Better Mortgage Can Reuse Bitcoin Pledged In Coinbase-Backed Home Loans

Better Mortgage can rehypothecate the Bitcoin borrowers pledge under its Coinbase-powered home loan product, and customers cannot recover that collateral until their primary conventional mortgage is repaid or refinanced. 

The companies took the product to general availability last week. Pre-application volume has since reached $360 million in requested loans, up from the $260 million projected during the earlier waitlist period.

How The Two-Loan Structure Works

Borrowers receive two loans at closing under the product. The first is a standard Fannie Mae-conforming mortgage secured by the home. The second funds the cash down payment and is secured by the borrower’s Bitcoin along with a second lien on the same property.

The Bitcoin-backed loan starts at a 250% collateral ratio, meaning a buyer must pledge $2.50 in Bitcoin for every $1 borrowed toward the down payment. In an example the company published, a buyer purchasing a $500,000 home could pledge $250,000 in Bitcoin to fund a $100,000 down payment.

Both loans are originated by Better and billed through one combined monthly payment. At closing, the borrower’s Bitcoin moves from a Coinbase account into Better’s custody account on Coinbase Prime. 

Bitcoin does not count toward qualifying for the first mortgage. Applicants must still meet Fannie Mae’s standard income, credit score and debt-to-income requirements on their own.

Pledged Bitcoin May Be Reused

Better disclosed that it may reuse the pledged Bitcoin as long as it keeps an equivalent amount on hand to return it. Coinbase’s role is limited to custody and technology; the company has no part in extending credit or deciding when collateral is liquidated, according to the firms. Better said in written responses:

“Better may rehypothecate the pledged Bitcoin, provided it keeps equivalent Bitcoin on hand to return the collateral at loan payoff. Nothing in the product converts crypto holdings into qualifying income or waives DTI or credit thresholds. The Bitcoin loan only solves the cash-for-down-payment problem.”

Rehypothecation allows collateral to be used in a separate transaction rather than sitting untouched in custody. Under this arrangement, a borrower is promised an equivalent quantity of Bitcoin at the end of the loan rather than the return of the specific coins pledged at closing. 

That leaves the borrower exposed to Better’s ability to maintain and return that Bitcoin, on top of ordinary price risk in Bitcoin and the property itself.

Better said its borrower agreements and custodial arrangements comply with applicable laws, including insolvency rules. 

The company did not address whether each borrower’s Bitcoin is separately identifiable, who holds legal title after rehypothecation, or whether a borrower would retain a property claim or instead become a general creditor if Better or a financing partner failed.

Borrowers also cannot repay the down-payment loan early simply to free their Bitcoin. Better said the collateral stays pledged until the conforming mortgage is fully repaid or refinanced, even though the Bitcoin and second lien technically secure only the separate down-payment loan. 

That condition could keep the Bitcoin encumbered for the full term of a 15- or 30-year mortgage unless the borrower refinances or sells the property. A home sale requires the down-payment loan to be repaid before the Bitcoin is released, according to the company’s public product page.

No Margin Calls On Price Drops

A decline in Bitcoin’s price does not trigger a margin call, a request for additional collateral, or an automatic sale, unlike many crypto-backed lending products. Liquidation occurs only after a borrower misses payments, even if the pledged Bitcoin falls below the value of the down payment loan, the company said.

A missed combined monthly payment starts the delinquency process. Better said it may liquidate the pledged Bitcoin after 60 days of delinquency, following notice to the borrower, and would sell only enough to bring the account current. 

Foreclosure on the home may begin after 180 days of delinquency under Fannie Mae guidelines, though Better said it must pursue the Bitcoin collateral first. The company noted that standard lending remedies may still apply if selling the Bitcoin leaves a shortfall.

Product Scope And Borrower Profile

Only Bitcoin is currently accepted as collateral. An earlier announcement in March had also named USDC, but Coinbase said the partners chose to launch with Bitcoin alone while they evaluate other collateral types.

Coinbase One members approved for the loan can receive a lender-funded closing-cost credit equal to 1% of the mortgage amount, capped at $10,000. The companies said 35.9% of current applicants hold more than $500,000 in crypto, and 38% plan to buy additional crypto within the next three months.