants rather than the needs of the homeowner.
The process is long and arduous and the industry doesn’t serve many segments of the population well.
Are you a small business owner? Are you asset rich but income poor? Is there any variance in your monthly income? Are you carrying debt that could be paid off at any time? Do you move money into and out of accounts regularly?
Good luck navigating a traditional mortgage process!
But reinventing the mortgage industry is no easy task. Homes are extremely expensive relative to the cash flow of a typical person/family, so long duration products have been created that take an otherwise unaffordable product and make it affordable.
So while mortgages sound simple (loans that pledge real estate as collateral), getting them to function IRL is challenging.
Jumping immediately to a crypto-native version will be difficult until crypto becomes more mainstream and downstream players have time to adjust.
Structurally, the mortgage market is split into two main components: A primary mortgage market and a secondary mortgage market.
Consumers interact with the primary market to obtain a loan while lenders and brokers interact with the secondary market to free up liquidity.
Consumers are frustrated with the hoops they have to jump through to navigate the mortgage process, but the players in the “primary market” space don’t have the ability to fix their processes because of the requirements of the “secondary market” players.
Without the secondary market, banks and mortgage originators would have to hold onto loans (up to 30 years) and this would limit the amount of funding available for homeowners.
A truism is that models that don’t tap secondary market liquidity will have problems scaling!
The secondary market enables investors to buy mortgage-backed securities (MBS) that entitle them to the cash flow from mortgage payments. MBS are typically packaged and wrapped with default guarantees by mortgage investors like Fannie Mae, Freddie Mac, the FHA and VA.
The result is that the mortgage process that consumers go through is a function of the requirements that have been dictated by the downstream secondary market players. And while change is possible, if it happens it will happen slowly.
So, while a web3 mortgage product sounds great on the surface, it’s most likely going to require a web2.5 intermediate solution if it wants to serve the masses. And there are companies working on these solutions, one of which is @MiloCredit.
@MiloCredit is putting the finishing touches on V1.0 of a “crypto mortgage” product and with very little fanfare amassed a waiting list 7,600 customers. Simple math suggests that these customers represent a LOT of real estate purchasing power (billions)! milocredit.com/crypto/
The premise is simple:
Customers apply to receive a no-down-payment-mortgage to buy a house and put up the value of the mortgage in crypto. In exchange for “locking” their crypto, borrowers receive a 30-year mortgage with rates that depend the amount of locked collateral.
Instead of adhering strictly to the usual criteria for underwriting, @MiloCredit’s decision matrix takes into consideration an applicant’s crypto wealth.
The process and underwriting criteria are a mix of the old and the new. Web2.5 in action!
V1.0 of the product requires a 1:1 “lock-to-value” ratio (i.e. – a $500,000 mortgage would need $500,000 worth of “locked BTC” to fund).
The BTC is only liquidated if the price of BTC falls massively (65-70%) or the mortgage holder stops paying their monthly payments.
If BTC goes down substantially, the mortgage holder can provide more collateral, and if BTC goes up substantially, the mortgage holder has a choice of either reducing their rate or withdrawing some of their BTC.
In up-market situations it acts like a frictionless re-finance!
@MiloCredit’s web2.5 mortgage solves some really interesting consumer problems and paves a path towards a more comprehensive web3.0 product in the future.
Collateral requirements will come down and stablecoins, ETH and alt-coins will be “lockable”. V1.0 is just a starting point.
Another benefit: HODLers can purchase real estate without having to sell their crypto to make a down payment. This avoids a taxable event and allows them to HODL.
An interesting stat: 1 in 8 new homeowners sold some crypto in the past year to finance their down payment.
And unlike traditional mortgage underwriting processes, @MiloCredit’s process takes into consideration HODLers’ crypto wealth in a way that downstream players find acceptable. Credit scores and income aren’t the end-all-be-all in their process. For HODLers this is important!
TL;DR: The innovation rippling through the web3 world stretches the thinking of what’s possible, but many Founders might need to work out a web2.5 version of their products vs. jumping directly to a full web3.0 version.
Web3 is on its way and shouldn’t be ignored!