Crypto Mortgages Face Senate Scrutiny: Better’s Bitcoin Collateral Model Sparks Debate Over Costs and Risks

Woofun AI reports that Vishal Garg, CEO of Better Home & Finance, has engineered a structural workaround for the liquidity trap facing asset-rich homebuyers, launching a partnership with Coinbase that allows Bitcoin and USDC to serve as mortgage collateral. This mechanism, which bypasses the immediate capital gains tax liabilities associated with liquidating assets for cash, was piloted in Ann Arbor, Michigan, and has drawn the attention of Fannie Mae, the government-sponsored enterprise that traditionally sets the benchmark for conventional mortgage standards. The core innovation lies in decoupling the down payment from cash liquidity, allowing borrowers to pledge digital assets directly against property purchases without triggering taxable events, a shift that challenges the traditional cash-first paradigm of real estate transactions.

The operational framework, introduced in March of this year, structures the financing into two distinct components: a first lien mortgage loan that adheres to Fannie Mae’s stringent underwriting criteria, and a separate private financing loan secured by crypto assets, which carries a second lien on the property. The Wall Street Journal reported that this marked the first instance of Fannie Mae accepting mortgage loans backed by crypto assets, signaling a potential shift in institutional acceptance.

In early June, a couple in their early thirties completed the first transaction under this model, validating the feasibility of the approach. Better disclosed that prior to the product’s official summer launch, the reservation list indicated a potential loan volume of approximately $250 million, with 41% of applicants lacking sufficient cash for down payments, highlighting the acute demand for alternative liquidity solutions among younger buyers.

Garg emphasizes that the loan assets generated through this model meet established bank investment standards, attracting interest from several major financial institutions. He notes that some of the largest banks in the U.S. are already lining up to acquire these loans, viewing them as a viable channel for integrating digital assets into the broader banking system. This institutional appetite suggests that the barrier to entry for crypto-backed mortgages may be lower than anticipated, provided the underlying collateral meets rigorous risk assessment criteria. The involvement of traditional banking giants lends credibility to the model, potentially paving the way for wider adoption beyond niche crypto-native platforms.

The collateral requirements are designed to mitigate the volatility inherent in digital assets. Pledging Bitcoin requires a 250% collateral ratio; for a $100,000 down payment loan, borrowers must pledge $250,000 worth of Bitcoin. In contrast, the stablecoin USDC requires only a 125% collateral ratio, reflecting its lower volatility profile.

Notably, the product does not employ a margin call mechanism, meaning that fluctuations in Bitcoin prices do not trigger immediate repayment demands or changes to loan terms. Asset liquidation is only initiated if the borrower defaults for 60 consecutive days, aligning the risk profile with conventional compliant mortgage loans. This structure aims to provide stability for borrowers while protecting lenders from short-term market swings.

Woofun AI data shows that this model targets a demographic that is increasingly marginalized by traditional housing markets. Data from Redfin indicates that 12.7% of young homebuyers have recently used crypto assets to raise down payments, underscoring the relevance of this solution. The National Association of Realtors projects 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 buyers among all purchasers will drop to a historic low of 21%. Although the Mortgage Bankers Association disputes these figures, citing federal loan data, Census data confirms that in the second quarter of this year, the homeownership rate for individuals under 35 was only 35.2%, highlighting a significant affordability crisis among younger generations.

The concept of using held assets as collateral is not novel in the broader lending landscape. Doug Ricketts, co-founder and CEO of PayJoy, argued in the podcast "On The Margin" that smartphones can serve a similar function to real estate collateral in micro-lending contexts. PayJoy operates in Latin America, Africa, and South Asia, providing credit to populations with weak credit histories by locking device functionality upon default. Ricketts distinguishes PayJoy’s model by charging a one-time fixed fee rather than rolling cumulative interest, avoiding the predatory practices often associated with high-risk lending. This approach contrasts with Better’s model, which leverages high-value digital assets rather than consumer electronics, but both share the underlying principle of using non-cash assets to unlock liquidity.

Regulatory scrutiny has intensified, with seven senators sending a letter on April 30 to Federal Housing Finance Agency Director William Pulte. The letter, led by Dick Durbin and Elizabeth Warren, and co-signed by Jeff Merkley, Chris Van Hollen, Richard Blumenthal, Bernie Sanders, and Mazie Hirono, demanded that regulators revoke approvals and prohibit government-supported enterprises from assuming risks related to crypto assets. The senators argued that the 250% collateral requirement implicitly acknowledges the high-risk nature of crypto assets, and that borrowers face the dual burden of interest on two loans. They estimated that financing costs could be 1.5 percentage points higher than standard Fannie Mae rates, warning that this burden could lead to defaults and losses borne by U.S. taxpayers. The FHFA was requested to respond by May 30, but no public reply has been issued.

Consumer advocacy groups have echoed these concerns, with Alys Cohen of the National Consumer Law Center and Corey Frayer of the Consumer Federation of America arguing in June that the federal government risks repeating the mistakes that triggered the 2008 housing foreclosure crisis. They characterize the model not as consumer-friendly innovation but as a precursor to disaster. Market volatility further complicates the outlook; Bitcoin peaked at approximately $123,000 last October, but by February this year, the price had plummeted to around $62,800, and throughout July, it fluctuated in the $60,000 range, remaining at half its peak value. This depreciation highlights the potential risks for borrowers who may find their collateral value eroding while their debt obligations remain fixed.

Looking ahead, Garg envisions expanding the collateral pool to include tokenized assets from companies such as SpaceX, Tesla, Coinbase, Better, Apple, and Amazon, while explicitly excluding meme coins. Ethereum and Solana are slated for inclusion in the next batch of supported tokens. The legal complexities of tokenization remain unresolved; Chan Ahn of Tessera noted that their February launch of a tokenized SpaceX product intentionally omitted KYC processes to lower entry barriers, a move that contrasts with traditional private equity restrictions that exclude 99.9% of ordinary investors. Chris Turner of Kula distinguished between tokens representing contractual income rights and those conferring direct ownership, a distinction critical for mortgage underwriters assessing collateral value.

Meanwhile, Better partnered with Framework Ventures in February to deploy up to $500 million via the Sky stablecoin ecosystem, with Framework investing $45 million for a 10% stake. This move aims to reduce capital costs by over 100 basis points, potentially lowering customer loan rates to below 5%, compared to the industry average of above 6%. Despite a first-quarter lending volume of $1.64 billion, an 89% year-on-year increase, and revenue of $47.5 million, Better reported a loss of approximately $70 million. Since 2016, the company has lent over $110 billion, but faced significant restructuring, including laying off 900 people in December 2021.

Garg remains steadfast in his strategic vision, asserting that the worst-case scenario of market disinterest has not materialized. He envisions a future where an AI agent automates the home purchase application process, calculating bidding limits and facilitating transactions, thereby reducing transaction friction. This long-term goal aligns with the belief that young people lack assets capable of hedging against inflation and capturing the benefits of rising housing prices. By integrating crypto assets into the housing finance ecosystem, Better aims to create a new paradigm for wealth accumulation and homeownership, despite the current regulatory and financial headwinds.