Can Alternative Forms of Collateral Influence Mortgage Costs?

Mortgage rates remain elevated by historical standards, and economists continue to debate the factors influencing long-term borrowing costs. Some analysts argue that inflation expectations and risk premiums play a significant role in determining mortgage rates.

Buying a home in the U.S.A. has rarely felt this far out of reach.

Home prices sit near record highs. Mortgage rates have hovered around roughly 6 to 7% for the better part of three years. Affordability, measured by the share of income a typical family needs to cover a typical mortgage, is near its worst level in roughly four decades.

Recent housing-market data indicate that the median age of first-time homebuyers has increased significantly in recent years, reflecting affordability challenges in many markets.

Everyone wants the same thing: lower rates. 

Some commentators believe that existing affordability strategies may not fully address all of the factors influencing mortgage rates.

The equation behind your mortgage

Strip a mortgage rate down, and it comes from a simple formula.

Mortgage rate = a base “risk-free” rate + a risk premium.

The base rate tracks what the market charges the U.S. government to borrow, anchored to the 10-year Treasury yield. The risk premium on top of the base rate is everything lenders tack on to cover the chances that they do not get paid back, plus the risk that the inflation rate eats the purchasing power value of the dollars they are repaid in over the next 30 years.

Critics argue that certain policy approaches may produce mixed results, depending on broader economic conditions.

Some market observers contend that concerns about future inflation contribute to higher long-term borrowing costs. Investors look at the debt load, the deficits, and decades of monetary expansion, and they demand a higher yield to lend for 30 years. That expectation is baked into the curve. A central bank can cut short-term rates, but it cannot easily talk the bond market out of its inflation worry. Some analysts caution that aggressive interventions can sometimes create unintended market signals.

Mortgage lending involves long repayment periods and exposure to various risks, factors that lenders may consider when pricing loans.

Add it all up and you get rates that resist coming down, no matter how badly buyers need them to decrease.

Why the popular fixes miss

Most proposed solutions push on the rate directly.

Have the central bank cut the rate. Have the federal mortgage giants buy hundreds of billions in mortgages to force yields lower. Both are injecting money to nudge the number down.

Critics of certain housing-affordability measures argue that some interventions may have unintended effects on inflation or borrowing costs, though economists continue to debate these relationships. You can shave the rate for a quarter or two, but you feed the very expectation that keeps rates high in the first place, and you push home prices up at the same time. Lower the rate, raise the price, and the buyer ends up no better off.

You cannot solve an inflation problem by adding more inflation.

The lever that may go unrecognized

Look back at the equation. Some analysts suggest that mortgage costs can be influenced through a variety of approaches, including changes to lending risk, monetary conditions, and market demand.

Push the base rate down, which requires fighting the entire bond market and the inflation it expects. Very difficult, and mostly out of any one marketplace participant’s control.

Or shrink the risk premium. Make the loan genuinely less risky for the lender, and the lender can charge less without anyone printing a dollar.

This is the concept Peoples Reserve, a bitcoin-native finance company, and TruFi, its affiliated real estate fund, are focusing on. 

The idea rests on one property of bitcoin, and tokenized gold, that even its skeptics concede: money on the blockchain is extraordinarily liquid and easy to verify. It trades 24 hours a day, every day, settles in minutes, and can be priced and sold instantly anywhere in the world. Compared to a house, which can take months to sell and is difficult to properly value, proponents argue that tokenized assets such as gold or bitcoin may offer characteristics that could appeal to some lenders, although views on their suitability vary widely.

Supporters of this approach argue that additional collateral may reduce certain lending risks, though the effectiveness of such strategies depends on market conditions and other factors. A smaller downside means a smaller risk premium. A smaller risk premium means a lower rate. The math moves without touching the money supply and poking inflation expectations.

Some companies are exploring models that incorporate additional asset-backed collateral alongside traditional mortgage underwriting. Supporters suggest these approaches could offer alternative financing structures, while critics note that long-term performance and adoption remain uncertain.

What’s the risk?

The obvious worry for borrowers is bitcoin's volatility. 

TruFi’s broader argument is that a financing structure using both the property and an additional liquid asset as collateral could reduce certain lender risks without relying on margin-style borrowing. In that kind of structure, a decline in the value of the additional collateral would not necessarily trigger an automatic margin call or forced sale, though the exact risk allocation would depend on the terms of the agreement. If the bitcoin collateral were to lose all its value, the borrower simply continues to make their mortgage payments as usual, the lender absorbs that risk, not the homeowner.

None of this depends on a government program or a central bank decision. The risk is lowered at the source, so the rate can follow. Risk is the variable that needs to be addressed because that’s what is supposed to make mortgages investable in the first place. 

Can this approach tackle affordability?

It does not make the house itself less expensive. It only changes how the cost is financed.

What it can do is attack the part of the affordability problem that policymakers keep failing to fix: the cost of the loan itself, without adding fuel to inflation, by addressing risk.

Different organizations and policymakers have proposed a range of strategies for addressing affordability and lending costs, with varying views regarding their effectiveness.

Supporters and critics continue to debate which approaches are most likely to improve housing affordability over the long term.

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