When Crypto Assets Become Mortgage Collateral: The Triangular Dilemma of Regulation, Costs, and Tokenized Rights

Written by: Boaz Sobrado

Compiled by: Chopper, Foresight News

Twelve years ago, Vishal Garg personally experienced the difficulties of buying a house and has since been seeking solutions. "At that time, I realized that I had to sell assets and pay capital gains tax to convert to cash to pay for the house. Why can't I directly pledge assets instead of having to liquidate them for cash?" said the CEO of Better Home & Finance in an interview.

The more complicated issue is the order of the transaction process. "What if I make an offer and don't get the house? But the real estate agent will require you to have cash ready, otherwise the seller won't seriously consider your offer. Buyers are forced to sell assets and pay taxes before they even know if their offer has been accepted."

In March of this year, Better, in collaboration with Coinbase, launched a solution. Borrowers can pledge Bitcoin or USDC to obtain two loans: one is a first lien mortgage loan that meets Fannie Mae standards; the other is a separate private financing loan for the down payment, secured by crypto assets, along with a second lien on the property. The Wall Street Journal also reported that Fannie Mae accepted mortgage loans backed by crypto assets for the first time. In early June, a couple in their early thirties in Ann Arbor, Michigan completed the first loan under this model. Better revealed that before the product officially launched in the summer, the potential loan volume corresponding to the reservation list was about $250 million, of which 41% of applicants did not have enough cash to pay the down payment.

Regarding the funding counterpart for the loan assets, Garg stated: "These types of assets meet bank investment standards, and several banks are already lining up to acquire and take on these loans, including some of the largest banks in the U.S." He believes this will become an important channel for the formal integration of digital assets into the banking system.

Real Costs and Mortgage Rules

The mortgage ratio directly determines the target audience for the product. Pledging Bitcoin requires meeting a 250% collateral requirement; if the down payment loan amount is $100,000, then $250,000 worth of Bitcoin is needed as collateral; the collateral requirement for the stable USDC is 125%. This product does not have a margin call mechanism, and a drop in Bitcoin prices will not change the mortgage loan terms. Only if the borrower is overdue for 60 consecutive days will asset liquidation be triggered, consistent with the standards of conventional compliant mortgage loans.

This mechanism is clearly designed for "asset-rich but cash-poor" homebuyers. Data from real estate research firm Redfin shows that recently, 12.7% of young homebuyers have used crypto assets to raise down payments. Data from the National Association of Realtors indicates that by the end of 2025, the median age of first-time homebuyers will reach a historic high of 40 years, while the proportion of first-time homebuyers among all buyers will hit a historic low of only 21%. (The Mortgage Bankers Association disputes this figure, citing federal loan data). Census data shows that in the second quarter of this year, the homeownership rate for those under 35 is only 35.2%.

Using loans issued against assets continuously held by borrowers is not a new model. Doug Ricketts, co-founder and CEO of PayJoy, stated in the podcast "On The Margin" that smartphones can serve a similar role as real estate collateral. "Our initial innovation was to set smartphones as collateral; in a sense, smartphones are equivalent to properties in mortgage business." PayJoy provides lending services to populations with weak credit records in Latin America, Africa, and South Asia. If users default, the device's functionality will be locked, which is a well-known digital collateral model.

Ricketts has a clear bottom line regarding collateral pricing logic: "Lending to low-income groups, one model is to charge extremely high interest rates, allowing a large number of users to default, relying on a few borrowers to reap high returns. But that is not PayJoy's route." PayJoy loans only charge a one-time fixed fee, with no rolling cumulative interest, which is quite rare in the technology consumer credit field.

Seven Senators Call for a Halt

On April 30, seven senators sent a letter to Federal Housing Finance Agency (FHFA) Director William Pulte, specifically naming Better and Coinbase, requesting that regulators "revoke the relevant approvals and prohibit government-supported enterprises from taking on risks related to crypto assets." The letter was led and signed by Dick Durbin and Elizabeth Warren, with co-signers including Jeff Merkley, Chris Van Hollen, Richard Blumenthal, Bernie Sanders, and Mazie Hirono.

