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‘Are We There Yet?’

A primer on conforming mortgages and virtual currency

bitcoin house
Chief Operations Officer, Atlantic Bay Mortgage

Cryptocurrency, virtual currency and other forms of alternative currencies, continue to forge ahead throughout the world, despite numerous speculations. As adoption increases, so do the challenges surrounding the use of said assets to the conforming mortgage industry.

Why don’t we start with the basics?

What is cryptocurrency? Cryptocurrency is an alternative currency such as Bitcoin and Dogecoin where each transaction is stored in a ledger called the blockchain.

What is blockchain? Blockchain is a distributed ledger of transactions. Blockchain is used to record virtual currency transactions, including the sale of NFTs.

What is an NFT? Non-fungible Tokens are digital items, such as digital art, MP3, and JPGs. Non-fungible just means that there can only be one of a single item. There is only one Mona Lisa, it is non-fungible. NFTs are typically sold on a Marketplace.

What is a Marketplace? A Marketplace is a website where NFTs are listed and sold.

For example, a piece of digital art might be turned into an NFT, uploaded to a Marketplace where it will be sold using cryptocurrency. The transaction of the sale will be recorded on the blockchain.

What is a virtual currency? As defined by the IRS, “Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value”. The difference between virtual currency and cryptocurrency in a very simplistic form, is in the fact that virtual currency can be either centralized or decentralized. So, is PayPal a virtual or cryptocurrency? No, it is a platform that utilizes US Dollars. Remember virtual currency is a digital representation of value that can exist only in electronic form.

Can you buy a house in full virtual currency? It has been done and I would imagine it will continue to be done more frequently. However, they are not purchasing these with a conforming mortgage and the downpayment being a true virtual currency. Side note: I just read that Christine Quinn from Selling Sunset has opened a brokerage in California that is doing these transactions: again, not with a conforming mortgage.

If you are anything like me, it has been a very complicated system to understand and digest, and it still is. However, like I said previously, as it is increasingly utilized, the challenges of how to handle this asset when dealing with mortgage transactions has increased, as well. For years, I have been presented with scenarios of how to utilize a borrower’s virtual currency as “source of funds to close.” I had a loan where the gentleman purchased Bitcoin seven years ago. How do we track the value? Did he purchase it recently? What was the initial investment? Oh, he can only convert over a small amount at a time. Thankfully, the GSEs are beginning to release guidance on how to navigate this complex asset and now an emerging income stream.

In December 2021, Freddie Mac released guidance on Cryptocurrency. See below:

Due to the high level of uncertainty associated with cryptocurrency, we have updated the Guide to address its uses in the Mortgage qualification process as follows:

  • Income paid to the borrower in cryptocurrency may not be used to qualify for the Mortgage
  • For income types that require evidence of sufficient remaining assets to establish likely continuance (e.g., retirement account distributions, trust income and dividend and interest income, etc.), those assets may not be in the form of cryptocurrency
  • Cryptocurrency may not be included in the calculation of assets as a basis for repayment of obligations
  • Monthly payments on debts secured by cryptocurrency must be included in the borrower’s debt payment-to-income ratio and are not subject to the guide provisions regarding installment debts secured by financial assets
  • Cryptocurrency must be exchanged for U.S. dollars if it will be needed for the mortgage transaction (i.e., any funds required to be paid by the Borrower and Borrower reserves)

We will continue to monitor cryptocurrency developments and may update these requirements as appropriate in the future.

In May of this year, Fannie Mae followed suit with their guidance for virtual currency:

Fannie Mae has provided guidance for virtual currency, such as cryptocurrency. Previously Fannie Mae did not have specific guidance on this topic in their guideline, but has now, for the most part, aligned with Freddie Mac requirements.

Effective immediately, the following requirements apply for Fannie Mae loans:

  • Income paid in the form of virtual currency may not be considered when qualifying a borrower
  • Assets used to establish continuance for certain income types cannot be in the form of virtual currency.
  • The purchase price of the property and any earnest money deposit may not be designated in virtual currency.
  • The payment used as rental income must be in U.S. dollars.
  • Payment on any installment debt secured by virtual currency must be included in the debt-to-income ratio calculation.
  • Virtual currency that has been exchanged into U.S. dollars is acceptable for the down payment, closing costs, and financial reserves provided:
  • there is documented evidence that the virtual currency was exchanged into U.S. dollars and is held in a U.S. or state regulated financial institution, and
  • the funds are verified in U.S. dollars prior to the loan closing

Alas, the mortgage underwriters of our industry finally have some guidance on how to handle these ever-increasing scenarios. To quote Freddie Mac, “We will continue to monitor cryptocurrency developments and may update these requirements as appropriate in the future.” I do believe this will continue to change and evolve (I mean this is the mortgage industry), but for now, we have something to guide us to ensure our salability is intact. We believe the next set of guidance will surround utilizing these investments as a source of income.

Stay tuned …

This article was originally published in the Mortgage Women Magazine July 2022 issue.
About the author
Chief Operations Officer, Atlantic Bay Mortgage
Published on
Jul 06, 2022
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