Rehypothecation means Better Mortgage has the right to use the bitcoin provided by borrowers as collateral for new home loans on the Coinbase platform. However, clients cannot reclaim their collateral until the regular mortgage is paid off or refinanced.
The companies launched the product last week. Better stated that since opening access to the general public, the volume of requested loans through preliminary applications has reached $360 million — more than the $260 million intended by participants on the preliminary waitlist.
When closing the deal, the borrower receives two loans. The first is a standard mortgage, compliant with Fannie Mae requirements and secured by the home. The second loan covers the down payment and is secured by the borrower's bitcoin, as well as a second lien on the same property.
Bitcoin-backed loans are issued at a collateral-to-loan ratio of 250%: the borrower must provide $2.50 in $BTC for every dollar borrowed for the down payment. For example, a buyer of a $500,000 home can provide bitcoin worth $250,000 to cover a $100,000 down payment.
Both loans are issued by Better, and payments are combined into a single monthly payment. At closing, the bitcoin is transferred from the borrower's Coinbase account to Better's custody account in Coinbase Prime.
Better clarified that it may rehypothecate the pledged bitcoin — provided it maintains an equivalent amount of cryptocurrency for subsequent return to the borrower.
Coinbase acts solely as a custodian of assets and a technology provider, does not participate in lending, and does not make decisions on collateral liquidation, the companies stated.
Bitcoin does not help the borrower get approved for the first mortgage. Applicants must meet standard Fannie Mae requirements for income, credit score, and debt-to-income ratio — regardless of cryptocurrency holdings.
"The product does not convert crypto assets into qualifying income and does not waive debt-to-income or credit score requirements," Better stated in written responses. "The bitcoin-backed loan only solves the problem of making a cash down payment."
How Bitcoin Rehypothecation Works
"Better can rehypothecate the pledged bitcoin provided it maintains an equivalent amount of cryptocurrency to return the collateral after the loan is repaid," the company stated.
Rehypothecation allows the use of the provided collateral in another transaction instead of leaving it idle in custody.
In practice, the borrower is promised the return of an equivalent amount of bitcoin after the loan concludes, but it is not guaranteed that the same coins will remain untouched throughout the entire term. Thus, the borrower depends on Better's ability to preserve and return the bitcoin and is exposed to the risk of fluctuations in the value of both the cryptocurrency and the property.
This turns the borrower's bitcoin more into a promissory note: Better can use the collateral for other purposes, promising to return an equivalent amount later. This contradicts the trend in the crypto industry post-FTX collapse — the push for verifiable reserves — and makes borrowers dependent on the intermediary's ability to return the bitcoin, potentially decades later.
The company stated that agreements with borrowers and custody terms comply with applicable laws, including insolvency regulations. However, it did not clarify whether each borrower's bitcoin is individually identified, who gains ownership after rehypothecation, or whether the borrower retains property rights or becomes a creditor in the event of bankruptcy of Better or one of its financial partners.
Borrowers also cannot simply repay the second loan to get their bitcoin back early. Better states that the collateral remains locked until the standard mortgage is fully paid off or refinanced — even though the bitcoin and the second lien secure a separate down payment loan.
This condition could result in the bitcoin remaining as collateral for the entire term of a 15- or 30-year mortgage, unless the borrower refinances the loan or sells the home. Better's public page indicates that if the home is sold, the down payment loan must be repaid before the bitcoin is returned.
Absence of Margin Requirements
Unlike a typical crypto-backed loan, a drop in bitcoin's price does not trigger a margin call, require additional collateral, or initiate an automatic sale.
Even if the bitcoin's value falls below the loan's down payment amount, liquidation only occurs after a payment default, the company stated.
Missing the combined payment triggers a delinquency process. Better stated it may liquidate the pledged bitcoin 60 days after notifying the borrower but will sell only as much as necessary to settle the debt and bring the account current.
Foreclosure on the home may begin after 180 days of delinquency according to Fannie Mae rules. Better stated it must first liquidate the bitcoin, but "standard collection measures" may be applied if the collateral sale does not cover the entire debt.
If the home is sold through foreclosure, proceeds first go to pay off the standard mortgage, then the crypto-collateralized down payment loan. Any remaining amount is given to the borrower.
Currently, only bitcoin is accepted. The initial announcement by the companies in March also mentioned USDC, but Coinbase stated the partners decided to launch the product only with $BTC while evaluating other collateral options.
Coinbase One members approved for this product may receive a loan from the lender to cover closing costs — up to 1% of the mortgage amount, but not exceeding $10,000.
The companies stated that 35.9% of current applicants hold over $500,000 in cryptocurrency, and 38% plan to make a purchase within the next three months.
