Virtually No Chance Soon for Any Bitcoin-Denominated Mortgages
Bitcoin has been all the rage recently, but consumers shouldn’t expect to be able to borrow in Bitcoins for a real estate transaction anytime soon. Make that more like ever, according to a pair of experts on the compliance side of the mortgage business.
Media reports have two confirmed properties being listed for sale where the buyer is willing to accept Bitcoins for them, and there is anecdotal evidence of a third. But all three are higher-end listings, ranging from $400,000 to $8 million.
The value of a Bitcoin is too unstable, especially for the typical length of a U.S. mortgage, says Marx Sterbcow, the managing attorney of the Sterbcow Law Group in New Orleans.
He gave an example where 10 Bitcoins are worth, say, $100,000. Six months from now, in his example, they lose half their value. The person or company that makes a loan denominated in Bitcoin “would lose their shorts,” Sterbcow points out. And that is just a short-term risk. The borrower is likely to default in such a circumstance.
Now spread that risk out over a 30 year period.
It could eventually be a great idea to use Bitcoin in a real estate deal, but right now it is just too early, Sterbcow says. It is not prudent at this point in Bitcoin’s history, which is “in its second inning right now,” he says.
Another issue is regulatory. How would a Bitcoin be translated on the closing documents and structured to meet the 3% qualified mortgage rule fee cap?
Mortgage disclosures are not set up for Bitcoin deals, just U.S. dollar transactions. This brings up the rather difficult task of converting Bitcoins to dollar amounts for the purpose of determining the annual percentage rate and for QM calculations, says Brian Levy, who is of counsel to Katten & Temple in Mequon, Wis. The volatility makes it difficult for pricing and calculations.
In addition, the other parties who get paid at the closing table or during the transaction, like appraisers, need to be willing to be paid in Bitcoin, he notes. But this is a big unknown at this point, although the fee could be converted back to dollars.
Even if it is a private mortgage or seller-held financing, Bitcoin loans are just too risky for a real estate transaction because of the fluctuations in value. It will take the creation of a level of stability in the Bitcoin market plus the creation of regulations to define what this currency is, Sterbcow says.
There have been mortgage loans issued in denominations other than U.S. dollars. But the difference is that those currencies like the euro or the yen have a level of governmental backing to guarantee them and some stability in their exchange rates.
A fixed-rate loan is a good deal for the borrower in an inflationary environment, but the borrower gets hurt in a deflationary one. The more time you introduce into the repayment cycle, the more currency volatility risk, Levy says.
That was and is the risk with the 30-year mortgage and the value of the dollar. With inflation, if the loan goes to maturity, the dollar has less value than when it was initially lent.
The amortization table helps to mitigate that. A Bitcoin mortgage would have to have a short amortization period because of the potential of inflation, he predicts.
The ability-to-repay rule going into effect on Jan. 10 could also restrict Bitcoin-based lending. If there is a default, the borrower could argue the lender should have known about the potential for volatility in Bitcoin values, Levy says.
Another issue with Bitcoin is fraud, Sterbcow says. It has been used in illicit transactions carried out via the Internet; there are also fears it is being used for money laundering.
There is also the possibility that a currency independent of government rules and support can have its value manipulated.
Bitcoin real estate transactions are more likely to take place in all-cash deals, where the buyer does not need any sort of financing. That is because of the immediacy and short timeframe of these transactions, he notes.
All-Bitcoin transactions are more feasible than deals which need financing, Levy adds. Once you start to introduce a mortgage loan into the equation, compliance hurdles arise.
There are even issues in a situation where the loan is made in dollars then, at the seller’s request, converted to Bitcoin. If it is a government-related mortgage the problem is how are you going to put a Bitcoin into escrow, Sterbcow says.
Furthermore, there are states with laws that define what type of proceeds can come into and go out of an escrow account.
For a Bitcoin mortgage, all the world governments and various organizations like the European Union and Mercosur need to put in place the items necessary to ensure the safety of this currency, Sterbcow points out.
Nor is exchanging dollars for Bitcoins like exchanging dollars for other currencies, Levy adds.
There is the possibility that a Bitcoin could be classified as a commodity and then exchanged in a barter transaction for the real estate. But the volatility of the valuation of Bitcoins remains and the seller holds the risk, even with the limits on the production of new Bitcoins, Sterbcow says.
In the future, if the volatility issue is worked out, it will take action by the Consumer Financial Protection Bureau to modify its regulations to enable Bitcoin mortgages, Levy notes. But there is just too much risk for the lender and the borrower to make Bitcoin-denominated mortgages feasible, he concludes.