Collateral Mortgage / 100% Financing: What am I Missing?

[michaelanthony]

Hi all,

So someone posted this link from BoA in another thread, and it intrigued me as I had never heard of this option before -- http://www.merrillhomeloans.com/mlhl/pages/100-percent-financing.aspx

It's a mortgage product, and the gist of it is this: instead of having to pay the traditional 20% down in cash, they allow you to use a BoA brokerage account as "collateral" against the loan. The only catch is that your account value must = 39% of the home's value at closing.

So, for example, on a $500,000 home: instead of having to come up with $100,000 cash for the down payment, you would need an account balance of $195,000. Then, once you close on the home, your account value threshold drops a bit to 33%, so it must always maintain a value of $165,000 (using our example).

Other than having to come up with the 39% amount initially, can anyone think of any drawbacks on this option?

Of course, your account value is subject to the whims of the market, and if the market goes south, you need to add additional funds to keep it above the maintenance amount ($165k). But if I were do go this route, I would probably keep the collateral value untouched ($195k), and add additional capital to the account each month anyway, as a type of safety margin.

The biggest benefit I see to using this mortgage option is that you get to keep your money invested in the market. I'm 33 and have rented my whole life, and the biggest drawback to me of purchasing a home was cashing out your investments to come up with the down payment; this seems like a way to get around that opportunity cost. If we take that original $195k, keep it invested in the market, and don't add another dollar to it, at 7% annual growth over 15 years it grows to about $538,000. After 25 years, we're at over $1 million.

Question: from the link above, toward the bottom of that page, they note that this is an "interest-only" mortgage. My understanding of that is that for the first couple/several (?) years, you pay only the interest portion of the payment; then, the principal kicks in on top. Is there any advantage/disadvantage to a payment plan like that? (Again, I've never had a mortgage).

Any feedback on any experience/thoughts re: this mortgage product would be great!

[skunkfunk]

39% down, interest only, keep your money invested? What's the interest rate? If that's under 4% it sounds like a great deal. A bit risky for my liking (I would prefer to get rid of my mortgage payment, personally) but it does sound like your thing there is probably the "best" way to go that I've heard. Can it be used for investment property?

[michaelanthony]

On their page, it says: "There are no additional fees or higher rates to use 100% financing." So it would seem to me your rate is what you would personally be able to get with a traditional mortgage. For me, yes, it would be under 4%.

Good question re the investment property; I don't see anything on the site about that.

[SeniorLibertarian]

Hi all,

So someone posted this link from BoA in another thread, and it intrigued me as I had never heard of this option before -- http://www.merrillhomeloans.com/mlhl/pages/100-percent-financing.aspx

It's a mortgage product, and the gist of it is this: instead of having to pay the traditional 20% down in cash, they allow you to use a BoA brokerage account as "collateral" against the loan. The only catch is that your account value must = 39% of the home's value at closing.

So, for example, on a $500,000 home: instead of having to come up with $100,000 cash for the down payment, you would need an account balance of $195,000. Then, once you close on the home, your account value threshold drops a bit to 33%, so it must always maintain a value of $165,000 (using our example).

Other than having to come up with the 39% amount initially, can anyone think of any drawbacks on this option?

Of course, your account value is subject to the whims of the market, and if the market goes south, you need to add additional funds to keep it above the maintenance amount ($165k). But if I were do go this route, I would probably keep the collateral value untouched ($195k), and add additional capital to the account each month anyway, as a type of safety margin.

The biggest benefit I see to using this mortgage option is that you get to keep your money invested in the market. I'm 33 and have rented my whole life, and the biggest drawback to me of purchasing a home was cashing out your investments to come up with the down payment; this seems like a way to get around that opportunity cost. If we take that original $195k, keep it invested in the market, and don't add another dollar to it, at 7% annual growth over 15 years it grows to about $538,000. After 25 years, we're at over $1 million.

Question: from the link above, toward the bottom of that page, they note that this is an "interest-only" mortgage. My understanding of that is that for the first couple/several (?) years, you pay only the interest portion of the payment; then, the principal kicks in on top. Is there any advantage/disadvantage to a payment plan like that? (Again, I've never had a mortgage).

Any feedback on any experience/thoughts re: this mortgage product would be great!

I don't know but I would proceed with caution.

Three rules of thumb apply here:

(1) If a financial product sounds too good to be true, it is.
(2) If a financial product is new, untested, novel or not 100% understandable, don't do it.
(3) Banks are in the business of making money.

