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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2010

Find Funds with Securities-Based Lending

This alternative path to financing could yield growth in a tight market

If you have difficulties finding lending programs for borrowers who can’t document their income, who need jumbo loans or who otherwise don’t fit conventional guidelines, then securities-based lending may be the solution.

This form of lending allows pledged securities such as stocks, bonds, mutual funds or Treasury bills to stand as collateral for borrowed funds for personal or business use. In working with securities-based lending, mortgage brokers will learn about common transactions — for example, interest-only fixed-rate loans carrying interest rates from 2.5 percent to 4.5 percent with minimum terms of three years.

Some of the benefits of securities-based lending can include:

  • Interest-only quarterly payments;
  • Quick fundings;
  • No closing costs;
  • No lender fees;
  • No credit checks;
  • No income or employment verifications;
  • Loan terms between three and 10 years; and
  • Low, fixed interest rates;

In addition, typical minimum loan amounts start around $100,000. With some lenders, there is no maximum loan amount, restriction on borrowers’ use of the funds or personal liability.

Many lenders will offer loans for as much as 80 percent of the securities’ value and allow borrowers to retain all dividends and upside market appreciation. Flexibility at loan maturity frequently includes options to renew the loan, refinance or pay off the balance.

Generally, for securities to qualify as collateral, they must be publicly and actively traded stocks, bonds, mutual funds or Treasury notes without restrictions. The loan process involves completing a form listing the name, symbol and shares to be pledged. Quote requests often are online, which can make it easy for brokers to access information.

A completed form and a recent monthly statement of the security or securities are typically sent to the lender, which usually responds within 24 hours. Terms are offered, and upon agreement, the loan documents are prepared and the securities are soon transferred to a holding company.

A final value is based on an average of the closing price of the collateral for three consecutive market days. The borrower then transfers ownership of the securities to the lender. The borrower retains all beneficial interests in the securities, including all dividends. The number of shares of collateral initially pledged is returned to the borrower when the loan terms are settled.

Lock-out periods are common, and brokers should familiarize themselves with all loan restrictions. Securities-based lending can help brokers erase the frustrations many borrowers face trying to find adequate lending programs in a market distinguished by constrained access to capital.

The lack of underwriting hoops and approval delays — along with unrestricted use of funds — represents another upside.

Brokers interested in breaking into securities-based lending can approach homeowners and business-owners in need of extra money. Often, brokers can earn as much as 5 points on securities-based lending transactions. Moreover, with fast closings, brokers’ can see their commissions quickly.


 


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