Securities-Based Lending

Liabilities, Retirement, Taxes, Wealth Management September 7, 2017

Securities-Based Lending

In the early part of this century, lax lending standards contributed to a housing bubble that ultimately led to the credit default swap market collapse, nearly bankrupting the U.S. banking system. In response to the crisis, the government enacted substantial banking regulations in order to prevent the recurrence of such dramatic market events. As a result, the banking industry is now mired in with process and red tape that makes obtaining a loan a time-intensive ordeal. For a borrower that lacks income, even temporarily, or for a borrower in the midst of a life transition, obtaining loans from traditional sources can be daunting.

There are options in the marketplace, such as margin loans or home equity lines, but these solutions carry the burden of bank underwriting or high interest rates.

Many of our clients have benefited from the ability to collateralize securities in their investment portfolios and access lines of credit that can provide timely, inexpensive access to liquidity.

For example, consider a couple getting a divorce, where one of the parties has been awarded the residence and the other has been awarded the $3.0 million portfolio. The individual with the portfolio assets would like to buy a residence of his own, but does not have a recent history of wage income as an individual, making a traditional loan difficult to obtain. The $3.0 million portfolio may also have embedded gains that carry a tax liability.

The individual can obtain a line of credit based on the value of his $3.0 million portfolio. He can:

  • Borrow up to 70% of the value of the investment account, up to $2.1 million in this example.
  • Pay interest at a competitive variable rate for a five-year term
  • Pay interest only on the portion of the line that is used
  • Pay back any or all of the line at any time with no prepayment penalty

This line of credit would enable the individual to both purchase a home and keep his portfolio intact until he is able to transition to a traditional banking product. We have helped clients utilize a securities-based line of credit for purposes such as:

  • Bridging a loan for the time period between purchasing and selling a home
  • Near-term liquidity for estate gifting
  • Near-term liquidity for tax planning

A securities-based line of credit can be established in less than three weeks. We welcome the opportunity to discuss this strategy further with you.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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