Investors and Home Equity

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mVesting's picture
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Joined: 2005-05-25

Do you think that leveraging an investor's home equity in order to
supply additional premiums into a UL policy, bond, retirement fund,
etc. is a safe financial strategy?

Please comment.

jamesbond's picture
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Joined: 2005-03-21

you are kidding right?? You can't have a client use a loan to purchase securities - it is against securites regs..

Duke#1's picture
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Joined: 2004-12-06

jamesbond wrote:you are kidding right?? You can't have a client use a loan to purchase securities - it is against securites regs..
I assume you're talking about mortgage loans, because of course margin loans have been around forever.  But, even re mortgage loans, since when have these become against securities regs??  While the NASD issued a Notice to Members last year that b/ds must be very cautious when recommending using things like home equity loans to purchase securities and to ensure proper disclosure of the risks and ensure proper suitability, to my knowledge it has not been outlawed.

Soothsayer's picture
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Joined: 2005-02-24

I cannot wait for the day when this sea of liquidity dries up and all of these "new and innovative" loan products are exposed.  It wasn't all that long ago that if you couldn't bring 20% cash to the table in a real estate purchase, then you were laughed out of the bank.  We have made an enormous industry in this country of loaning money to one another.  All of those closing costs you pay to finance or refinance a home creates exactly zero new or real wealth.  I've got my cash ready to buy today's 600K house for 425K.  I am as sure of this happening as the sun coming up in the East and going down in the West.  Leveraging your house to buy securities?  No responsible adviser would ever suggest such a scheme. 

BigPayDay's picture
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Joined: 2005-01-10

Soothsayer,

Now don't tell me you are jealous of all the people who have made money in real estate, too.

I think it was John Wooden who said "Don't compare yourself to others, concentrate on being the best YOU can be."

Pretty good advise, wouldn't you agree?

BPD

menotellname's picture
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Joined: 2004-12-01

I think James and Sooth are using outdated thinking.  Further, they are focusing strictly on the securities aspect.  The poster mentioned other alternatives in using the refi proceeds.  As far as I know you can use the proceeds from a refi for whatever you want.
Finally, if using a loan to purchase securities is illegal...how do you explain margin accounts?

Mark Astarita's picture
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Joined: 2005-05-18

menotellname wrote:
Finally, if using a loan to purchase securities is illegal...how do you explain margin accounts?

Regulation X makes it illegal for anyone other than a registered broker-dealer to loan money for the purpose of purchasing securities.
However, that does not make it illegal for a borrower to use the proceeds of a refinance to purchase securities.
One might question the sanity of such a proposal, but it is not against the law to do so.
 

Soothsayer's picture
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Joined: 2005-02-24

I never said it was illegal.  I just think it's stupid.  And, no, I'm not jealous of anyone.  But, this whole real estate thing at the present time smacks of the Nasdaq in about late '97 or '98.  In other words, we haven't seen the end of it yet, and it needs to reach its ridiculous, foolish, and obscene crescendo.  I covered my short position on FNM @ 50 in my own account, but remain short H&R Block, New Century Financial, Countrywide, and IndyMac.  I'll make my money on this trend on the short side--and use the profits to buy today's 600K house for 425K.  Oh, and by the way, I'll pay cash.  My current shack is paid for. 

Mooline's picture
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Joined: 2005-05-29

Rather than putting the roof over your head on the line by "leveraging" the home's equity, why not sell the place, buy only what you need (now THERE'S a novel concept!) which will likely be smaller, less costly to acquire and less costly to operate. If there's money left over, invest that without the risking your principal residence.
 Keep debt to a minimum, always...a solid formula for restful nights and true, sustainable long term financial success. Yes, I do understand the before tax/after tax argument as it applies to home mortgages, but it's still debt - carry only what you absolutely must to acquire the home you need. God forbid that the bottom falls out, you lose your health, you lose your job or some unforseen crisis erupts...
Or, you could listen to the "no can lose" real estate mavens who'll tell you to "make a fast buck" in a preconstruction condo with a reverse amortization mortgage...yeh, there's a sure winner!!

rightway's picture
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Joined: 2004-12-02

If you advise or support your client to extend a home equity loan and
use the proceeds to invest, and that scenerio does not play out in
favorable light for the client, you better hope they do not complain
and seek to re-capture losses.  

Soothsayer's picture
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Joined: 2005-02-24

Check out Jamie Dimon's comments from today on the flattening yield curve, the overextension of credit, the lack of systems in place to adminster HELOCs in a difficult environment, etc. etc.  I'm more sure than ever that the short side is the safe side.  

Soothsayer's picture
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Joined: 2005-02-24

Soothsayer wrote:I never said it was illegal.  I just think it's stupid.  And, no, I'm not jealous of anyone.  But, this whole real estate thing at the present time smacks of the Nasdaq in about late '97 or '98.  In other words, we haven't seen the end of it yet, and it needs to reach its ridiculous, foolish, and obscene crescendo.  I covered my short position on FNM @ 50 in my own account, but remain short H&R Block, New Century Financial, Countrywide, and IndyMac.  I'll make my money on this trend on the short side--and use the profits to buy today's 600K house for 425K.  Oh, and by the way, I'll pay cash.  My current shack is paid for. 
 
