Florida-based rating and research firm Weiss Ratings has released a warning about the risks of crypto mortgages amid the current economic climate in the United States.
The firm paid particular attention to Milo, a Miami digital banking startup that offers 30-year mortgages backed by Bitcoin (BTC), Ethereum (ETH), or stablecoins as collateral. The company requires zero down payments and its loan rates range from 3.95% to 5.95%.
In the May 3 report, Weiss analyst Jon D. Markman urged caution with these types of mortgages, citing the underperformance of stocks and cryptocurrencies this year, the US housing bubble, rising interest rates and upcoming policy changes by the Federal Reserve.
“The product appears to be a win-win, assuming real estate and cryptocurrency prices continue to rise… except there are signs that both bets are unlikely to be winners any time soon. Bitcoin is down 40% since hitting $66,000 in November 2021.”
“And US property prices are now facing headwinds from a change in Federal Reserve policy and rising mortgage rates,” he added.
Markman concluded that not all crypto risk is bad, but it could be in real estate, before adding that “no matter what the markets are doing, the potential to succeed in crypto is real.”
Many cryptocurrency and stock investors have been negatively anticipating the potential market impacts of serious interest rate hikes this year as the Federal Reserve aims to curb inflation.
With both markets suffering from lackluster performance due to a myriad of factors, macro analysts like Alex Krueger have boldly suggested that the Fed’s latest announcements due this week “will determine the fate of the market” going forward.
However, removing the housing market from the equation, if the price of BTC or ETH were to crash significantly in the coming months, there seems to be quite a bit of wiggle room for Milo users.
According to the terms and conditions of the mortgage, the price of the collateralized crypto assets “may decline in value without any consequence, as long as it does not fall below 35% of the total amount of the loan.” To avoid liquidation, users must top up their collateral within 48 hours of reaching the minimum percentage. While stablecoins could also be used in times of market volatility.
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Milo raised $17 million in Series A funding in March and has plans to build out its mortgage products to meet increased demand, as well as increase its headcount.
However, Markman also expressed concern that Milo’s “biggest plan is to bundle cryptocurrency-backed mortgage loans and offer them as bonds to asset managers and insurance companies,” comparing it to behavior that resulted in the housing market crash. from 2009.
“It’s an interesting strategy… but given current market conditions, investors should be skeptical, especially with financial stocks. This should all sound familiar. Pooling risky home loans and then selling them to unsuspecting asset managers was the recipe for the Great Recession of 2009.”