Crypto Considered as Collateral for Mortgages: Senate Democrats Demand Answers on Hidden Risks

US Senate Democrats Probe FHFA Director over Crypto Consideration in Mortgage Approval Process

A group of five US Senate Democrats has sent a letter to the Federal Housing Finance Agency (FHFA) director William Pulte, requesting him to provide clarification on his recent order regarding the consideration of cryptocurrency holdings in the approval process for certain mortgages. The senators, led by Jeff Merkley, expressed concerns that Pulte’s plan could introduce unnecessary risks to consumers and pose serious safety and soundness concerns for the US housing and financial markets.

Understanding FHFA and Fannie Mae, Freddie Mac

The Federal Housing Finance Agency (FHFA) has overseen Fannie Mae, also known as the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corporation, since 2008. This was after the two entities were placed under government watch following the 2008 financial crisis caused by the collapse of the subprime mortgage market. The government stepped in to stabilize the housing finance system, ensuring that Fannie Mae and Freddie Mac continue to operate under FHFA’s oversight.

Crypto Risks for Home Buyers

The senators expressed concerns over Pulte’s plan to consider cryptocurrency holdings without converting them to US dollars. They stated that current policy prohibits lenders from considering crypto in mortgage determinations unless it is first converted into US dollars. The senators pointed out that crypto has historically been subject to high volatility and liquidity crunches, which could put borrowers at a higher risk of defaulting on their mortgages.

The letter also highlighted the risks associated with using cryptocurrency, such as scams, cyber hacks, or physical theft, which could result in homeowners losing their assets. This underscores the potential for increased exposure to risks by allowing lenders to consider cryptocurrencies in mortgage determinations.

Concerns about Pulte’s Order and Conflicts of Interest

The senators also raised concerns about how Pulte’s order will prevent conflicts of interest among those involved in developing proposals, particularly considering President Donald Trump’s family ties to the crypto industry. The letter pointed out that Fannie Mae and Freddie Mac, under FHFA oversight, must obtain approval from their respective boards before implementing changes.

The senators criticized Pulte for not providing clarity on how Fannie Mae and Freddie Mac will develop a proposal, assess risks and benefits, or gather feedback. This vagueness is particularly concerning given the previous instances of failure to adequately oversee crypto-related activities within FHFA, such as the 2023 banking crisis where the agency’s oversight was criticized.

Additional Questions for Pulte

The letter includes several questions that Pulte must answer by August 7:

• What is the process for approving the order and implementing changes in Fannie Mae and Freddie Mac?
• How will Pulte recuse from conflicts of interest, considering his spouse’s significant holdings in cryptocurrency?
• What measures will be taken to prevent the introduction of unnecessary risks to consumers and ensure public safety?

The senators also requested detailed information on communications related to crypto within FHFA. These questions underscore the need for transparent communication and clear guidelines regarding crypto’s role in mortgage decisions.

The full response to these concerns from Pulte and key stakeholders in the housing finance sector can be expected soon, offering insights into how cryptocurrency policies will shape mortgage determinations.