How to Underwrite a Crypto-Backed Mortgage

(Illustration by The Real Deal; Getty)

(Illustration by The Real Deal; Getty)

For years, the only thing worse than walking into a bank with a Bitcoin was walking into one with a bomb.

This might be an exaggeration, but until recently, cryptocurrencies and funds derived from them were not viewed by lenders as safe assets.

But with banks updating their guidelines over the past two years, what was once impossible is now merely difficult and expensive.

“None of my clients have used crypto as a means of payment for a property,” said Erik Mendelson, a broker on the Cryptocurrency Realtors Team at The Miami Real Estate Agency, who says he has pioneered a way for crypto investors to own property without parting from their digital currency. “What my clients do is they leverage it, they borrow against the asset.”

The Miami Real Estate Agency's Erik Mendelson

The Miami Real Estate Agency’s Erik Mendelson

Mendelson’s method requires buyers to tie up twice the amount of their loan as collateral, plus they usually need six to 12 months reserves — money set aside for mortgage payments — but his clients prefer it to the alternative. There’s another way, through a company called Milo, but that requires much more collateral.

“It’s [being] a 2023 realtor,” he said. “You’ve got to understand this stuff if you want to play in this space.”

Until recently, banks were adverse to floating a deal involving crypto funds, or funds derived from the sale of cryptocurrency. Now, they’ll accept funds that have been converted from cryptocurrency into cash. But there’s a cost and a process.

“Whenever they use crypto to buy anything, if that Bitcoin has appreciated in value from when the client bought it, they’re paying a 30 percent capital gains tax,” Mendelson said, though that rate could change depending on how long a cryptocurrency has been successful.

Despite the increasingly mainstream status of cryptocurrencies, and the emergence of so-called crypto-millionaires, there’s too much uncertainty for most banks to accept it as collateral.

“The arch of crypto is moving towards acceptance,” said Patrick Keane, Manhattan branch manager at Envoy Mortgage, but added: “We’re a long way away from being able to show a crypto statement to an underwriter. That’s the whole thing, they don’t want to know.”

And last week’s spectacular collapse of the crypto platform FTX won’t help perceptions, as investors in the FTT token saw their fortunes wiped out in the span of a few days.

Cracking the code

While it isn’t a deal-breaker for a bank to know its client’s wealth is backed by crypto, the borrower still must convert enough of it into liquid capital to afford the property independently of their crypto worth. As it stands, banks do not value cryptocurrencies as safe assets because of their unpredictable volatility.

Corcoran's Ryan Kaplan

Corcoran’s Ryan Kaplan

“We don’t know what tokens are going to be the Googles and Ebays, if I’m making a dot com analogy,” said Ryan Kaplan, a Corcoran broker with crypto clients. “All this fluff, this flotsam and jetsam, that’s going to be nonexistent, it’s going to go the way of the dinosaur. Then we’re going to see the real companies that are going to be part of the crypto world moving forward.”

Banks are also wary of money laundering, which is why they historically refused to deal with crypto investors, Keane said, explaining that in 2018 when he worked in the mortgage division of a big bank, a client’s file was denied after they disclosed their downpayment was partially derived from a crypto sale.

“Let’s say that customer said forget the Bitcoin… I’m going to get the money from somebody else,” Keane said. “They didn’t care. They said that client is a red flag.”

Although executing an all-cash deal would be easier by virtue of avoiding a bank, buyers often don’t want to part with their cryptocurrency because they believe it’s their most valuable asset.

Envoy Mortgage’s Patrick Keane

“Why would you sell something you bought to be a lottery ticket to pay for a house?” Keane said.

Mendelson advises his clients to borrow against their crypto assets via specialized lending platforms. Say a client needs $200,000 for a downpayment on a $1 million home. The platform gives them $200,000 in cash, as long as they put up twice the crypto equivalent in collateral.

Once the loan is paid off, they can recoup the cryptocurrency at whatever its value is that day. In other words, they get as much crypto currency back as they put in, so if the value has appreciated, they pocket the difference.

Mendelson has identified two banks that provide a 30-year, non-QM, no-doc mortgage with 8 percent to 10 percent interest for 75 percent to 80 percent the value. The borrower can then use a traditional down payment, along with a six to 12 month reserve.

Closings can happen in under a month, but some banks require the buyer to let the cash “season” in a bank account for 30-60 days.

“[Banks] have no idea where that money comes from, [and] don’t care as long as it’s been seasoned 30 days,” Mendelson said.

But he cautions his clients against overextending themselves, given crypto’s volatile nature. A Bitcoin this morning was worth roughly $16,500, down from a peak of over $64,000 last year.

“If I have a client worth $30 million-$40 million in Bitcoin and they want a $30 million house, I caution them not to,” Mendelson said. “They’re usually buying a property that’s worth 10 percent of their crypto net worth, not 80 percent.”

While crypto buyers remain a small part of the buyer pool, the FTX scare likely won’t be the end of crypto-millionaires. Investors in other currencies are keeping the faith, and several people said they believe government regulation is inevitable, which could make crypto exponentially more popular.

“I took my bumps and bruises in the beginning and I started focusing on a lot of the currency that had more utility,” said Compass broker Terrence Harding. “There’s thousands of different coins, people just have to do their own research.”

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