Niche Financing
Various lenders have created a raft of mortgage products
geared toward the specific needs of the affluent borrower. For example, First
Financial Equities in Englewood, N.J., will loan up to 65 percent of the
purchase price of a home, and the firm has practically no upper loan limit,
explains Ari Sorotzkin, the company’s vice president. Sorotzkin’s firm is one of
those now starting a separate mortgage banking division to take advantage of
increased activity in the $1 million-plus market. It arranges pledged asset
loans that allow customers to pledge the assets in an investment account as
collateral for a down payment loan. By not having to liquidate other
investments, they avoid paying capital gains taxes. The remainder of the
purchase is financed through a mortgage, resulting in 100 percent financing that
leaves the buyer’s other investments intact. Other financial services companies,
such as Fidelity and Morgan Stanley, also allow their clients to take out loans
against their accounts for this purpose. Borrowers should be aware, however,
that these loans require that the value of the underlying securities remains
sufficient to cover the loan obligations, and may result in margin calls if
those securities fall in value.
| “People don’t like to have debt, and they don’t like the uncertainty of
owing someone money.” |
Some companies, such as First Financial,
also offer loan modification programs that allow clients to refinance for a
nominal fee—usually about $1,000 per $1 million—without having to complete
additional paperwork or pay mortgage recording tax and title fees, which can be
as much as 2 percent of the loan—the amount New York state levies.
Another recent entrant to this field is Concierge Luxury Finance, a
financial services firm in Heathrow, Fla., that conducts one-third of its
business in the super-jumbo mortgage market. According to the firm’s president,
Carl Hendrix, super-jumbo loans usually carry a slightly higher interest rate
than smaller mortgages. Most lenders feel that multimillion dollar homes carry
more inherent risk because they are much slower to sell, so they price the loans
accordingly. “Some lenders say, ‘We’ll go as high as you want,’ but that’s not
really true,” he says. “Lenders want to have security that the house isn’t going
to be walked away from. The marketing time on a $30 million home can be years.”
Many will limit their exposure by capping the loan-to-value ratio at about 50
percent of the home’s value beyond a certain size, which varies by lender.
 Debt Be Not Proud
Ironically, given the numerous financial benefits of a
jumbo mortgage, often the biggest impediment to convincing wealthy buyers to use
one is the emotional barriers that many people erect around mortgages and debt.
Although David Avital has mortgages on his roughly $5 million worth of homes, he
initially bought them outright with cash. Only after some prodding by Sorotzkin
did Avital agree to mortgage them, and the note is for only $400,000, just over
one-third of the amount on which he could claim mortgage interest deductions.
“I don’t want a sword hanging over my neck,” says Avital, founder of MTP
Investment Group, which owns New York parking garages and invests in real
estate, bridge financing and private equity. “It’s a primitive philosophy, I
know, because obviously I could make more money by taking a mortgage and
investing that cash somewhere else. But my house is my house; I don’t want to
mortgage it. I worry about what will happen when I leave this world. I don’t
want to put too much thinking into my house. Emotionally, I want my home
minimally exposed to debt.”
This reaction, however irrational, is not
uncommon, experts suggest. “What I’ve learned in this business is that emotions
definitely come into play,” says Jason Papier, the producer and co-host of Pro
Money Talk, a financial podcast for executives, and a partner in PW Johnson
Wealth Management, a fee-only financial planning firm in Sunnyvale, Calif.
“People don’t like to have debt, and they don’t like the uncertainty of owing
someone money. There are some people who will always feel more comfortable
paying cash.”
Gibran Nicholas, the founder of Nicholas & Co., a mortgage
business in Ann Arbor, Mich., claims that most people inherit their aversion to
mortgages from their parents and grandparents. “Our grandparents grew up in a
time when mortgages were callable,” Nicholas points out. “The bank could call
you up at any time and ask for its money back immediately. They could take your
home. Today, there are safeguards against that.” Yet many individuals still
retain the lessons told to them as children.
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