4 ms·

A nit: You mean non-recourse state, as in "The lender has no recourse to tap your assets in order to fulfill obligations of the mortgage in the event of non-pa

A nit: You mean non-recourse state, as in "The lender has no recourse to tap your assets in order to fulfill obligations of the mortgage in the event of non-payment." But CA is a bit strange: A mortgage is non-recourse only in defined circumstances, eg when the mortgage is purchase money guaranteed by the property. It used to be that refis turn non-recourse debt into recourse debt. I'd be very surprised if a loan backed by stock met the non-recourse requirements. So if you fail to pay, it's probable that they can go after your other assets. fyi I haven't kept up with how things evolved out of the mortgage meltdown, so perhaps things have changed. But anyone taking such a loan should figure out their potential liabilities carefully.

tsunamifury 10y ago
Restricted shares may not be used to back a loan. They can only be used as a measurement of future income. edit: actually its complicated
- jpmattia 10y ago
  For the case where stock is not being pledged: I would be amazed if the lenders were taking on 100% of the risk of default. Usually there's some assumption of asset recovery. That probably means the no-money-down loan is being structured so that there is some additional liability on the part of the borrower. (The mortgage itself would be "nonconforming", so it wouldn't be backed by FNM/FRE.) Or maybe we're just back to 2006 standards for mortgages and I'm slow to realize it.
  - tsunamifury 10y ago
    I actually looked into it. You are required to put 4 months of payments in escrow. This is far less than a downpayment, but still shows your ability to pay.
    - jpmattia 10y ago
      > but still shows your ability to pay. I wasn't being clear: It doesn't matter that you can pay, it matters that you will pay. (Four months is nothing to the mortgage principal.) Look, the Fed is going to raise rates RSN. Which way does the high end of real estate go when interest rates come off zero %? So suddenly the homeowner is down 10% on the value of their $2M home. Is it worth it for them to mail in the keys to the bank for $200K and tell the collectors to pound sand? For a lot of people, yes. So the bank (or more accurately, the loan service) has to figure out how to send over two guys named Rocko with the power to get their money back. In the bubble, the solution was to lay off all the Rockos because, you know, housing never goes down. Maybe we're back to that state, which would be amazing, but I'd guess the banks are somehow covering for their liability on zero-down loans this time around. Edit for tcoppi's comment: s/FedIncrease/BlackSwan/ because home prices do decline for a variety of reasons. BTW: Implied probability of a Fed rate increase in Sept is back to where it was before Brexit. http://www.ft.com/fastft/2016/07/25/odds-of-16-fed-rate-rise-climb-to-nearly-50/ http://www.ft.com/fastft/2016/07/25/odds-of-16-fed-rate-rise... Edit for dragonwriter's comment (hn doesn't let replies go this deep?): Fed has been trying to normalize rates, and employment/gdp/cpi has been stabilizing. See the link above for implied prob from Fed Futures for how people are betting on Sept.
      - tcoppi 10y ago
        > Look, the Fed is going to raise rates RSN. Is it? It doesn't really seem like it, they raised them .25% in December and haven't done diddly since then, with no signs that they will. Like it or not it is incredibly difficult for us to get out of the ZIRP trap, we most likely won't see anything more than 2% out of the fed for a decade or more. Barring massive inflation, it definitely won't go up fast enough to have a major effect on housing prices like that.
      - dragonwriter 10y ago
        > Look, the Fed is going to raise rates RSN. What in the considerations that drive monetary policy (employment and inflation, mainly) suggests that another interest rate hike is imminent?
- JumpCrisscross 10y ago
  > Restricted shares may not be used to back a loan This is not true. All manner of restricted stock units (granted to insiders) and unregistered stock (not publicly traded) can be used as collateral for loans (though some issuers make you sign documents promising not to do so). I have been asked to appraise private stock for lenders and render an opinion around its volatility and liquidity.
  - jpmattia 10y ago
    > I have been asked to appraise private stock for lenders and render an opinion around its volatility and liquidity. That must be a ton of fun. How do they incentivize you and your operation to be conservative? Because they presumably only make money if you hit the number, which was the big problem with home appraisers in the housing bubble. They only way I can think of to cause correct behavior would be to ensure that your operation maintains an interest in the loan after the deal is done.
    - JumpCrisscross 10y ago
      I do think it is fun! My firm works with companies and their shareholders. Issuing a letter to a lender is something I do for clients as a professional courtesy. I receive no special compensation in connection with it, and strongly prefer to mark assets to market (i.e. the last comparable trade or fundraising event) over model. The contents are less "this is where you should mark this asset" and more "this is where others have marked it, the circumstances under which they did so and how those circumstances may differ from this situation". The value isn't in providing a "right" number as much as turning a zero-information situation into an information-positive one.
      - roymurdock 10y ago
        > The value isn't in providing a "right" number as much as turning a zero-information situation into an information-positive one This should be the slogan for all market research companies. Good way to look at it.
- SilasX 10y ago
  Mayn't or aren't? Do you mean that, a) it's illegal and grounds for penalty if you merely write up such a contract, ("mayn't") or b) it's not common practice to use them as collateral? ("aren't") Because if there's someone who thinks it's valuable, then there's someone who's willing to accept it as collateral.

