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Two-and-a-half years of falling stock prices have not killed a type of home loan called a pledged-asset mortgage. The loans were more popular during the bull market, but they're still around. Pledged-asset mortgages allow borrowers to buy homes with little or no down payment while retaining the benefits of making substantial down payments. The main benefits of making hefty down payments are lower interest rates and not having to pay for mortgage insurance. The
market for pledged-asset mortgages consists almost
exclusively of wealthy
people buying expensive houses. Although these loans
aren't for regular folks,
they offer a hint of the financial options that rich people enjoy. "We
don't do that many pledged-asset mortgages, but we
do offer them because
it has a lot of attraction and a lot of appeal," says
Larry Goldstone,
president and CEO of Thornburg Mortgage, based in Santa
Fe, N.M. "We make
it possible for them to continue to be invested in
the market for the long term
and still be able to finance a home in the long term." A
pledged-asset mortgage works like this: Instead of
selling stocks to rustle
up cash for a down payment, the borrower "pledges"
investments to
the lender. The pledged assets -- stocks, bonds, even
certificates of deposit
-- sit in an account maintained by the lender. The
assets serve in lieu of a
down payment. "They're
free to manage the account -- they can buy and sell
stocks, buy
and sell bonds, cash -- inside the account," Goldstone
says. But the borrower
can't withdraw cash or securities without permission. Let's
say you're buying a $1 million house. You have found
a lender that will
give you a loan at an excellent rate and with no private
mortgage insurance
if you make a 30 percent down payment. You don't have
$300,000 in cash lying
around, but you have millions of dollars worth of investments.
You don't want
to sell them, though, for two reasons. First, you don't
want to pay capital
gains taxes (or take losses) on the investments. Second,
you believe their value
will grow faster than the value of the house. So
you borrow the full $1 million and place a portion
of your investment portfolio
into what amounts to a brokerage account maintained
by the lender. You get the
low mortgage rate and freedom from mortgage insurance
while avoiding capital
gains taxes. Meanwhile the value of the portfolio rises -- you hope. Because
investment values rise and fall, your pledged-asset
account includes
a cushion. National City's private banking group, for
example, requires the
securities to have an initial value of 130 percent
of the pledged amount. So,
in the above example, you would deposit investments
worth $390,000. The lender
reviews the portfolio's value weekly, and if it drops
to 110 percent of the
pledged amount -- $330,000 in this example -- the borrower
has to add enough
to the account to meet the 110 percent threshold. It's like a margin call. "This
is what we've seen in the last month or so," Goldstone
says.
"Every single borrower met their margin requirements
without any concern
or complaint at all." Financial
advisers say pledged-asset mortgages work best when
stock prices
are rising and home values are relatively stable. For
the past two-and-a-half
years, the opposite has happened: Stocks fell and house values zoomed higher. But
probably no borrowers have lost homes because the value
of their pledged
assets dropped. Anthony Hsieh, founder of Home Loan
Center, an online lender,
says lenders haven't been too worried because "the
value of the homes has
skyrocketed." "I
have not heard of any particular institutions getting
real nervous
about stocks going down, and my thinking is that they
have so much equity in
that home now," he says. Hsieh
hasn't heard of anyone underwriting a pledged-asset
mortgage in about
four years. The long bear market and the increasing
popularity of low-down-payment
mortgages have pushed pledged-asset mortgages into obscurity, he believes. But,
as Goldstone notes, they still exist. Thornburg Mortgage
has underwritten
15 or 20 of them, he says, and has bought others. Financially
sophisticated
borrowers will continue to use them, he believes. "Some
people want to own stocks over the long term," he says,
"and
we make it possible for them to hold stocks and invest
in a house. And if stocks
go down, they go down. If they go up, they go up. This
is a tool to help them
better achieve their financial objectives." |