To me, this is akin to buying stocks on margin. Plus, you are tying up your brokerage account, converting it (conveniently, from the bank's point of view) into collateral. And you are turning unrelated risks (the stock and real estate markets) into related risks.

[Tyler]

Quickly browsing the fine print, there are definitely a few gotchas.

1) you can't remove the brokerage money (below a certain amount, at least) while you have the mortgage. It's essentially off limits.
2) you can only invest in "eligible securities" that they don't list. I'd wager the options have high fees, and there's no guarantee they will make for good investments.
3) most notably, if the value of the investments ever falls below 10% above the original guaranty amount (like in a stock crash) they can liquidate your account with no warning. Since the same bank also owns your mortgage who knows what kind of recourse they may have to take your house as well.
4) as a result of 3, you actually need to deposit a minimum of 30% more than the down payment you want to avoid. Note that in their example, rather than simply putting $100k down on a $500k house, the family puts $195k in an approved investment account.

I personally wouldn't go near this. If I ever considered it, I'd want a lawyer to read the fine print.

[AH013]

Quickly browsing the fine print, there are definitely a few gotchas.

1) you can't remove the brokerage money (below a certain amount, at least) while you have the mortgage. It's essentially off limits.
2) you can only invest in "eligible securities" that they don't list. I'd wager the options have high fees, and there's no guarantee they will make for good investments.
3) most notably, if the value of the investments ever falls below 10% above the original guaranty amount (like in a stock crash) they can liquidate your account with no warning. Since the same bank also owns your mortgage who knows what kind of recourse they may have to take your house as well.
4) as a result of 3, you actually need to deposit a minimum of 30% more than the down payment you want to avoid. Note that in their example, rather than simply putting $100k down on a $500k house, the family puts $195k in an approved investment account.

I personally wouldn't go near this. If I ever considered it, I'd want a lawyer to read the fine print.

For #2, with my experience in brokerage I take this more to mean it has to be some liquid security covered by Regulation T, like shares of stock of a company in the Russell 3000, or some sort of government bond, not that the security has to be some BoA hawked proprietary junk.
http://www.investopedia.com/terms/r/regulationt.asp

Definitely sounds like BoA is making 2 transactions behind the scenes to combine into this product: 1) a standard mortgage with 20% down, 2) a standard margin lending arrangement to provide you the cash for the 20% down using collateral from your brokerage.  They can then present this to you the borrowed as a "0% down no PMI mortgage when you link your brokerage account" product.

FYI -- You can effectively create the same setup yourself if you'd like, probably for less money.  For example Interactive Brokers has margin rates below 2%.  Say you want a $250k home -- you could effectively have a conforming 20% down mortgage with BoA for say $200k @ 4%, and take a $50k 20% margin loan on your account with IB for say 2%, and effectively put no net money down while having 1 $200k loan at 4% and another $50k loan at 2% for a total $250k loan @ 3.6%.  I wouldn't do this, but it at least mitigates the risk of having assets and liabilities with the same institution (a general no-no in terms of creditor protection).

[Another Reader]

In theory you could do this. but the bank won't be interested.  The bank, or rather the broker arm of the bank, is looking at getting the securities in a margin/collateral call.  Also the house if the cash from the fire sale is insufficient or if you can't make the underlying mortgage payments.  This scheme was used extensively in the go-go days of the internet bubble.  They were even doing investment properties back then.  Plenty of folks lost their securities and their properties when the bubble burst.

This scheme relies on the borrower's overconfidence in the market and lack of understanding of the risk.  If all goes well, the bank collects interest.  If/when the SHTF, the bank gets the collateral.  Good margin traders unwind their positions and pay off the loans when the market starts to look dicey.  What are you going to do?  Mortgage loans last for decades.  Margin trades do not.

[gimp]

Very interesting...

AR, what if the borrower were to continue investing into the brokerage fund? That would means a much higher drop is needed to force a margin call, and as investments continue, it would get to the point where shit's so fucked anyways it might not matter overmuch. What do you think?

[chasesfish]

Here's the opinion from the Banker on the board...

Banks have been doing this for years, there's nothing new at all to the product.  It just became less popular when the feds were allowing an 80-10-10 or an 80-20 with the second loan secured by a junior lien. 

You borrow 50% against your securities portfolio and 80% against the house.   Your securities are subject to a margin call, so you want the piece against your portfolio to amortize down while you add to your securities portfolio.

There's nothing "too good to be true" about this, other than instead of having to come up with 20% you have to come up with 40%.  I didn't read the terms, but hopefully the bank is willing to give a nice rate on the secured 2nd.