Rebellious Digital Banking Pioneers Leverage Crypto for Home Loans
Mortgage rates in the United States are rising rapidly, but a Miami startup is racing to securitize home loans with cryptocurrency. No deposit is required.
Milo, a Florida-based digital bank, is now using digital coins to secure hard assets. The larger plan is to bundle crypto home loans and offer them as bonds to asset managers and insurance companies.
The strategy is risky. Financial stock investors should beware.
This should all sound familiar. Bundling risky home loans and then selling them to unsuspecting asset managers was the recipe for the Great Recession of 2009. As long as house prices continued to rise, buyers could refinance and everyone got paid , including bondholders. However, when housing prices imploded, millions of low-credit borrowers defaulted. The rest is history.
Many economists see parallels.
Inflation is at its highest for 40 years. Several years of cheap money policies at the Federal Reserve have helped too many buyers chase too few new homes. Prices in many parts of the country have risen at an unsustainable rate.
At the Federal Open Market Committee meeting this week, Fed governors are expected to raise short-term rates by 50 basis points and signal that further hikes are in sight. Although belated, the Fed’s policy shift sends a chilling message.
The the wall street journal reported that national mortgage rates were rising at the fastest rate in 35 years. At 5.5%, the average rate for a 30-year fixed mortgage is up 71% since January. Higher rates can increase a borrower’s monthly costs by hundreds of dollars. Ultimately, these increases should lead to fewer buyers and lower home prices.
This is why Milo’s projects are strewn with pitfalls. Bloomberg notes that Milo recently raised $17 million in Series A funding and the company issued pre-approval letters for $340 million in new mortgages in the past month. Additionally, Josip Rupena, chief executive, says the company has a waiting list of 8,000 home buyers in Texas, California and New York.
These buyers will be able to obtain mortgages without worrying about the down payment. Applicants will simply pledge their digital coins as collateral. This means that they will also avoid capital gains taxes or the opportunity cost of rising crypto prices.
The product seems like a win-win, assuming real estate and crypto prices continue to rise. Except there are signs that both bets are unlikely to win in the short term. Bitcoin
Curiously, the major banks in the monetary center in 2022 have stepped up their exposure to cryptocurrencies.
Reuters noted in April that a slew of big banks have started offering crypto to their more affluent clientele. Morgan Stanley
Financial stocks are down sharply in 2022 despite rising rates. Traditionally, financial firms have been aided by wider spreads between their lending rates and their borrowing costs. This year, the banks fell sharply. More downsides seem to be spotted.
At $305.49, Goldman is trading at 7.4 times forward earnings and 1.8 times sells. It’s not hugely expensive, but it’s not historically cheap either. The stock is likely to trade substantially lower if rates continue to rise and the crypto remains under pressure.
My research suggests that a drop to the December 2020 lows at $240 is possible if real estate and crypto prices continue to fade.
Aggressive investors should consider new short positions to gain strength.
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