U.S. Democrats Launch Investigation into Regulator’s Action to Add Crypto to Mortgage Lending
A group of five lead Senate Democrats, led by Senator Jeff Merkley, launched a formal investigation on Tuesday into the Federal Housing Finance Agency’s (FHFA) recent action to add crypto to mortgage approvals.
The legislators signed a letter to FHFA Director William Pulte Friday, which was released in solemn concern over the impact of the plan on the overall housing marketplace and financial system.
Senators Elizabeth Warren, Bernie Sanders, Chris Van Hollen, and Mazie Hirono are co-signers of the letter.
They asked for a breakdown of the order and rationale for it by August 7, calling for disclosure of a move that could redefine the intersection of crypto and real estate finance.
FHFA Calls for Crypto to be Considered in Risk Assessments
A month ago, Director Pulte instructed Fannie Mae and Freddie Mac, the two government-sponsored mortgage giants, to provide proposals that analyze the consideration of crypto assets in single-family mortgage loan risk evaluation.
In a twist of events, the directive states that the crypto assets in question would not necessarily be converted into U.S. dollars before being evaluated.
The action represents a radical departure from current policy, under which lenders are prohibited from pricing crypto assets unless they are first converted to fiat.
The FHFA has regulated Fannie Mae and Freddie Mac since the 2008 global financial crisis, and such a change could have significant consequences for U.S. housing market stability.
Lawmakers Warn of Excess Liquidity, Volatility, and Security Risks
The senators had various concerns about introducing crypto into mortgage lending.
High among them is the volatility of cryptocurrencies, which they opined could expose borrowers and the overall financial system to risk.
The letter warned that crypto investors can’t quickly sell out of their holdings or at good prices when there’s a fall in the market, increasing the risk of mortgage defaults.
Besides, legislators cited the risk of cyber theft, fraud, and hacking that would see borrowers forfeit their properties outright, or worse, leave homeowners financially stranded with no or limited redress.
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Charges of Conflict of Interest and Non-transparency
Besides the financial risks, the senators were also sounding an alarm on potential conflicts of interest surrounding the FHFA’s governance.
They noted that Pulte’s spouse is said to have up to $2 million in cryptocurrency, a situation they contend could taint the objectivity of the agency’s decision-making process.
They also questioned how Pulte, as chairperson of the boards of both Fannie Mae and Freddie Mac, could ensure an objective approval process, considering he appointed a number of the board members himself.
The senators extended their skepticism to political officials like President Donald Trump and his family members, as a result of their extensive reach to the crypto industry as a probable source of excessive influence on the process.
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Request for Elucidation Alongside Broader Regulatory Issues
The senators concluded their letter by requesting explanations on several fundamental issues regarding the FHFA’s directive on cryptocurrencies.
They grouched that the directive was vague and imprecise as to how the proposals would be developed, how risks and benefits would be balanced, and what public input or oversight processes would be established.
Citing the 2023 bank meltdown, when several institutions partially collapsed due to overspeculation in crypto enterprises, the senators underscored the importance of transparency in government in this field.
They also referred to a 2021 internal Fannie Mae report that concluded using crypto as deposits or collateral was the least viable application of blockchain technology in housing finance.
Legislators now await Pulte’s full response to their series of questions and disclosures submitted by the August deadline.