It’s been just over a week since Federal Housing Finance Agency (FHFA) Director Bill Pulte directed Fannie Mae and Freddie Mac to start preparing for the use of cryptocurrency in single-family mortgages.
With limited guidance beyond the FHFA’s directive, mortgage originators and industry experts are working to assess how cryptocurrency could be applied to mortgages. They’re evaluating potential use cases, volatility risks, collateral pricing and implications for the underwriting process.
Among these experts is Armando Falcon, chairman and CEO of Falcon Capital Advisors and the former director of the Office of Federal Housing Enterprise Oversight (OFHEO), now known as the FHFA.
Falcon sat down with HousingWire to offer his perspective as a predecessor of Pulte’s and to showcase Falcon Capital Advisors’ new digital asset practice that advises mortgage lenders on how to safely incorporate crypto and other digital currencies into their businesses.
This interview has been edited for length and clarity.
Sarah Wolak: Can you tell me about your background as a regulator for the government-sponsored enterprises (GSEs) and what you do today?
Armando Falcon: I left the government about 20 years ago. I went into the consulting business with another group of people and eventually set up my own firm. And so for the past 17 years or so, I’ve been building a management consulting firm focused on not just the mortgage market, but also credit markets and capital markets.
I think we built up a nice niche business of providing basic management consulting services, and we try to be on the leading edge of developments in the mortgage market. Several years ago, I saw that there was a growing movement in the eNote initiative. So I formed an E-note digital mortgage practice group within the firm, and I’ve now got a team of people there who focus on that.
Whenever we see the markets moving in a certain direction, we try to align with where the market’s going and help clients take advantage of new opportunities, as the mortgage market is always evolving. And that sort of leads into the whole cryptocurrency world.
Wolak: Can you tell me about your latest division, Digital Assets Advisors?
Falcon: We’ve been watching what’s going on with the digital currencies world. We view digital assets, as a lot of people say, as crypto — and that refers to digital currencies generally — but the whole digital space is more than crypto.
It’s also various types of assets, like NFTs, and so this practice group, once the Trump administration decided they wanted to bring some regulatory structure around the digital currency world — and, more broadly, digital assets — we thought that if this market’s going to start to develop within a well-established regulatory framework, then our clients and new clients may need some help.
Our first webinar is in a few weeks, and that will focus primarily on the emerging role of crypto in housing finance.
Wolak: Can you share some of the developments you’ll be discussing, specifically about Fannie’s and Freddie’s directive to prepare for crypto?
Falcon: Director Pulte instructed the GSEs to reconsider how crypto is utilized or not utilized in the underwriting process. And so we’ll talk about some of the implications of that as it moves forward, and what potential originators and servicers and investors have to be thinking about as that begins to get implemented.
Wolak: What are some of the things that they have to be mindful of?
Falcon: We have to think about what the risk appetite is. Do they do they have the risk appetite and the proper risk management practices internally to originate mortgages in the way that the agency is going to permit crypto to be utilized in the underwriting process?
They will, like anything else, be able to decide if they want to engage in that type of mortgage origination or not. They’ll have to consider what the competitive advantages and disadvantages are if they don’t get involved.
So the next step is to make sure that they have a full compliance regime, the right risk management practices, the right amount of policies and procedures, training for all of their personnel, and make sure their whole investor network is aligned with the origination of these types of mortgages.
Wolak: What about the hurdles for the GSEs when developing the framework to accept crypto?
Falcon: They have to make sure that it’s done in a very safe and sound manner. The last thing they want to do is to authorize something that creates unintended consequences.
It’s one thing to say crypto will be allowed in the underwriting process for getting a mortgage. It’s another thing to ask, well, what kind of crypto? There are many types of cryptocurrencies out there, besides just Bitcoin.
Does the crypto have to have a certain amount of market volume so it is very liquid? Does it have to be traded on an exchange so that it’s freely bought and sold and converted into cash, if need be? All these things have to get figured out to make sure it’s not the wild west, right?
Wolak: Based on your experience, what do you think it will take for Fannie and Freddie to safely and accurately integrate crypto into risk models as they move forward in this process?
Falcon: I think one good step would maybe to do this as a pilot program, rather than wide-scale permission to transact. It would make sense to start with just the pilot program, so the originators, some participants in the pilot program on the origination side, can do some transactions. They can figure out if there are any hidden risks that they didn’t anticipate or problems with the transaction itself.
Same thing for the regulator — they can assess the transaction and see how it went, and decide if risk management and internal controls were adequate.
Wolak: How are you perceiving the FHFA’s directive?
Falcon: I look at this as just part of the continual evolution of the mortgage market. You know, before, I mentioned eNotes. Who would have ever guessed we would have paperless mortgages? There were a lot of hurdles to get to this point where eNotes are now accepted by investors and by originators.
ITIN mortgages are now also very well accepted in the industry, and investors put money into them. Maybe crypto will end up being treated just like a form of currency.
So that’s certainly something that the underwriting process can handle and that investors can figure out. Are there any differences in those mortgages from any other kind of traditional mortgage? I think the industry’s very capable of figuring this out.