Brokerage firms are offering up to 100 percent loan-to-value ratio mortgages or pledged-asset mortgages to clients who do not have enough cash to make a down payment on a home. Instead of making a down payment, customers are required to pledge their stocks, bonds, mutual funds, and other securities. Though brokerage firm websites and brochures often tout the advantages of 100 percent mortgages, such as allowing the investor to avoid private mortgage insurance or liquidating their securities, investors may overlook and consign to the fine print without understanding the risks associated with these mortgages. Investors must realize that pledged-asset mortgages, or 100 percent mortgages, are not suitable for everyone. In order to determine whether 100 percent mortgages are suitable, an investor must start by evaluating their risks.
The classic 100 percent mortgage requires little or no cash down payment. Instead, the investor pledges securities in his or her brokerage account, allowing the investor to finance up to 100 percent of the value of the house. The amount of securities required in the pledge will depend on the type of securities proposed in the pledge and the terms of the mortgage. The amount pledged usually exceeds the amount required, which allows for some fluctuation in the value of the securities. However, if the value of the securities pledged goes down below a minimum amount set by the firm, the firm may issue a collateral call, which is a demand that the investor deposit additional cash or securities. If the investor cannot meet the demand or the value of the securities continue to decline, the firm may sell some or all of the securities, sometimes without notification.
100 percent mortgages also bear certain costs. Since the investor is borrowing more money with a 100 percent mortgage, he or she is probably paying more interest than if a cash payment would have been made. This may be economical if the investor's portfolio is able to make returns on investments that are greater than the mortgage payments. Furthermore, if the investor chooses an adjustable-rate 100 percent mortgage and interest rates rise, the returns in the investor's portfolio may not keep up with the rising mortgage payments, particularly if the investor is holding bonds or other fixed income instruments - fixed income principal values decline when interest rates rise. With an adjustable-rate mortgage, the securities markets decline at the same time that interest rates rise, the investor may be stuck with both larger mortgage payments and thousands in markets losses.
Investors considering a 100 percent mortgage must consider the risks associated with them before making a decision. Investors are encouraged to keep in mind the following:
-Even after obtaining a mortgage loan, an investor may be required to deposit more cash or securities if the value of the securities pledged falls below the minimum required by the firm.
-The firm can force the sale of pledged securities to meet a collateral call. The case will remain in the account until the mortgage is paid or refinanced, the firm is instructed to use the funds to pay down the mortgage, the equity in the home reaches a certain level, or the cash is applied to the outstanding mortgage balance upon default.
-The firm can sell the securities without contacting the investor. Most firms will attempt to contact the investor prior to the sale, but they are not required to do so. Even if the investor is contacted and given a specific date to meet a collateral call, the firm may decide to proceed with selling the securities before the date.
-Investors are not entitled to choose which securities are sold. The firm may decide to sell any of the securities that are held as collateral for the mortgage.
-Investors are not entitled to an extension of time on a collateral call. While an extension may be available to an investor to meet a collateral call under certain conditions, there is no right to an extension.
-If the investor defaults on the mortgage, he or she could lose both the home and the securities pledged. Some states allow firms to sell the securities immediately, while others only allow for liquidation after the home is sold for a loss at a public sale.
Have you suffered losses in your portfolio due to a pledged-asset mortgage? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at firstname.lastname@example.org for answers to any of your questions about this blog post and/or any related matter.