Anyone have experience with using assets to back a loan to buy an apartment versus a typical mortgage? I was quoted by a private banker 30 day LIBOR plus 1.25%, or about 1.5% annually, as the interest rate today. Lending up to 70% of collateral (stocks and bonds held in an account with the bank). The theory here is that since there is no mortgage interest deduction above $1 million, you would take... [more]
Anyone have experience with using assets to back a loan to buy an apartment versus a typical mortgage?
I was quoted by a private banker 30 day LIBOR plus 1.25%, or about 1.5% annually, as the interest rate today. Lending up to 70% of collateral (stocks and bonds held in an account with the bank).
The theory here is that since there is no mortgage interest deduction above $1 million, you would take out a $1m mortgage and finance the rest in effect with a margin loan, which can be tax deductible.
The collateral will throw off a yield in the 10% range, with the excess paying down the borrowing fairly rapidly so that in 10 years or less it would be paid off and all you would have left is a small mortgage.
If LIBOR moves up, I could either sell down collateral positions to reduce the loan or enter into a swap with the bank to fix the rate (albeit higher).
I think I can structure this so I end up with 100% financing at a very low rate, with the idea that if people want to lend me money for almost nothing I should take it and invest it for higher yields.
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Response by tavistmorph
about 16 years ago
Posts: 52
Member since: May 2007
sure, sounds fine. Only catch is the carry trade works great until it doesn't. :-) You're leveraged, and assuming 10% yield on your collateral is definitely optimistic historically. Just make sure you can accept the risk of another 30-40% stock crash like we saw last year. If that happens, will you be OK?
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Response by front_porch
about 16 years ago
Posts: 5316
Member since: Mar 2008
ooh, modern, did you find something?
This sound like a pretty typical Wall Street arrangement from the old days, where you had finance guys (pardon my making an assumption about your gender) who wanted to leverage their tied-up assets.
I would say the danger to my eye is not that the collateral decreases in value, but that LIBOR moves up (raise your hands if you think it won't, I thought so) and then the bank won't do the swap. We are in a commercial residential market where there is no credit whatsoever, and a residential market where there has been very little lending for a year and a half -- will your private bank keep its lending open?
If I were you, I would be more tempted to get a larger fixed mortgage (say to half of your purchase price) and then try this fancy arrangement on the other half. I think that will help you sleep at night at not too much extra cost.
What collateral throws off 10% yield? In today's market, a floating rate asset of LIBOR + 975bps or a 10yr Junk Bond at 10yr T + 650bps.
Or are you talking about high dividend stocks? While you can find 5% to 7% dividends, anyone would be crazy to assume these as an annuity (as we saw last year with dividend cuts by the most stellar, GE, Pfizer, etc).
This just sounds like a silly leverage play while hoping to live of capital appreciation. That is a very 2007 attitude.
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Response by KISS
about 16 years ago
Posts: 303
Member since: Mar 2008
I agree with tavistmorph -- S&P 500 is trading at a P/E multiple of 22, highest since 2002. Do you have the liquidity to meet the margin calls if the value of your collateral gets whacked?
Typicaly private banks and full service brokerages offer securities based lending at around LIBOR 1.25 to 300 bpts negotiable upon the amount borrowed and the quality of the relationship. The amount you can borrow depends on the type securities you are borrowing against, for example AAA muni's have far more borrowing power than stocks. Ask your accountant, but I believe the interest is not tax deductable.
Front Porch, Yes these are to borrow against tied up assets (tied for various reasons). for example,If you owned 10 million in muni's that you couldn't replace in today's market are you saying that you should not be able to borrow against those assets to make a real estate purchase? no wall street chicanery (or from the "old days"). When used properly just sound financial planning, A RE broker in NYC should be a bit more knowledgable about these things.
FWIW, LIBOR 1.25 is insanely cheap borrowing any way you slice it...
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Response by front_porch
about 16 years ago
Posts: 5316
Member since: Mar 2008
Cpalms, "chicanery" is your word, not mine. I'm a Wall Street alum -- DLJ '88-'90.
ali
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Response by Cpalms
about 16 years ago
Posts: 122
Member since: Sep 2007
3 whole years 20 years ago, you crafty old veteran you...lol!
"chicanery is your word, not mine"
right ,chicanery, it is my word, that why I put the quotes around "old days" which are your words..
