A pledged asset mortgage is nothing more than a non-purpose securities-backed loan or credit line used to facilitate a real estate transaction. The securities asset can be used as the collateral alone, or in combination with the real property. When used in combination, we call it "pledged asset combo" or "asset integrated" financing.
There are several reasons one might consider a stock or securities loan for real estate purposes. With the recent changes in the real estate lending environment, many otherwise excellent, even high net worth borrowers, are being turned down by traditional lenders due to lack of appropriate income documentation, high debt ratios, lower credit scores or they simply might not have enough equity in the property. The recent mortgage crisis has caused mortgage lenders to respond by eliminating stated income and no doc products, by decreasing loan to values and by imposing stricter credit score requirements. At least for the time being, the days of stated income mortgages, no doc loans and 100% real estate financing are gone.
If you have a stock or securities portfolio, though, you are fortunate in that you might still be able get the funds you need by using that portfolio as collateral to obtain a low interest, institutional line of credit. Institutional securities based credit lines are non-transfer-of-title, which means that your securities remain in your ownership and in your own account at a major, top tier institution throughout the loan term. A simple lien is placed on your asset within your account during the term of the loan. Once the loan is paid in full, the lien is released from your asset. Depending on the type of securities asset you own, the loan to value will range generally from 60% up to 99%.
There are a multitude of advantages to using a stock loan for real estate purposes. Here a just a few:
- No Credit Check
- No Income or Employment Documentation ("No Doc")
- The lien on the securities is not reported to credit bureaus
- The real estate is not tied to the securities financing whatsoever (non-purpose financing)
- No appraisal or underwriting – because it is not tied to the real estate
- Very low rates
- Convenient line of credit with monthly interest only payments
- Opportunity to be a "cash buyer"
- No prepayment penalty
- One week close vs. 4 to 8 weeks for a typical real estate financing
Today, savvy borrowers and investors are pledging their stock or other marketable securities along with, or even instead of, real property. This allows them to achieve the flexible real estate financing they desire today, while still retaining ownership of their securities asset and keeping their long-term financial plan in tact. Many investors will eventually obtain permanent real estate financing for the property, at which time they simply pay down or pay off the line of credit and use it again for their next real estate project or other need (this type of financing is "non-purpose" and can be used for a multitude of reasons). Additionally, using a securities based credit line as the funding source gives real estate investors the advantage of being a "cash buyer" in the market place, often resulting in attractive price reductions.
It is important to note that many Institutions offering this type of non-purpose securities financing will work only with high net worth clients with a substantial depository relationship (7 figures and up). Therefore, real estate investors and individual borrowers will most often use an independent stock loan firm that has special arrangements with institutions offering non-transfer-title stock loans to new clients seeking financing in the lower range ($100,000 and up). Additionally, institutions have different appetites for the types of securities instruments they will actually accept as collateral. For example, many institutions will not lend on a concentrated stock position (single stock) and will require that the borrower have a diverse or mixed portfolio. Each institution also establishes its own requirements relative to the minimum market value of the stock and the minimum trading volume. For these reasons, using an independent stock loan firm can save the investor time in researching which institutions will accept their specific securities asset and loan amount request, and which will offer the best rate and loan to value for their specific situation.