It wasn’t until relatively recently that we’d all collectively decided that money -- the paper stuff with the old guys on it -- was the ideal way to pay for things like merchandise and debt installments. Before that, we might have been just as inclined to trade six chickens a month to a landholder for our little corner of the world, or to share our harvest at the end of the year. A lot of things have value, even if they’re not printed by a central government.
Even so, it was a bit of a surprise when United Wholesale Mortgage (NYSE: UWMC) announced that it was exploring accepting cryptocurrency for mortgage payments. According to CEO Mat Ishbia, in an interview with the Detroit Free Press, the mortgage giant hasn’t even settled on a cryptocoin yet, though he expects to have that sorted by the end of Q3 or during Q4.
During UWM's Q2 earnings calls, Ishbia explained that net income was down because of increasingly slim margins on mortgage loans, even though the quarter saw a record volume of closed mortgage loans, at $59.2 billion. Profits were lowered due to a drop in total gain margin from 2.19% to 0.81%, which he attributed to a modest climb in interest rates.
A drop in revenues, income, or margins can make companies make some pretty weird decisions. And although Ishbia claims that many customers have requested that they be able to pay their mortgages with crypto, the actual implementation of this process could be very bulky for little more than a basic goal of allowing customers easier access to payment methods. Call me paranoid, but I think there’s a lot more here than meets the eye, especially in light of those recent margins.
The problem with paying with crypto
There are a number of issues involved with paying with crypto, but let’s look at the probably most pressing one: the tax implications. In 2014, the IRS decided that it would treat cryptocurrency like Bitcoin as property for tax purposes, not as currency. So, every time you do anything with Bitcoin, you could be subject to capital gains tax. Imagine doing this 12 or 24 times a year as you pay down your mortgage.
For the bank’s part, and surely it has considered this, it will have to report the crypto as gross income based on fair market value at the time it was used. In theory, this should be the same amount as the payment due, but what if that crypto payment was made during a violent downturn or spike in the crypto market? The crypto market is extremely volatile, making it prone to dramatic swings.
Following up on that thought, there’s a matter of converting the cryptocurrency into the equivalent of old-man paper money. Unless it’s done instantaneously, additional risk awaits UWM. One would think it would make more sense to batch convert crypto payments, so rather than doing one or two payments a day, the bank may choose to wait and do it monthly -- for example, betting on the crypto to climb in value.
And that’s all fine and good, and would certainly improve margins on payments made in crypto should the gamble pay off, but they must be new around here if that’s the actual plan. I may have mentioned how volatile crypto is in general. On Aug. 27, 2021, for example, Bitcoin went from $46,949.60 at open to $48,340.50 around 3:30 p.m. ET. On the same timetable, Ether went from $3,111.12 to $3,230.48.
These are not insignificant changes in value during a single day, and UWM surely isn’t going to be collecting and holding cryptocoins for the longer haul. One tweet from Elon Musk can send the crypto markets plunging or soaring, which seems like a violently irresponsible kind of risk for a mortgage company to take on.
The Millionacres bottom line
Although some merchants are finding ways to accept crypto payments for merchandise, it should necessarily remain a novelty while crypto is treated as an asset and not a currency. The market volatility alone is a big reason that mortgage companies should be steering clear from this situation, even if the tax ramifications were not included in the equation.
Bitcoin, at least, (currently) has a cap on how many coins can be mined, so theoretically it's hedged from additional inflationary pressures that could be created by miners flooding the market with newly minted currency, but other big names like Ether do not. An Ether miner could just basically keep printing money indefinitely, without regard to the wider market, or their own best interests. These internal pressures create a far more complicated equation than what is presented by other types of monetary translations, like international exchange rates.
Trading mortgage payments for crypto is a great idea while the market is high, but it’s like walking on an icy pond in the winter -- you’re safe until the moment you’re not. And by the time you know you’re in danger, you’re already in the drink.
If this is UWM’s answer to narrowing margins, the company may be better to revisit the chicken-for-housing monetary model. The chicken market has been largely stable for many years.