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Response by w67thstreet
about 16 years ago
Posts: 9003
Member since: Dec 2008
DLJ, great shop for those who could hang.... BFD, 2 yrs as an intern... kicked you out as soon as they realized you were better off selling RE than $100MM bonds.... okay nxt... as to modern's carry trade.... FLMAO.... let me just interject something here.... the mkt is up 100% since 3-09, on an risk adjusted basis me thinkz the equity mkt is being way way underpaid.... but ALL returns are riskless, right?
As to why I left WS, let's say it was mutual.....
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Response by KISS
about 16 years ago
Posts: 303
Member since: Mar 2008
Cpalms -- "KISS, The S&P is trading at a p/e of 16"
Cpalms, per Bloomberg, S&P p/e multiple is over 22:
Dec. 1 (Bloomberg) -- U.S. equities will fall "substantially" below their March lows because the global economy will weaken in 2010 and stocks are expensive, said Societe Generale SA's Albert Edwards.
The recession will worsen as businesses and consumers reduce debt and deflation remains a "key threat" for the world in the next one to two years, said Edwards, a global strategist for the Paris-based bank. Government bonds are a poor investment because yields may drop below 2 percent in 2010, while gold is cheap, he wrote in a research report today.
"Deep down, even the fiercest equity bulls must surely be doubting themselves," said Edwards, who is based in London. "We still see much pain to come" for stocks in 2010 and 2011.
The Standard & Poor's 500 Index has surged 63 percent since a 12-year low on March 9 as the American government lent, spent or guaranteed more than $11 trillion to end the nation's worst recession in seven decades. Societe Generale's outlook contrasts with the median economist estimate in a Bloomberg survey that U.S. gross domestic product will expand 2.6 percent in 2010 and 3 percent in 2011. The nation's economy expanded for the first time in a year during the third quarter.
Edwards was voted second-best European strategist in a 2009 Thomson Extel survey released in June. The report also named Societe Generale as the top economics and strategy research firm for a third straight year.
'Revulsion' Levels
Valuations for U.S. equities didn't reach "revulsion" levels in the last bear market, suggesting that theS&P 500 will retreat to below its March 9 close of 676.53, Edwards said. The S&P 500 trades at 22.2 times the past year's earnings from its companies, the highest since 2002.
Gold, which has risen for the past eight years and climbed 35 percent in 2009, topped a record $1,200.50 in New York trading today. Treasury 10-year notes yield 3.23 percent, up from 2.05 percent in December, according to Bloomberg data.
"Recession will quickly follow recovery," Edwards said. "Thinking the unthinkable has paid off in the last decade and should continue to do so."
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Response by clt89
about 16 years ago
Posts: 61
Member since: Sep 2009
1) Are you sure there isn't a floor to the rate (ie: LIBOR + 125, with a floor of 5%). That is very common.
2) Someone mentioned AAA munis as collateral. Show me a 10% yielding AAA munis, even moving very far out the curve.
If you have cash and securities to put up as collateral, then pay cash for your home and be done with it. Your dreaming if you think you are creating some huge positive carry trade. By doing so, you are picking up pennies in front of the steam roller. Just go borrow $'s, convert to higher yielding currency and buy some higher yielding Euro assets, for example. Benefit from positive carry AND dollar depreciation....... all the way up to the time that you don't. Why bother with real estate?
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sure, sounds fine. Only catch is the carry trade works great until it doesn't. :-) You're leveraged, and assuming 10% yield on your collateral is definitely optimistic historically. Just make sure you can accept the risk of another 30-40% stock crash like we saw last year. If that happens, will you be OK?
ooh, modern, did you find something?
This sound like a pretty typical Wall Street arrangement from the old days, where you had finance guys (pardon my making an assumption about your gender) who wanted to leverage their tied-up assets.
I would say the danger to my eye is not that the collateral decreases in value, but that LIBOR moves up (raise your hands if you think it won't, I thought so) and then the bank won't do the swap. We are in a commercial residential market where there is no credit whatsoever, and a residential market where there has been very little lending for a year and a half -- will your private bank keep its lending open?
If I were you, I would be more tempted to get a larger fixed mortgage (say to half of your purchase price) and then try this fancy arrangement on the other half. I think that will help you sleep at night at not too much extra cost.
ali r.
Read more on Moneywatch: http://bit.ly/3rDqWW
What collateral throws off 10% yield? In today's market, a floating rate asset of LIBOR + 975bps or a 10yr Junk Bond at 10yr T + 650bps.
Or are you talking about high dividend stocks? While you can find 5% to 7% dividends, anyone would be crazy to assume these as an annuity (as we saw last year with dividend cuts by the most stellar, GE, Pfizer, etc).
