Less than a week after a group of Democratic senators aired concerns about the proposed inclusion of cryptocurrency assets in single-family mortgage risk assessments made by Fannie Mae and Freddie Mac, a GOP senator introduced a bill that would codify that proposal and “bring America’s mortgage system into the digital age.”

The 21st Century Mortgage Act, sponsored by Sen. Cynthia Lummis, R-Wyo., would require Fannie and Freddie to consider digital assets when assessing single-family mortgage eligibility. Currently, the government-sponsored enterprises (GSEs) make borrowers convert cryptocurrencies into U.S. dollars before the companies can include the assets in mortgage risk assessments.

“The American dream of homeownership is not a reality for many young people,” Lummis said in a press release. “This legislation embraces an innovative path to wealth-building, keeping in mind the growing number of young Americans who possess digital assets. We’re living in a digital age, and rather than punishing innovation, government agencies must evolve to meet the needs of a modern, forward-thinking generation.”

The press release cited data from a study released in April by the National Cryptocurrency Association, which found that 21% of U.S. adults own some form of cryptocurrency and 67% of crypto owners are under age 45.

Following Pulte’s lead

If passed by Congress, Lummis’ bill would add legislative muscle to an order issued by Federal Housing Finance Agency (FHFA) Director Bill Pulte on June 25, which directed the GSEs to prepare proposals on how to incorporate crypto assets into the risk assessment process.

Pulte, whose agency oversees Fannie and Freddie through a conservatorship arrangement, wrote in a social media post that the order came “after significant studying,” and was “in keeping with President Trump’s vision to make the United States the crypto capital of the world.”

While the order was vague on which specific cryptocurrencies may be allowed for consideration by Fannie and Freddie, it directed the GSEs to “consider additional risk mitigants per their own assessment, including adjustments for market volatility and ensuring sufficient risk-based adjustments to the share of reserves comprised of cryptocurrency.”

Fannie and Freddie purchase loans that meet their underwriting criteria and package them as mortgage-backed securities that are sold to investors. The process adds liquidity to the secondary mortgage market, which allows lenders to originate more loans and helps lower the interest rates paid by borrowers.

Collectively, Fannie and Freddie support about 70% of the U.S. mortgage market, according to the National Association of Realtors.

A letter of concern

Sen. Jeff Merkley, D-Ore., has been a prominent voice urging caution about introducing cryptocurrencies into the mortgage underwriting process. In a statement provided to Scotsman Guide, he drew comparisons to the 2008 financial crisis.

“The 2008 crisis proved that lax financial practices around risky investments can blow up the housing market — and hardworking families in Oregon and across the country paid the price,” Merkley stated. “Crypto poses serious risks to the stability of the housing market. This is a risk we must address.”

Merkley was among a group of four Democratic senators and one independent who sent a letter to Pulte on June 24 expressing concerns about his proposal to add crypto assets to the world of mortgage underwriting.

“Expanding underwriting criteria to include the consideration of unconverted cryptocurrency assets could pose risks to the stability of the housing market and the financial system,” the senators wrote.

Those risks stem from the historical volatility of cryptocurrencies such as bitcoin, the senators elaborated, citing a fact sheet from iShares, a popular issuer of exchange-traded funds that is owned by BlackRock. The iShares guide — which was updated July 28 — found that bitcoin is 3.6 times more volatile than gold and 5.1 times more volatile than global equities.

“To the extent that historical volatility and liquidity persists even as the market matures, a borrower using crypto faces an increased risk that they may not be able to exit a crypto position and convert to cash at a price that would allow them to buffer against risk of mortgage default,” the Merkley letter states. “Crypto is also subject to heightened risks of loss due to scams, cyber hacks or physical theft, which could leave homeowners vulnerable to losing their crypto assets with little hope of recovery.”

Merkley and his Senate colleagues also questioned what studies or other data Pulte and the FHFA relied on before issuing the crypto order. The letter concluded by asking the FHFA director to respond to nine detailed questions about the crypto proposal by Aug. 7.