Nashville, Tennessee-headquartered Defy Mortgage is the latest player to join the non-QM (non-qualified mortgage) lending space, which targets entrepreneurs and gig workers who have various forms of collateral, including cryptocurrency.

The company takes a “holistic approach” to evaluating a homebuyer’s entire asset portfolio, including cryptocurrency and bitcoin, Defy Mortgage said Tuesday in an announcement about the launch.

“Defy Mortgage understands and incorporates the entirety of a borrower’s financial profile,” Todd Orlando, co-founder and CEO of Defy Mortgage, said in an emailed response to questions about the risk of taking cryptocurrency into evaluating a borrower’s qualification.

“From a liquidity standpoint, Defy Mortgage is comfortable with assets that are inclusive of cryptocurrency and allow the borrower to use those assets within the approval process. What sets Defy Mortgage apart is our ability to consider everything that the borrower brings to the transaction,” Orlando said.

Defy Mortgage is able to use the crypto, which is held by the borrower and remains in their custody, as a means to help them qualify for mortgages, according to the firm. “We are able to count it as liquidity from a reserve requirement and for asset depletion.” 

During the life of the mortgage, the borrower keeps the mortgage payments current, as with traditional lending and may choose to liquidate their personal portfolios as needed to fund their monthly operational costs.

A handful of companies began offering crypto-backed mortgage products earlier last year after cryptocurrency emerged as a popular asset class. The biggest advantage of a crypto mortgage is the opportunity to use the cryptocurrency as collateral on the mortgage without having to sell. 

Due to the volatility of cryptocurrency, some lenders require the borrower to add to their collateral if the value of bitcoin drops significantly, which is known as a margin call. 

The early entrants into the market — including Milo and Figure Technologies —  made loans equal to 100% of the borrower’s cryptocurrency value with no down payment required.

Milo, which offered mortgages of up to $5 million, launched a crypto-refi product in September 2022 and reportedly closed $10 million in cryptocurrency mortgages in July of last year. 

Figure Technologies, founded in 2018 by Mike Cagney, planned to merge with a mortgage bank to bring blockchain tech to the financial institution through a blank check company, Figure Acquisition Corp. I. However, that plan was scrapped after the blank check company got delisted from the New York Stock Exchange in December 2022 citing “the state of the capital markets.”

In case of delinquency, borrowers with Defy Mortgage have the option to liquidate their alternative assets as necessary to keep their home current, the lender said.

“Defy’s ultimate recourse in default is to the collateral itself, not to the individual’s alternative investments, as is the case with other mortgage lenders,” the lender stated.

Licensed in five states — Colorado, Florida, Oregon, Tennessee and Texas — the lender has two sponsored LOs and offers conforming, FHA, jumbo, construction loans, Home Equity Line of Credit (HELOC), and cash-out refis in addition to non-QMs.

Lenders struggled to sell in the secondary market after the rapid rise in mortgage rates made it difficult for lenders offering non-QM loans that are not eligible for purchase by Fannie and Freddie Mac. 

Investors seeking higher yields caused liquidity problems, forcing non-QM lenders First Guaranty Mortgage Corp. and Sprout Mortgage to shut their businesses and Impac Mortgage Holdings to withdraw from offering non-QM products in 2022. 

With more stability in rates in recent months, borrowers who don’t qualify for conventional loans continue to seek non-QM loans. 

Defy Mortgage aims to rake in $100 million in loan production this year and has plans to hire sales consultants who advise and move the borrowers through the entire lending process, Orlando said.

“The way our model runs is primarily through inbound leads as a result of marketing and sales efforts,” the CEO said, explaining why sales consultants are a priority compared to LOs at Defy Mortgage. 

“The effective use of technology allows us to accomplish this. It allows us to directly target, work with and stay focused on the customer experience for our borrowers,” Orlando said.