Despite its dizzying volatility, crypto has gained a reputation as one of the most profitable investments in recent years. But many people question how practical the asset really is. When buying house, for instance, crypto isn’t an option people typically think of.
Milo, a fintech startup, is changing that attitude. In March 2022, the Miami-based company started offering crypto-backed 30-year mortgages. Investors can use Bitcoin, Ether or the stablecoins, USDC, UST and Gemini Dollar, as collateral for their loan.
Milo is working with over 700 potential borrowers on pre-approvals and has processed $300 million. The Florida-based company has also raised a total of $24 million, according to a press release.
With Milo, borrowers pledge crypto, equivalent to the cost of their property, as collateral. So if a borrower wants to invest in a $500,000 property, they would pledge $500,000 of crypto as collateral to Milo, in addition to the property itself. The cryptocurrency is then held by a third-party custodian (either Gemini or Coinbase) for the duration of the loan.
This dynamic allows investors to use their crypto without converting it to cash. There are many reasons crypto investors might hesitate to sell their crypto for fiat currency (government-issued currency). First it means they will be subject to capital gains tax and conversion fees. Plus it means missing out on any potential gains if Bitcoin or Ether, for example, double or triple in value.
With Milo, investors can borrow up to $5 million in a 30-year loan, and will pay 3.95% and 5.95% interest rates.
Milo is one of the latest products to bridge the world of decentralized finance with traditional finance. Figure and Ledn are two other startups working to offer crypto-backed mortgages, and both say they have waiting lists for loans, Barron’s reported. There’s also BlockFi, which offers crypto-backed loans that borrowers can then use to buy a home.
Apart from these companies attempting to bridge traditional and decentralized finance, some traditional lenders are also trying to incorporate crypto into their lending products. One traditional lender, Michigan-based United Wholesale Mortgage, announced plans to accept crypto as payments in 2021, but then stopped two months later, “Due to the current combination of incremental costs and regulatory uncertainty in the crypto space,” CEO Mat Ishbia told CNBC.
Up until recently, investors who’ve amassed crypto wealth and wanted to diversify their portfolio, either had to convert to fiat currency or invest in other assets like NFTs and other cryptocurrencies.
Founder and CEO Josip Rupena told Leverage.com, “One of the biggest things we’re trying to emphasize is that for the first time with this product, people can think about buying a home with that crypto wealth, where perhaps before they might have just thought about staking their crypto, or maybe buying some NFTs or something within the ecosystem. I think that we can expect this is going to open up a lot of opportunities for people to diversify their wealth.”
Rupena added that the company has so far found a wide distribution of people that have amassed crypto wealth and are interested in the product. “We’ve been surprised to not just see people that are earlier in their home buying age brackets, but also people that actually have crypto that are in their 50s and 60s,” he said.
Another aspect that’s different from traditional mortgages is that Milo can finance up to 100% of the mortgage. Milo is able to do this because, “there is a level where if the value of the crypto collateral that we have is not sufficient, we’re going to ask the consumer to post more or to reduce the loan balance to get us back into a level that we feel that we feel comfortable with,” Rupena said.
If a crypto asset dips 65% in value, Milo will issue a margin call (demand for an investor to deposit additional funds when an account has fallen below a required amount) and give consumers 48 hours to add to their pool of collateral. Milo will manually liquidate the asset and store the value in USD if the value of the crypto collateral depletes by 70%. On the other hand, if the value of the crypto goes above the initial collateralized value, consumers can either withdraw the excess crypto or have their rate reduced, during loan assessment periods.
Crypto mortgages are also faster and more streamlined than traditional mortgages because the lender is assessing the crypto asset rather than the lender himself. Milo has closed deals within two to three weeks. For this reason, Milo does not require a FICO score or Social Security Number for approval but does conduct standard KYC (Know Your Customer). “There are many ways today to conduct KYC on consumers,” Rupena explained, adding that the company does ask for a consumer’s SSN if they have one as part of their process to verify their identity.
Milo also conducts AML (Anti-Money Laundering) on the funds the consumer plans to pledge as collateral. They do this “by using similar tools that the exchanges use to validate that the crypto is clean and not tainted,” Rupena said.
In the future, Milo will consider lending for other types of real estate besides residential, Rupena told Leverage.com. In addition, the company has been getting requests to offer collateral in the form of other digital assets, but is focusing on their current product before expanding.
“When we’re lending to someone, we’re starting this long-term relationship with them,” he explained. It’s a 30-year relationship, and new digital assets will have to be considered in this context from a real estate perspective, a borrower’s perspective, and the long-term future of the digital asset.
Rupena also believes this is only the beginning of crypto-backed mortgages and that they will continue to grow. He added that borrowers should do their research to fully understand the terms of a non-traditional loan.
“I think with this product, it’s important for whoever is looking at this to feel really comfortable with the company that they’re working with,” Rupena said. “Because this is not just a regular mortgage, right? This is a transaction where [borrowers] are also pledging their wealth to be able to qualify.”
Part of the research entails making sure those companies are licensed, regulated and audited.
“I expect more people to try to come out and launch these types of products, but consumers should definitely do their diligence on what’s out there,” he said.