FHFA Opens Door for Crypto Assets to Count Toward Mortgage Applications

In a watershed moment in mortgage lending, Federal Housing Finance Agency Director William Pulte announced last week on social media that Bitcoin and Ethereum soon could help borrowers get a mortgage without needing to cash out their crypto.

Pulte tied the announcement to the broader Trump administration agenda of helping the U.S. cement itself as a world leader in digital currency.

“In keeping with President Trump’s vision to make the United States the crypto capital of the world, today I ordered the Great Fannie Mae and Freddie Mac to prepare their businesses to count cryptocurrency as an asset for a mortgage,” Pulte wrote on X.

Lenders typically accept cash, bank deposits, or brokerage funds. Under the new order, regulated crypto from U.S. exchanges would soon be acceptable, as long as borrowers exclude self-custodied and international digital currencies.

This transition raises tough questions. Crypto is a lot riskier than traditional currencies. A borrower whose Bitcoin holding falls 40% in value after loan origination could easily become a default risk. Scale that scenario across thousands of loans, and the entire system creates crypto-related volatility.

Since these loans will be backed by Fannie and Freddie, the two government-sponsored enterprises (GSE) will now be exposed to crypto risk. And if exposed, lenders will need tools with which to address it. But we have none yet.

Banks will strike back with synthetics designed explicitly to reduce crypto exposure using pools of mortgages.

Think of swaps, tranches, structured notes, and new indexes — reminiscent of 2000s-era vehicles designed with subprime risk in mind.

Crypto-backed mortgages will be securitized into mortgage-backed securities (MBS). Then a basic question arises: Will GSEs brand which pools contain crypto-backed loans?

If they do, investors would pay a premium for such securities, and accordingly, the prices of mortgages would rise for crypto holders. In case they do not, and crypto debtors are covered under pools, all of the purchasers of MBS would incur added risk.

In any case, crypto may find its way into U.S. housing finance. Investors and regulators will need new tools with which to measure added risk.

Borrowers may pay higher mortgage rates tied to crypto-backed pools yet lack information about their loan interest.

The FHFA directive is not an isolated one. It slices across broader federal oversight of virtual currencies, and it may force other regulators to take a look at their own roles.

Until now, regulations of crypto exchanges have been focused on fraud, money laundering, and investor protection. But these same platforms now offer a window into mortgage finance.

A token listed on a U.S. exchange could now underwrite a mortgage proposal anywhere. That makes crypto exchange regulations and listing rules about more than protecting investors. They also influence housing market stability.

The U.S. Securities and Exchange Commission, Commodity Futures Trading Commission, and other regulators will also be under pressure to work with housing regulators.

They will need to agree on how exactly they will collectively scrutinize crypto asset reserves used this way — specifically with lesser-known coins and self-custodied wallets entering the mix.

Banks may view this as an opportunity. As crypto reserves move into loan underwriting, lenders may have room to create new mortgage products aimed at large holdings of crypto.

For example, a borrower with $100,000 of Bitcoin may become eligible for a fee-reduced or flexible loan. Financial institutions can develop products with one of these limited cryptocurrencies. In any event, policy adjustments have a way of catching up with financial innovations.

Lenders could introduce new mortgage products to accommodate the crypto market and audience.

Hedge funds and trading desks can then make money by short-selling these new products. That creates a new financial linkage between crypto and housing finance.

Echoes from 2005 abound. Risk was packaged, cut, and resold, then housing prices exploded. Crypto-backed reserves can currently create a similar dynamic.

It’s not a harbinger of an unstoppable debacle. Early volumes will stay modest, and risk tools are sophisticated these days. However, adding volatile instruments into mortgage markets adds risk. It is difficult to undo once crypto gets a foothold into calculations of asset reserves.

If policymakers and players don’t adapt, instability may propagate in ripples. Not because homebuyers are using Bitcoin as a way of buying homes but because they use Bitcoin to look safer on paper.

Clarity is paramount to avoid systemic risk. What is a regulated exchange? How do cryptocurrencies become eligible? How will you calculate reserve values if prices move violently on a daily basis?

The FHFA has yet to issue guidance on these details. Until then, lenders, servicers, and investors will have to guess. That may generate inconsistent implementation and further uncertainty. The lack of a firm timeline for proposals adds yet another degree of uncertainty to pre-existing underwriting procedures.

Regulators can safely develop with well-defined standards. Without them, we risk fueling a fresh exotic finance boom — this one on virtual coins creating dud mortgages.

Fannie and Freddie will have to write their own plans. Pulte’s order offered no deadline, but urgency is indicated by the FHFA guidance to act reasonably soon.

Lenders will have to plan for reserve audits as well as risk questions about mortgage-backed securities. In their turn, regulators and policymakers need inter-agency coordination. Crypto’s invasion of home lending reorders the operations of both worlds. 

Forecasting problems can help avoid larger disruptions. Initially, a movement toward broadened financial access will likely seep into housing finance. The broad-based impact will be a function of how successful subsequent developments turn out.