No money down loans are back…(psuedo-affluent borrowers only..)

[Coronita]

We’re baaaaaaack…

Only this time, it’s better… only for people with assets….

About fvcking time…

Beautiful tax implications as well. I hope it comes to a Charles Schwab, vanguard, and Fidelity soon….

I sort of thought this sort of arrangement makes would eventually come. It only makes sense, because I’m sure there would be a demand for this product.

http://www.marketwatch.com/story/no-money-down-home-loans-are-back-2013-02-01

Some affluent buyers are getting the keys to their new home without putting a penny down.

It’s 100% financing—the same strategy that pushed many homeowners into foreclosure during the housing bust. Banks say these loans are safer: They’re almost exclusively being offered to clients with sizable assets, and they often require two forms of collateral—the house and a portion of the client’s investment portfolio in lieu of a traditional cash down payment.

In most cases, borrowers end up with one loan and one monthly payment. Depending on the lender and the borrower, roughly 60% to 80% of the loan can be pegged to the home’s value while the remaining 20% to 40% can be secured by investments. On a $2 million primary residence, for instance, the borrower could get a $2 million loan, which would require a pledge of assets in an investment portfolio to cover what could have been, say, a $500,000 down payment. The pledged assets can remain fully invested, earning returns as normal, without disrupting the client’s investment goals.

While these affluent clients may be flush with cash, this strategy allows them to get into a home without tying up funds or making withdrawals from interest-earning accounts. And given the market’s gains combined with low borrowing rates in recent years, some banks say clients are pursuing 100% financing as an arbitrage play—where the return on their investments is bigger than the rate they pay on the loan, which can be as low as 2.5%. Some institutions offer only adjustable rates with these loans, which could become more expensive if rates rise. In most cases, the investment account must be held by the same institution that’s providing the loan. See: Home improvement gets a makeover

These loans also provide tax benefits. Since borrowers don’t have to liquidate their investment portfolios to get financing, they can avoid the capital-gains tax. And in some cases, they can still tap into the mortgage-interest deduction. (Borrowers can usually deduct interest payments on up to $1 million of mortgage debt.)

Basil Petrou, Federal Financial Analytics managing partner, on the Consumer Financial Protection Bureau’s new mortgage rules and how the feds control nearly every corner of the housing market. Photo: Associated Press

While these loans make up a small portion of banks’ overall lending, demand for them has been rising. BNY Mellon Wealth Management’s mortgage team says it experienced a 10% increase in requests for 100% jumbo-mortgage financing involving clients’ investment portfolios in 2012 compared with a year prior. BOK Financial, which offers up to 100% financing just to medical doctors through its private-banking divisions in eight states, including Arizona, Oklahoma and Texas, says there has been a roughly 25% increase (or about 100 more borrowers) in this lending from a year ago. Also, at Citi Private Bank, applications have been growing over the past two years. “Demand is two to three times what it normally is,” says Peter Ferrara, managing director of the private bank’s residential real estate.

Some banks are using this product to lure in clients, such as BOK Financial’s offer, which is available to new physicians. To provide the loan, the bank must first receive proof that the borrower has cash or investments, like stocks or mutual funds, that equal 10% of the borrowed amount. (The company says it doesn’t seek a pledge of those assets but just wants to know that borrowers can meet their obligations over time.)

What to consider before signing up:

Portfolio restrictions. The amount clients can borrow against investment accounts will depend on what the portfolio comprises. In most cases, they can get up to 95% if the account comprises cash, up to about 80% if it’s bonds, and between 50% and 75% with stocks. Withdrawing pledged funds is typically restricted while the loan is outstanding.

Relationship pricing. To get the lowest rate, clients who already have significant assets at a particular bank should consider applying for 100% financing there.

Underwriting standards. Borrowers will still need to pass regular underwriting requirements, including having a high credit score, a low amount of overall debt—including student debt—and providing documentation of substantial income or assets.

[Coronita]

Wow borrowing 50-80% of your portfolio, not having to cash out on your portfolio to pay for income/capital gains tax meanwhile, and still being able to deduct mortgage interest on the loan…..where do I sign up???

[spdrun]

*yawn* It’s basically a secured loan — they even existed during the tight-lending years of the 80s. Nothing horrible to see here. Same deal as getting a margin loan against an investment account, though likely with a slightly better rate.

[bearishgurl]

[quote=flu]Wow borrowing 50-80% of your portfolio, not having to cash out on your portfolio to pay for income/capital gains tax meanwhile, and still being able to deduct mortgage interest on the loan…..where do I sign up???[/quote]

I don’t think this makes too much sense for a “retired person” but it seems more palatable for a youngish professional just starting out or in mid-career.

Are these loans going to allow the purchase of investment properties?

flu, if any of the investment houses you do biz with offer similar programs and the answer is “yes” to the above question, why not inquire further on the exact terms, closing costs and loan limits, etc?

[livinincali]

It always amazes me that everybody thinks they can win the leverage arbitrage game. Don’t worry I’m going to borrow at 3% and make 7-8%. While some have proven to be successful at this, and usually cash in big with a book or a seminar, the math says that for every winner at this game they has to be a loser. In most cases there’s a couple big winners and a lot of losers wondering what went wrong.

[spdrun]

7-8% cap rate on renting out fork-lost properties in some parts of the country is actually LOW these days.

[Coronita]

[quote=spdrun]*yawn* It’s basically a secured loan — they even existed during the tight-lending years of the 80s. Nothing horrible to see here. Same deal as getting a margin loan against an investment account, though likely with a slightly better rate.[/quote]

Um.. Please let me know where you’re getting a margin loan rate of <5%, or are you talking out of your ass?

