According to a research report from the Office of Financial Research (OFR), an increasing number of low-income households are using gains from cryptocurrency investments to apply for new home mortgages or to apply for higher loan amounts.
Researchers Samuel Hughes, Francisco Ilabaca, Jacob Lockwood, and Kevin Zhao wrote in a report published on November 26 that among low-income households, "the sale of cryptocurrencies may support obtaining larger mortgage amounts through larger down payments." They added, "The increase in borrowing among low-income households in areas with high cryptocurrency exposure is particularly significant."
A new OFR Brief examines the relationship between crypto exposure and the increase in household debt since the COVID-19 pandemic. https://t.co/0h1aCfqhFh
— Office of Financial Research (OFR) (@OFRgov) November 26, 2024
The report indicated that the proportion of low-income households with mortgages in areas with high cryptocurrency exposure increased by over 250%, with the average mortgage balance rising from approximately $172,000 in 2020 to about $443,000 in 2024, an increase of 150%.
Researchers wrote: "In the postal areas with the highest measurement of cryptocurrency exposure in 2021, the issuance and balances of mortgages and auto loans saw the largest increases in subsequent years."
Mortgage ownership rates, mortgage balances, and mortgage delinquency rates among low-income groups from January 2020 to January 2024, Source: Office of Financial Research (OFR), U.S. Department of the Treasury
Additionally, the reported mortgage debt-to-income ratio of low-income households in areas with high cryptocurrency exposure is significantly higher than the recommended levels, highlighting potential vulnerabilities in terms of financial instability. Researchers noted: "High cryptocurrency exposure may be associated with behaviors that could lead to financial instability."
However, the delinquency rates for loans in these areas remain low, indicating that immediate financial distress has not yet emerged. But researchers pointed out that if economic conditions worsen, high leverage could pose future risks.
Researchers concluded that while there is little evidence suggesting that households with cryptocurrency exposure are currently facing distress, the report's findings indicate a correlation between consumers' debt and spending and their exposure to cryptocurrency. A key area of focus for the future is the "increased debt balance and leverage levels among low-income households with cryptocurrency exposure."
The report stated: "If the plight of this group worsens, especially when the exposure of systemically important institutions to these highly leveraged, high-risk consumers is highly concentrated, it could trigger future financial stress."
According to data from the Federal Reserve Bank of New York, the increase in debts from mortgages, auto loans, credit cards, and student loans has driven the overall U.S. household debt to a record $17.9 trillion in the third quarter.
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