Weiss Ratings flags major risks with crypto-backed mortgages

• Weiss analyst cites the risk of the current uncertain macroeconomic situation and the sharp fall in the crypto prices this year.
• Some market players are offering 100 percent crypto-backed loans without any down payment.

Popular rating agency Weiss Ratings has warned investors to remain careful with crypto-backed mortgage loans owing to the current economic situation in the U.S. This comes as there’s been a growing number of players offering crypto-backed mortgage loans in the market.

In the report, Weiss analyst Jon D. Markman talks about a Miami-based digital banking firm Milo. The firms recently rolled out 30-year mortgages backed by digital assets such as Bitcoin (BTC), Ethereum (ETH), or stablecoins as collateral.

Interestingly, Milo doesn’t ask for any kind of down payment and offers the loan at a very attractive interest of 3.95 percent to 5.95 percent. In the report, Markman writes:

The product seems to be like a win-win, assuming real estate and crypto prices keep rising […] except there are signs both bets are unlikely to be winners in the near term.

But in the report, the Weiss analyst notes that the global macroeconomic situation is quite concerning. He especially points out the volatile nature of digital assets and that Bitcoin has corrected 40 percent from its November high. The analyst also talks about the rising interest rates and chances of the housing bubble in the U.S.

Related: Could extraordinarily elevated inflation numbers lead to a crypto market carnage this June?

FOMC is scheduled to have a major meeting tomorrow Wednesday, May 4. Market analysts are expecting that the Federal Reserve will increase interest rates by 50 basis points. “[The] U.S. property prices now face headwinds from a change in Fed policy and rising mortgage rates,” added Markman.

Crypto loan providers are scaling the business

Crypto-backed loan providers have been raising more money from the market to scale their businesses. As per the Bloomberg report, Milo recently secured $17 million in Series A funding. Over the last 30 days, it has also issues in pre-approval letters on $340 million in new mortgages.

Josip Rupena, the founder of Milo, said that they want to scale their crypto-backed loans business. They are planing to pool these loans and sell them further to asset managers, banks, and insurance companies. Rupena said:

We’re going to refine this and get it bigger. Milo will be looking to provide other long-term solutions to those with crypto wealth—not just mortgages.

But offering crypto-backed loans isn’t just limited to new-age FinTech startups. Some of the largest banking institutions on Wall Street have joined the bandwagon. Last week, banking giant Goldman Sachs provided a Bitcoin-backed to its clients citing growing demand. The bank also said that the deal was interesting due to its structure and 24-hour risk management.

Crypto-backed loans certainly have a great value proposition in the long term.  The borrower can get additional cash by pledging his holdings and let their value appreciate. But there are major downsides on the flipside as well. If the value of digital assets fall drastically, they might have to pledge more assets against the borrowed cash.