And no, there is nothing horrible about this. This is absolutely positive. It's exactly what i was hoping for...

It works out great for folks who have long term investment gains in post tax accounts who don't want to cash out get hit with one time lump sum tax bill on cap gains...Only to have the funds purchase say an property for investment, which then gets taxed on income too.

A little planning, and you can do a part loan and part cash out me thinks, and manage how much income/cap gains is realized and spread it out over longer period of time... and if rates on the loans are low enough, the interest on the loan would be neglible (or close to it)...

[The-Shoveler]

Hmmm I mean I wonder it they could call the loan if the portfolio assets price falls ?
In some respects this does look like a margin loan,

Seems complex maybe too complex.

[earlyretirement]

[quote=livinincali]It always amazes me that everybody thinks they can win the leverage arbitrage game. Don’t worry I’m going to borrow at 3% and make 7-8%. While some have proven to be successful at this, and usually cash in big with a book or a seminar, the math says that for every winner at this game they has to be a loser. In most cases there’s a couple big winners and a lot of losers wondering what went wrong.[/quote]

Funny. I just saw it online at a different link. I figured someone would have posted about it here at Piggington and I was right. I totally agree with you livinincali. It will be interesting to see the availability of these and if they become main mainstream amongst the affluent here in California.

http://research.tdameritrade.com/grid/public/markets/news/story.asp?docKey=1-SN20130201011400-5T0BM8NE5S4AENE68ID55LS7DE&category=PersonalFinance

Flu, do you know which institutions are offering this besides BOK Financial, Citi Private and BNY Mellon? The article makes it sound like several institutions are offering this product.

[earlyretirement]

[quote=The-Shoveler]Hmmm I mean I wonder it they could call the loan if the portfolio assets price falls ?
In some respects this does look like a margin loan,

Seems complex maybe too complex.[/quote]

And what happens if the value of the assets were to have a sudden fall? With a margin account you get a margin call but how would it work here?

[The-Shoveler]

[quote=earlyretirement][quote=The-Shoveler]Hmmm I mean I wonder it they could call the loan if the portfolio assets price falls ?
In some respects this does look like a margin loan,

Seems complex maybe too complex.[/quote]

And what happens if the value of the assets were to have a sudden fall? With a margin account you get a margin call but how would it work here?[/quote]

If they could not call the loan as long as you were making payments, then not too bad.

Other wise I see a trap (first impression anyway).

Sorry, Currently it is possible for banks to call the mortgage home loans in certain cases (basically, pay off the loan now or we foreclose), there is always fine print on these loans, ie.. must occupy home a certain amount of time etc…

[Coronita]

[quote=earlyretirement][quote=livinincali]It always amazes me that everybody thinks they can win the leverage arbitrage game. Don’t worry I’m going to borrow at 3% and make 7-8%. While some have proven to be successful at this, and usually cash in big with a book or a seminar, the math says that for every winner at this game they has to be a loser. In most cases there’s a couple big winners and a lot of losers wondering what went wrong.[/quote]

Funny. I just saw it online at a different link. I figured someone would have posted about it here at Piggington and I was right. I totally agree with you livinincali. It will be interesting to see the availability of these and if they become main mainstream amongst the affluent here in California.

http://research.tdameritrade.com/grid/public/markets/news/story.asp?docKey=1-SN20130201011400-5T0BM8NE5S4AENE68ID55LS7DE&category=PersonalFinance

Flu, do you know which institutions are offering this besides BOK Financial, Citi Private and BNY Mellon? The article makes it sound like several institutions are offering this product.[/quote]

I’ll find out, but I have a feeling it’s offered on higher levels… For example, I wouldn’t be surprised if Wells Fargo private bank has some deal like that..

It’s probably for folks with several million in assets who, even if it takes a hit, wouldn’t matter overall to the loan amount and who don’t want to cash out but rather borrow against it…In other words, probably a rich’s people’s game… Probably not for folks below a threshold (and that’s inclusive)…
Banks aren’t stupid…. And futhermore, doubt it’s done against IRA’s, since IRA’s have BK exclusions, if I recall.

[earlyretirement]

[quote=flu]

I’ll find out, but I have a feeling it’s offered on higher levels… For example, I wouldn’t be surprised if Wells Fargo private bank has some deal like that..

It’s probably for folks with several million in assets who, even if it takes a hit, wouldn’t matter overall to the loan amount and who don’t want to cash out but rather borrow against it…In other words, probably a rich’s people’s game… Probably not for folks below a threshold (and that’s inclusive)…
Banks aren’t stupid…. And futhermore, doubt it’s done against IRA’s, since IRA’s have BK exclusions, if I recall.[/quote]

Ah..yeah that makes sense if this is who it’s geared towards but that article didn’t make it sound like that.

I can see if someone has all cash there isn’t risk to the bank if the bank is preventing the account holder from tapping that cash. But I can see some scenarios of someone that is pledging 75% stock portfolios having some problems depending on what their portfolio is made up of.

I think this go around, banks and financial institutions will limit their downside exposure but I can see some scenarios where it might not end up too well for the borrower.

Absolutely if you have responsible people that use it the right way it can make sense. But anytime you allow 100% leverage for “arbitrage” reasons, investors can easily find ways to screw themselves.

Still it’s interesting they are coming out with products like these. As if the market wasn’t getting tough enough with inventory issues with hedge funds and funds snapping up properties.

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