Bitcoin mortgage recollateral: counterparty risk behind 360 million pre-applications

According to Woofun AI, Better (BETR.US) and Coinbase (COIN.US) officially launched a Bitcoin-backed mortgage product that allows the reuse of borrowers' collateral to the public last week. This innovative mechanism marks an in-depth exploration of crypto asset liquidity in the housing finance sector, but it also introduces a complex counterparty risk structure. Since the launch of the product, the market response has been overwhelming, and the total amount of pre-applied loans has rapidly climbed to $360 million, far exceeding the $260 million previously anticipated by borrowers on the waiting list.

This excess demand not only reflects the pursuit of capital efficiency by high-net-worth individuals, but also reveals the structural tension of traditional housing loan models when combining crypto assets. The core dispute is that although the borrower received down payment support, the bitcoins they collateralized were not statically sealed, but were given the attributes of re-collateral, which substantially separated ownership and control of the asset.

According to data compiled by Woofun AI, the product's loan structure design is extremely precise and complex. After completing the procedure, the borrower will hold two loans at the same time: the first is a regular mortgage loan secured by the house and meets Fannie Mae (FNMA.US) standards; the second is a loan for a cash down payment. The collateral includes the borrower's Bitcoin and a second lien on the same property. Bitcoin-backed loans require maintaining a collateral ratio of at least 250%, which means that for every $1 borrowed for a down payment, the borrower must collateral $2.50 worth of Bitcoin.

For example, a borrower who buys a property worth $500,000 would need to collateral $250,000 in Bitcoin to get a $100,000 down payment. Both loans were issued by Better (BETR.US), and borrowers met their obligations through consolidated monthly repayments. At the fund flow level, Bitcoin will be transferred from the borrower's personal account to Better (BETR.US)'s escrow account on the Coinbase Prime platform. The point is that Better (BETR.US) made it clear that as long as it can keep an equal amount of bitcoins to be repaid when the loan matures, it can reuse those pledged bitcoins. Coinbase (COIN.US) acts only as a custodian and technology provider in this process, and does not participate in credit approval or liquidation decisions.

Notably, Bitcoin holdings do not help borrowers meet the eligibility requirements for the first mortgage, and borrowers are still required to independently meet Fannie Mae (FNMA.US)'s regular requirements for income levels, credit scores, and debt-to-income ratios. In its written response, Better (BETR.US) emphasized that the product did not convert cryptocurrency holdings into qualified income, nor did it eliminate debt-to-income ratios or credit thresholds; Bitcoin loans only solved the problem of down payment funding. Re-collateralization means that assets that have already been pledged can be used for other transactions rather than being held in a sealed state. Borrowers only get a promise that they will receive the same amount of bitcoins at the end of the loan, not a guarantee that these specific bitcoins will not be used throughout the loan period.

As a result, the borrower's bitcoin is essentially more of a debt because although Better (BETR.US) promises to return the same amount of bitcoin in the future, it can use these collateral for other purposes. In the context of increasing emphasis on verifiable reserves in cryptocurrencies after the FTX incident, this is clearly not conducive to establishing trust in the industry, and also makes borrowers have to rely on the ability of intermediaries to return bitcoins until decades in the future. The company claims that the borrower agreement and escrow plan it developed complies with relevant laws and regulations, including bankruptcy regulations, but it does not specify whether each borrower's Bitcoin can be individually identified, who has legal ownership of the Bitcoin after re-mortgage, and whether the borrower will still retain ownership of the property or become an ordinary creditor if Better (BETR.US) or its financing partners default.

Furthermore, borrowers can't get their Bitcoin back early by simply paying off a second loan. Better (BETR.US) notes that as long as traditional mortgages are not fully repaid or reprocessed, collateral will remain locked in. Unless the borrower refunds or sells the property, these bitcoins may remain occupied for 15 or 30 years of loan terms. According to the official website of Better (BETR.US), Bitcoin will only be released once the down payment loan is paid off.

Unlike typical crypto-backed loans, falling Bitcoin prices do not trigger additional margin requirements or automatically sell collateral. Better (BETR.US) said that even if the value of Bitcoin is less than the down payment amount required for the loan, it will only be liquidated when the borrower is overdue. If the consolidated repayment period is missed, the overdue process starts immediately. Better (BETR.US) says it can sell the collateralized Bitcoin after 60 days after the notice is given, but the proceeds of the sale will only be used to repay the debt and get the account back to normal. According to Fannie Mae (FNMA.US) regulations, a property may face foreclosure if it is 180 days overdue. Better (BETR.US) said it will try to recover Bitcoin first, and if you still owe money after selling the collateral, you can still take regular loan relief measures. If the property is sold through foreclosure, priority is given to repayment of the traditional mortgage loan, followed by repayment of the down payment loan guaranteed by Bitcoin. The rest is owned by the borrower. Currently, the product only accepts Bitcoin as collateral.

Although Better (BETR.US) mentioned USDC in its initial announcement in March, Coinbase (COIN.US) said that partners decided to launch the product using only Bitcoin before evaluating other collateral. Eligible Coinbase One members can also benefit from settlement fee subsidies provided by the lender in the amount of 1% of the total loan amount, up to a maximum of $10,000. Judging from the applicant's profile, 35.9% of applicants currently have cryptocurrency assets worth more than $500,000, and another 38% plan to buy a home within the next three months.

This concentrated participation of high-net-worth groups further exacerbates the potential impact of this model on systemic risk. The more critical variable is that this structure, which deeply binds crypto assets to traditional real estate, exposes borrowers to dual market fluctuations: they have to bear the risk of cryptocurrency price fluctuations and deal with the uncertainty of changes in real estate values.

This combined risk is extremely rare in traditional credit models, and the blurred zone at the regulatory level also lays hidden dangers for future legal disputes.

Judging from long-term trends, although this model has relieved down payment pressure for some high-net-worth individuals in the short term, its inherent counterparty risk has not been eliminated; instead, it has been amplified through a recollateral mechanism. As an intermediary, Better (BETR.US)'s credit status directly determines the security of borrowers' assets. In a context where the crisis of industry trust caused by events such as FTX has not completely dissipated, requiring borrowers to lock down core crypto assets for decades and rely on the ability of third parties to fulfill contracts is a high-risk financial arrangement. The uncertainty of legal ownership and the complexity of creditor status in the event of default make the legal protection of this product far weaker than traditional mortgages.

For regulators, how to define the ownership of remortgaged assets, how to ensure the isolation of escrow accounts, and how to protect borrowers' rights and interests in bankruptcy proceedings will be the core focus of future policy formulation. This may be another major risk experiment in the integration of traditional finance and crypto finance, following DeFi lending agreements. The final outcome will depend on the operational stability of Better (BETR.US), the transparency of Coinbase (COIN.US) escrow, and the degree of perfection of the regulatory framework. For ordinary investors, understanding this complex structural risk is far more important than focusing on short-term interest rate concessions.

After all, the breakdown of any single link in a decades-long loan cycle could have disastrous consequences.