The Trouble with Securities Loans

In the aftermath of the U.S. housing market collapse, many financial advisors have been forced to address the issue of refinancing to reduce interest rates on a “no doc” loan, a type of loan which has since virtually disappeared. According to Guy Cecala, publisher of Inside Mortgage Finance, obtaining a mortgage has generally become more difficult from 2007 to present. Many self-employed individuals, having obtained “no doc” or “no paper" loans without documentation and have landed in a pot of hot water as a result.

In the U.S., banks have been losing money on their loan portfolios as the average home price decreased. In May of 2010, the Senate passed into effect regulations that counteract predatory lending practices such as the aforementioned “no doc” loans, also known as “liar” loans, which were made with no proof of income or assets. Although these kinds of mortgages remain here and there, the majority of banks do not accept them.

Typically, financial advisors have encouraged borrowers to refinance these high interest rate mortgages into the current low rates when possible. In terms of mortgages, conventional loans traditionally offer much lower interest rates. Recently, underwriting standards at banks and financial institutions have been evolving and must conform to new standards, including regulations on borrower loan-to-value ratios. However, lenders generally use proof of income and assets in order to determine whether or not a borrower can afford to repay the loan, and in the absence of this documentation, Cecala notes the difficulties of refinancing a home in the current economic climate.

Asset-based lenders aid individuals and small businesses by basing their loans upon the value of pre-existing assets. U.S. banks and some international ones may offer this service. Some asset-based lenders do not restrict the loan fund application toward business capitalization necessities. Thus, clients should analyze the costs versus the benefits to determine whether refinancing a home mortgage with an asset-based lender would be a viable option, especially since an asset-based lender could potentially require a borrower to find a new refinancing option after only a few years.

According to Karna Hoskote of MGBM Capital in Chicago, Illinois, only specialist lenders can offer these types of mortgage loans. In these situations, liquid securities, including stocks or municipal bonds, are favored over other forms of assets, due to the fact that lenders will liquidate them if a mortgage default occurs.

Borrowers with quite a bit of portfolio assets who are seeking a conventional mortgage may be required to liquidate these assets and assume the tax consequences. Using securities as collateral for asset-based loans could lead to potentially worse consequences.

Consumers searching for alternative options for financing will not have much success, according to Dustin Hobbs, spokesperson for the California Mortgage Bankers Association. He continued to state that these borrowers should instead consult mortgage professionals such as lenders, brokers, or other financial advisors, in order to find a lender that is optimal for their unique situations. He also advises that the most plain mortgage loans are the most reliable and safe investment, and that investors and lenders have become cautious of alternative financing products in recent years.

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