The core reason proposed by the senators is Better's claim of a 250% collateral requirement representing robust risk control. The letter stated: "This mechanism requires homebuyers to put up crypto assets worth up to 2.5 times the down payment amount to qualify for a loan. This itself acknowledges that crypto assets are high-risk assets; in addition, homebuyers need to pay interest on two loans simultaneously." The senator team estimated that the combined financing costs could be up to 1.5 percentage points higher than standard Fannie Mae mortgage rates and warned: "The high burden may lead borrowers to directly abandon repayment, ultimately resulting in losses borne by U.S. taxpayers." They requested a response from regulators by May 30, but the FHFA has yet to publicly respond.

Alys Cohen from the National Consumer Law Center and Corey Frayer from the Consumer Federation of America published a more radical commentary in June, arguing that the federal government "could repeat the mistakes that triggered the 2008 housing foreclosure crisis." Their conclusion is that this is not consumer-facing financial innovation but rather a precursor to disaster.

Market conditions have also cast a shadow over this business. Bitcoin reached a peak of about $123,000 last October, but by February this year, the price fell to around $62,800, and throughout July, it fluctuated in the $60,000 range, with the price remaining only half of its peak.

Garg's Long-Term Layout

Bitcoin is just the beginning. "Currently, we support Bitcoin and USDC, and we plan to integrate various mainstream tokenized assets in the future, including equity tokens from companies like SpaceX, Tesla, Coinbase, Better, Apple, and Amazon." Garg stated that the project will not support meme coins, only selecting assets with liquidity and high institutional interest, with Ethereum and Solana being the next batch of tokens to be launched.

He has a further vision: parents can pledge retirement account assets to help their children buy homes, which aligns with the direction of crypto asset pension tracks. In the future, homebuyers will only need to take photos of properties and let software complete the entire process. "An AI agent will submit the home purchase application on the Better platform and automatically calculate the bidding limit. In the long run, ordinary people can hold shares in properties and flexibly exchange different homes. Currently, this is difficult to implement, and the only obstacle is the complex transaction friction."

The underlying logic of this concept is a judgment on the asset allocation trends of young people. "Today's young people lack assets that can hedge against inflation and share in the benefits of rising housing prices."

Controversies Behind Token Pledging

The tokenized equity business faces a key question that has no unified answer: what legal rights do holders of tokens actually possess? Currently, the "tokenization of everything" sector is generally troubled by this issue. Chan Ahn, founder and CEO of Tessera, revealed in the podcast "On The Margin" that the company launched a tokenized product for SpaceX in February. He candidly stated the characteristics of the business model, "The platform intentionally does not set up KYC processes, not as an oversight." The original intention of the project is to lower the entry barrier—private equity markets have long relied on complex procedures, high minimum investment thresholds, and geographical restrictions, keeping 99.9% of ordinary investors out.

Chris Turner, co-founder of Kula, made a distinction in the same podcast, stating that the vast majority of tokenized assets only represent contractual rights to asset income, which does not equate to direct ownership of the underlying assets; another model achieves that tokens are assets, where holding a token is equivalent to owning the underlying asset. There is a fundamental difference between the two. For mortgage loan underwriters, when conducting collateral valuation, it is essential to distinguish which type of rights they hold.

Meanwhile, Better is reconstructing its financing channels. In February of this year, the company partnered with Framework Ventures, planning to leverage the stablecoin ecosystem Sky to deploy up to $500 million in funding, while Framework Ventures also invested $45 million for a stake of about 10%. Better expects this adjustment to reduce capital costs by over 100 basis points. The company claims that once tokenized financing is implemented, there is an opportunity to lower customer loan rates to below 5%, while the industry average rate is above 6%.

The company urgently needs to reduce funding costs. In the first quarter, Better's lending volume was $1.64 billion, a year-on-year increase of 89%, with revenue of $47.5 million, but it still incurred a loss of about $70 million. The company has cumulatively lent over $110 billion since 2016; in December 2021, it laid off 900 people in a single online meeting, and for years Garg has faced external criticism regarding this matter.

The immense pressure has not weakened his determination to bet on this sector. "The worst outcome is that the product is launched and no one is interested, but that is not the reality." When discussing the industry's prospects, he stated: "It is not necessary to only fantasize about the future; what is more important is to create the future with our own hands."