Time to check the tape:
New Century Financial (NEW): Price then $37.35/ Price now $14.65
H & R Block (HRB):  Price then $24.13/ Price now $21.55
IndyMac Bancorp (NDE):  Price then $38.25/ Price now $31.41
Countrywide (CFC):  Price then $36.34/ Price now$37.02

AllREIT's picture
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Joined: 2006-12-16

Soothsayer wrote:New Century Financial (NEW): Price then $37.35/ Price now $14.65

From NEW's 12b-25 (Why we can't file a 10-K) filing

Quote:In the event the Company is unable to obtain satisfactory
amendments to and/or waivers of the covenants in its financing
arrangements from a sufficient number of its lenders, or obtain
alternative funding sources, KPMG has informed the Audit Committee that
its report on the Company’s financial statements will include an
explanatory paragraph indicating that substantial doubt exists as to the Company’s ability to continue as a going concern.

aldo63's picture
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Joined: 2006-09-11

The best thing about the RE crash will be that the regulators will focus their attention on the mortgage industry and their loan practices and hopefully get the hell out of our business. Type in Mortgage debt bubble on google news and look at some of the predictions. I also  paid off  my house a ferw years back. I think soothsayer is right in that you will be able to buy a 600k house for 425k. the problem is that it will be worth 425k for the next 10 years and you/my current home will also go down. I do not believe in debt.
The question for this board is what stocks will get hit if we start seeing massive defaults. I know the sub-primes, but which brokerage firms, banks, small banks are holding the bag.

EDJ4now's picture
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Joined: 2006-02-08

Generally speaking, doing this is pretty stupid.  I have done it once, but I can't see doing it in other circumstances.
My father in law did this with me, he has quite a bit of experience in real estate and in investing.  I told him it was a bad idea, but he wanted to do it anyway and said he would do it with someone else if I didn't take the trades, so I took the trades.  If it was anyone else I probably wouldn't have taken the money if I knew what they were doing, a couple of hundred in GDC isn't worth a complaint, which this could easily lead to. 
The other thing he had going for him was a low teaser rate (4% for 1st year or something like that), and he only owed about $30,000 on a $200,000 house, and he has a $1mm net worth.  This was purely play money for him, he wanted to buy a couple of individual stocks and see how lucky he could get.  He bought some stocks, and then a couple of weeks before his teaser rate expired he sold them and paid off the loan.  My recollection is he made a few bucks, but not much. 

Soothsayer's picture
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Joined: 2005-02-24

Check out the ass-kicking on this lot of stocks today.  And we're only in the early innings of real estate deflation.  Memo to all the realtors out there--warm weather and sunshine ain't going to make the problem go away.  You'll know it's over when a major "quality" company in the mortgage business (maybe someone like CFC) has a big "come to Jesus" on the quality of their loan portfolios, and their ability to continue to churn out big quarterly earnings numbers.  Remember folks, reversion to the mean. 
The lawyers aren't far behind this gigantic mess as well.  The incestuous relationships of realtors/builders/developers/mortgage professionals/title companies makes whatever existed in this business in the late 90s look like a sandbox compared to these folks.  They are about to get what they deserve. 

johnson's picture
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Joined: 2006-12-20

It's one thing if one is dollar cost averaging into equities over the years instead of paying down principal for their mortgage
MUCH different than
telling a client who has alot of principal in their home to dump it in the market ....there is way to much risk with that

Soothsayer's picture
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Joined: 2005-02-24

Thought it might be interesting to revist this thread.  I saw this mess coming more than 3 years ago, although I would have never thought it would take down the likes of Bear and Lehman.  WaMu?  Maybe.

HymanRoth's picture
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Joined: 2008-08-25

Soothsayer wrote:Soothsayer wrote:I never said it was illegal.  I just think it's stupid.  And, no, I'm not jealous of anyone.  But, this whole real estate thing at the present time smacks of the Nasdaq in about late '97 or '98.  In other words, we haven't seen the end of it yet, and it needs to reach its ridiculous, foolish, and obscene crescendo.  I covered my short position on FNM @ 50 in my own account, but remain short H&R Block, New Century Financial, Countrywide, and IndyMac.  I'll make my money on this trend on the short side--and use the profits to buy today's 600K house for 425K.  Oh, and by the way, I'll pay cash.  My current shack is paid for. 
 
Time to check the tape:
New Century Financial (NEW): Price then $37.35/ Price now $14.65
H & R Block (HRB):  Price then $24.13/ Price now $21.55
IndyMac Bancorp (NDE):  Price then $38.25/ Price now $31.41
Countrywide (CFC):  Price then $36.34/ Price now$37.02Good call fellas-see above.IndyMac is GONE.Countrywide was bought out for next to nothing by BAC.New Century- Must be GONE...quote for 3 bucks but not traded in the last 6 months.H&R Block is up, but I believe they are out of the mortgage business.

Anonymous's picture
Anonymous

Good call Sooth!

Soothsayer's picture
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Joined: 2005-02-24

I got called a liar today by B24 on another thread today.  I may change a small fact here and there mostly to protect my identity or the identity of someone else on this forum, but I don't lie.  Exaggerate to make a point, maybe.  Blow hard to make myself look great--don't do it.  I come on here to have fun and talk shop with other professionals in my business.  I'm not afraid to share ideas and try to give advice to new guys.  I'm opinionated and edgy, and can be a little crude when I get on here after I've been drinking.  However, I do not lie.  I've been right about so many things on this forum over the years, I don't bother keeping track anymore.  But, when I got a one word post "Liar!", I needed to reestablish just why they call me Sooth.  Thanks for the compliment.  B24 is still some home office GP who gets paid to post on here, and EDJ still sucks and swallows.

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