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Submitted by Stripes on April 17, 2017 - 10:02am

Any guesses on how common securities-based loans and lines of credit are in high end housing in San Diego? It sounds like they are nothing new, but increasing in popularity. I could not find anything by searching these terms, but if already discussed, please send me the link!

From Kevin Dugan of the New York Post today:

Financial insiders are getting increasingly worried over the popularity of securities-based loans, or SBLs — a risky form of debt marketed to wealthy investors who typically use it to buy big assets like houses.

The loans, which are taken against pools of stocks and bonds, offer borrowers cheap money fast without having to sell their underlying securities — an attractive option when the Dow is rising.

But if markets crash, brokers can unload their clients’ holdings at fire-sale prices — and go after the house to cover the the vig.

Submitted by spdrun on April 17, 2017 - 10:10am.

Isn't that just a secured margin loan by another name?

Submitted by Stripes on April 17, 2017 - 10:31am.

I think so?

Here is the argument for why it is more than just the same old, according to Josh Brown of Reformed Broker via Fortune (this is from 2014):

"I would point out the striking similarities between the current spate of leveraging assets with the type of behavior that led to the most recent financial crisis. Consider:

-Once again, the biggest banks on Wall Street are acting as the fulcrum for this leverage, connecting debt funding with investors of dubious levels of sophistication (anyone who believes that wealthy people are automatically savvy hasn’t spent much time around them).

-Once again, a seemingly unencumbered source of instant cash (read: free money) has been streamlined, productized, turned into a conveyor belt-esque enterprise, and marketed to a mass audience. Morgan Stanley’s version is actually called Express CreditLine.

-Once again, super-cheap financing based on an asset whose value can fluctuate wildly (a stock and bond portfolio in this case) is being used for the purchase of assets that can be significantly less liquid, like real estate, fine art, or business expansion.

-Once again, investors are being goaded into a seemingly consequence-free transaction in which they’re being counseled to seek instant gratification."

Submitted by ucodegen on April 17, 2017 - 3:50pm.

I think the max you can margin is to about 50% of current stock assets. I suspect that is also the case with these loans. You can only use 50% of current asset value for the loan to buy the house. Because they are secured with assets in excess of the loan, they are much more secure than a mortgage. The prices on the underlying asset would have to drop more than 50% for the lender to get hurt. Provided that the investor is not concentrated too much on one specific asset and didn't go for the max 50%, it is a very safe way for the lender to handle the mortgage.

I noticed the article stated borrowing between 50% to 95% of equity value. I don't think that is the case. I would need to double check. Margin requirements are max at 50%. I don't see how bonds would increase the %. A Bond's redeem value can go down - only if held to the end is the final value guaranteed.

I know that this has been around since the 1960's.

NOTE: I think this article might be trying to stir up something that is a non-issue. See the following quote:

Defenders of the securities-based lending boom point out that wealthy people have always borrowed against their assets and that ultra-low rates make such offerings a logical option, especially compared to second-lien mortgages or credit card debt. And this is true. The bigger question revolves around whether a true financial advisor (read: a fiduciary) would really be recommending that their clients put retirement assets up as collateral for increased consumption in the first place. Can you really be giving quality advice while tacitly facilitating the purchase of luxury goods or other forms of consumption using additional debt?

Who said they were putting up their retirement accounts? I know that in my case, most of the people in this category will have significant assets in the non-IRA accounts. In the '60s, they didn't have IRAs.

Submitted by Stripes on April 17, 2017 - 4:04pm.

This is from an SEC investor alert:

Typical advance rates range from 50-65 percent for equities, 65-80 percent for corporate bonds and 95 percent for U.S. Treasuries. For example, if your account contains a mix of equity securities and mutual fund shares with a total market value of $500,000, you could be eligible to borrow from $250,000 to $325,000 for an SBLOC.

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