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Weiss Ratings, a rating company based in the US, has said that mortgages backed by cryptocurrencies came with a high level of risk, such as the one that triggered the recession in 2009. Weiss Ratings referred to companies offering crypto-backed home loans despite the increased market risk.
Weiss Ratings is concerned over crypto-backed home loans
Weiss Ratings said that the plans of Milo, a startup company based in Miami offering crypto-backed loans, failed to heed the warning signs of issuing such loans. Milo is a platform that allows its clients to access real estate projects by using crypto assets as collateral.
The Milo website said that the project had processed more than 1200 applications from 63 countries. It has also offered financial support worth $300 million. The business uses a model that allows crypto mortgages to be sold in the form of bonds to asset management firms and other investors in the financial sector.
According to the Weiss report, offering such loans in the housing sector was among the factors that caused the Great Recession in 2009. At the time, housing prices were skyrocketing, but they could access financing through largely unregulated credit options.
While the strategy worked well for a while, housing prices dropped, and lending to the real estate sector was no longer possible. The refinancing was no longer an option, and it forced millions of borrowers to default on their mortgage loans, causing a global financial crisis.
The report by Weiss Ratings added that Milo was offering mortgages backed by digital assets, which was similar to the situation that caused the 2009 situation in the mortgage sector.
The US Federal Reserve is expected to increase the inflation rate to deal with the rising levels of inflation. This situation could cause the number of home buyers to drop as monthly instalments rise. This could cause a serious situation for Milo mortgages, whose plan remains successful if the real estate and crypto prices continue to rise.
Crypto-backed loans on the rise
Crypto-backed loans have been on the rise. In December 2021, Ledn, a savings and credit firm based in Toronto, announced it would be launching mortgage products backed by Bitcoin. The company announced it would use Bitcoin and real estate as collateral.
While these loans are on the rise, not everyone is impressed by them. In October 2021, United Wholesale Mortgage announced that it would halt cryptocurrency payments two months after approving them.
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