Pledge that hefty stock portfolio as a down payment on a house? Here's how
By Pat Curry • Bankrate.com

You're smart, you're a savvy investor, and you've made a nice chunk of change in the stock market. Now that you're among the upwardly mobile, you're looking at buying a house. If you put down less than 20 percent, your lender will make you buy mortgage insurance. But the only way to make a 20 percent down payment is to sell some stock, and that will have serious repercussions at tax time.

Enter the pledged-asset mortgage, a mortgage that allows you to pledge stocks and other securities for your down payment instead of having to cash them in and get hit with capital gains taxes.

The concept itself is nothing new -- this kind of mortgage has been around for decades -- but in the past, it was typically tied to such products as low-yield certificates of deposit.

Usually tied to stock portfolios
Today, pledged-asset mortgages generally are tied to stock portfolios. While the details of the mortgages vary from lender to lender, essentially the program works like this: You pledge a certain amount of assets for the down payment, place those in a margin account, and receive a mortgage for 100 percent of the purchase price. As long as the pledged assets retain the required level of equity in the margin account, you can continue to trade, exchange or redeem the assets. The interest and profits from any investment activity is still yours.

If the value of the assets falls below the amount you are required to maintain, you have to pledge additional assets to make up the shortfall. The worst-case scenario is that if you default on the loan, you lose both the house and the pledged assets, but if you had sold the assets for the down payment and defaulted, the money would have been gone anyway.

"This makes sense to anybody with the asset base to be able to handle it," said Thomas Black, director of secondary marketing for MortgageIT.com, an online home mortgage Web site with 120 affiliated lenders. "With the current equity market, it makes sense to leave it there. If you have a $250,000 loan, your down payment is $50,000. Your $50,000 in the market, in 30 years, could double seven or eight times."

"It appeals to several different segments of customers," said John LoPresti, vice president of online brokerage at Fidelity Investments, which began offering pledged-asset mortgages through GMAC in March 1999.

"We've seen mortgages at the $80,000 and $100,000 level and the $1 million level. Maybe someone will put 10 percent in cash and the other 10 percent in pledged assets. One key thing here is customers don't have to liquidate securities or fund assets to buy their new home.

"They don't have to incur capital gains. Meanwhile you're pledging the assets. They're still invested; you can still trade on those securities. That's been a real popular feature. If you're in a stock or a fund that's doing really well, you don't have to get out of that or sell to buy a house."

Best for very affluent home buyers
While that may be the case at Fidelity, other mortgage experts say the concept only makes sense for very affluent home buyers with significant stock portfolios.

"You need to have the financial wherewithal where you need to keep your assets working for you," MortgageIT.com's Black said. "It's definitely not for the home buyer in the $100,000-$200,000 range."

Peter Conners, vice president for Fidelity Mortgage Services at GMAC, Fidelity Investments' partner in its pledged-asset mortgage program, shared that opinion, saying that the borrowers need enough available assets to cover the pledged amount if there's a significant fluctuation in the market.

"You have to know the stock market, it's not for the faint of heart," he said. "If the stock market crashes, it'll be a problem. Most people who look at this type of loan, 99 percent of them have enough assets to not get into a margin call situation. If we require they have $100,000 in a brokerage account and they've got $50,000 and struggling to get to $100,000, we'll say, 'This is not the right product for you.' "

Keep in mind that tax-deferred retirement accounts, often a family's largest cash asset, cannot be used toward a pledge.

Consumer advocate David Horowitz of Lowermybills.com said that pledged asset loans are not something most home buyers would be able to take advantage of anyway.

"If you've got the money, and you're in a hurry to buy a piece of property and you're worried about capital gains, you're not part of the average," he said. "This is for someone who is keenly aware of how to use money."

Even then, he said, he would be concerned about the risk involved in tying a mortgage to the volatility of the stock market.

"They're leveraging everything," he said. "I think of leverage like hanging over a cliff. You're chipping away the terra firma you have, the money you have ... Not me. I'd rather sleep at night."

Appeals to Gen Xers
Pledged asset mortgages are most appealing, one mortgage banker said, to consumers who have inherited substantial wealth and those who have acquired it in the stock market and can't imagine putting their hard-working assets into something as slow-growth as real estate.

"Today, a Gen Xer wants nothing to do with a down payment," said Charles Wagner, a vice president at HomeBanc, a mortgage bank based in Atlanta that offers a variety of pledged-asset mortgages in partnership with Merrill Lynch. "They'll do anything they can to stay away from it."

But, for fiscal conservatives, a pledged asset mortgage contradicts everything we've ever been taught about buying a house. It runs completely counter to the age-old wisdom of putting down as much money as possible, financing as little as possible, and paying it off as quickly as possible to reduce the amount of interest paid on the loan.

"It's got to be part of an overall strategy because it does fly in the face of overall wisdom," Conners said.

HomeBanc's Wagner agreed, and recommended talking to your financial Adviser before making this kind of investment.

"You have to ask what makes the most sense to get me where I want to be in the future," he said, "whether it's personal or financial. You need advice from people you trust ... You need to set goals and say, 'This is where I want to be.' "

A pledged-asset mortgage may also be a way to help a child, grandchild or other family member get to where they want to be -- into a home of their own -- while the assets (one hopes) continue to earn money.

"We have a customer who is a doctor and had two daughters, both coming out of school," GMAC's Conners said. "He pledged money for both of them, as well as buying a new home of his own. He understood this was a great way not to have to liquidate funds, go through a tax treatment, and be able to help his kids at the same time."

Pat Curry is a freelance writer based in Georgia