Its
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 clients 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 homes 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 clients 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 markets 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.
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. While
these loans make up a small portion of banks overall lending, demand
for them has been rising. BNY Mellon Wealth Managements 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 banks residential real
estate.
Some
banks are using this product to lure in clients, such as BOK Financials
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.
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 its bonds, and between
50% and 75% with stocks.
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 and
documentation of substantial income/assets. Source: Marketwatch
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