The recent launch of a groundbreaking crypto-backed mortgage product has been (rather expectedly) lambasted by economist and financial commentator Peter Schiff.
He has warned that the new financial vehicle will drive up costs for homebuyers and significantly increase the risk of default.
“Crypto-backed mortgages increase the cost of buying homes. Not only must homebuyers pay interest on the home loans, but they also must pay interest on the crypto-backed second mortgages,” he said.
Crypto mortgage mechanics
The controversy centers on a newly-announced partnership between Better Home and Finance and crypto exchange Coinbase, which recently became the first crypto-backed mortgage product to be accepted by Fannie Mae.
The new offering aims to help Americans buy homes without having to liquidate their cryptocurrency holdings.
By doing so, borrowers can avoid capital gains taxes and maintain exposure to potential future appreciation of assets like Bitcoin.
Borrowers take out two simultaneous loans held by Better (a traditional primary mortgage and a secondary loan, backed by the borrower’s cryptocurrency).
Once pledged, the cryptocurrency remains locked in a Coinbase Prime account and cannot be traded until the loan is repaid.
Crucially, borrowers do not face margin calls if the value of their crypto drops if they continue making their monthly payments.
Key concerns
Crypto advocates are celebrating the move as a major adoption milestone, but Schiff believes that the new offering is dangerous.
First of all, as Schiff has noted, homebuyers are essentially financing 100% of the home’s purchase price by borrowing both the primary mortgage and the down payment. “Not only must homebuyers pay interest on the home loans, but they also must pay interest on the crypto-backed second mortgages,” Schiff posted, warning that this aggressive leverage raises the overall default risk.
Schiff also took issue with the option to pledge USD Coin ($USDC), a stablecoin pegged to the U.S. dollar. “The craziest aspect of the new crypto-backed mortgages is that homebuyers can pledge $USDC stablecoins instead of making down payments,” Schiff argued.
Given that a stablecoin has no price upside, it defies logic to borrow money at an interest rate against it rather than simply cashing it out to make a traditional, interest-free down payment.