tsunamifury 10y ago

Restricted shares may not be used to back a loan. They can only be used as a measurement of future income. edit: actually its complicated

jpmattia 10y ago
For the case where stock is not being pledged: I would be amazed if the lenders were taking on 100% of the risk of default. Usually there's some assumption of asset recovery. That probably means the no-money-down loan is being structured so that there is some additional liability on the part of the borrower. (The mortgage itself would be "nonconforming", so it wouldn't be backed by FNM/FRE.) Or maybe we're just back to 2006 standards for mortgages and I'm slow to realize it.
- tsunamifury 10y ago
  I actually looked into it. You are required to put 4 months of payments in escrow. This is far less than a downpayment, but still shows your ability to pay.
  - jpmattia 10y ago
    > but still shows your ability to pay. I wasn't being clear: It doesn't matter that you can pay, it matters that you will pay. (Four months is nothing to the mortgage principal.) Look, the Fed is going to raise rates RSN. Which way does the high end of real estate go when interest rates come off zero %? So suddenly the homeowner is down 10% on the value of their $2M home. Is it worth it for them to mail in the keys to the bank for $200K and tell the collectors to pound sand? For a lot of people, yes. So the bank (or more accurately, the loan service) has to figure out how to send over two guys named Rocko with the power to get their money back. In the bubble, the solution was to lay off all the Rockos because, you know, housing never goes down. Maybe we're back to that state, which would be amazing, but I'd guess the banks are somehow covering for their liability on zero-down loans this time around. Edit for tcoppi's comment: s/FedIncrease/BlackSwan/ because home prices do decline for a variety of reasons. BTW: Implied probability of a Fed rate increase in Sept is back to where it was before Brexit. http://www.ft.com/fastft/2016/07/25/odds-of-16-fed-rate-rise-climb-to-nearly-50/ http://www.ft.com/fastft/2016/07/25/odds-of-16-fed-rate-rise... Edit for dragonwriter's comment (hn doesn't let replies go this deep?): Fed has been trying to normalize rates, and employment/gdp/cpi has been stabilizing. See the link above for implied prob from Fed Futures for how people are betting on Sept.
    - tcoppi 10y ago
      > Look, the Fed is going to raise rates RSN. Is it? It doesn't really seem like it, they raised them .25% in December and haven't done diddly since then, with no signs that they will. Like it or not it is incredibly difficult for us to get out of the ZIRP trap, we most likely won't see anything more than 2% out of the fed for a decade or more. Barring massive inflation, it definitely won't go up fast enough to have a major effect on housing prices like that.
    - dragonwriter 10y ago
      > Look, the Fed is going to raise rates RSN. What in the considerations that drive monetary policy (employment and inflation, mainly) suggests that another interest rate hike is imminent?
JumpCrisscross 10y ago
> Restricted shares may not be used to back a loan This is not true. All manner of restricted stock units (granted to insiders) and unregistered stock (not publicly traded) can be used as collateral for loans (though some issuers make you sign documents promising not to do so). I have been asked to appraise private stock for lenders and render an opinion around its volatility and liquidity.
- jpmattia 10y ago
  > I have been asked to appraise private stock for lenders and render an opinion around its volatility and liquidity. That must be a ton of fun. How do they incentivize you and your operation to be conservative? Because they presumably only make money if you hit the number, which was the big problem with home appraisers in the housing bubble. They only way I can think of to cause correct behavior would be to ensure that your operation maintains an interest in the loan after the deal is done.
  - JumpCrisscross 10y ago
    I do think it is fun! My firm works with companies and their shareholders. Issuing a letter to a lender is something I do for clients as a professional courtesy. I receive no special compensation in connection with it, and strongly prefer to mark assets to market (i.e. the last comparable trade or fundraising event) over model. The contents are less "this is where you should mark this asset" and more "this is where others have marked it, the circumstances under which they did so and how those circumstances may differ from this situation". The value isn't in providing a "right" number as much as turning a zero-information situation into an information-positive one.
    - roymurdock 10y ago
      > The value isn't in providing a "right" number as much as turning a zero-information situation into an information-positive one This should be the slogan for all market research companies. Good way to look at it.
SilasX 10y ago
Mayn't or aren't? Do you mean that, a) it's illegal and grounds for penalty if you merely write up such a contract, ("mayn't") or b) it's not common practice to use them as collateral? ("aren't") Because if there's someone who thinks it's valuable, then there's someone who's willing to accept it as collateral.