This just sounds like a silly leverage play while hoping to live of capital appreciation. That is a very 2007 attitude.
I agree with tavistmorph -- S&P 500 is trading at a P/E multiple of 22, highest since 2002. Do you have the liquidity to meet the margin calls if the value of your collateral gets whacked?
KISS, The S&P is trading at a p/e of 16
http://finance.yahoo.com/q?s=spy
Typicaly private banks and full service brokerages offer securities based lending at around LIBOR 1.25 to 300 bpts negotiable upon the amount borrowed and the quality of the relationship. The amount you can borrow depends on the type securities you are borrowing against, for example AAA muni's have far more borrowing power than stocks. Ask your accountant, but I believe the interest is not tax deductable.
Front Porch, Yes these are to borrow against tied up assets (tied for various reasons). for example,If you owned 10 million in muni's that you couldn't replace in today's market are you saying that you should not be able to borrow against those assets to make a real estate purchase? no wall street chicanery (or from the "old days"). When used properly just sound financial planning, A RE broker in NYC should be a bit more knowledgable about these things.
FWIW, LIBOR 1.25 is insanely cheap borrowing any way you slice it...
Cpalms, "chicanery" is your word, not mine. I'm a Wall Street alum -- DLJ '88-'90.
ali
3 whole years 20 years ago, you crafty old veteran you...lol!
"chicanery is your word, not mine"
right ,chicanery, it is my word, that why I put the quotes around "old days" which are your words..
DLJ, great shop for those who could hang.... BFD, 2 yrs as an intern... kicked you out as soon as they realized you were better off selling RE than $100MM bonds.... okay nxt... as to modern's carry trade.... FLMAO.... let me just interject something here.... the mkt is up 100% since 3-09, on an risk adjusted basis me thinkz the equity mkt is being way way underpaid.... but ALL returns are riskless, right?
As to why I left WS, let's say it was mutual.....
Cpalms -- "KISS, The S&P is trading at a p/e of 16"
Cpalms, per Bloomberg, S&P p/e multiple is over 22:
Dec. 1 (Bloomberg) -- U.S. equities will fall "substantially" below their March lows because the global economy will weaken in 2010 and stocks are expensive, said Societe Generale SA's Albert Edwards.
The recession will worsen as businesses and consumers reduce debt and deflation remains a "key threat" for the world in the next one to two years, said Edwards, a global strategist for the Paris-based bank. Government bonds are a poor investment because yields may drop below 2 percent in 2010, while gold is cheap, he wrote in a research report today.
"Deep down, even the fiercest equity bulls must surely be doubting themselves," said Edwards, who is based in London. "We still see much pain to come" for stocks in 2010 and 2011.
The Standard & Poor's 500 Index has surged 63 percent since a 12-year low on March 9 as the American government lent, spent or guaranteed more than $11 trillion to end the nation's worst recession in seven decades. Societe Generale's outlook contrasts with the median economist estimate in a Bloomberg survey that U.S. gross domestic product will expand 2.6 percent in 2010 and 3 percent in 2011. The nation's economy expanded for the first time in a year during the third quarter.
Edwards was voted second-best European strategist in a 2009 Thomson Extel survey released in June. The report also named Societe Generale as the top economics and strategy research firm for a third straight year.
'Revulsion' Levels
Valuations for U.S. equities didn't reach "revulsion" levels in the last bear market, suggesting that theS&P 500 will retreat to below its March 9 close of 676.53, Edwards said. The S&P 500 trades at 22.2 times the past year's earnings from its companies, the highest since 2002.
Gold, which has risen for the past eight years and climbed 35 percent in 2009, topped a record $1,200.50 in New York trading today. Treasury 10-year notes yield 3.23 percent, up from 2.05 percent in December, according to Bloomberg data.
"Recession will quickly follow recovery," Edwards said. "Thinking the unthinkable has paid off in the last decade and should continue to do so."
1) Are you sure there isn't a floor to the rate (ie: LIBOR + 125, with a floor of 5%). That is very common.
2) Someone mentioned AAA munis as collateral. Show me a 10% yielding AAA munis, even moving very far out the curve.
If you have cash and securities to put up as collateral, then pay cash for your home and be done with it. Your dreaming if you think you are creating some huge positive carry trade. By doing so, you are picking up pennies in front of the steam roller. Just go borrow $'s, convert to higher yielding currency and buy some higher yielding Euro assets, for example. Benefit from positive carry AND dollar depreciation....... all the way up to the time that you don't. Why bother with real estate?