Like many real estate professionals whose conventional paths to profit have been closed off, Joel Greene wants to find ways to make money during the downturn. Greene, who built up a successful business based in Florida brokering condo-hotel sales, recently turned his focus to helping would-be buyers obtain a form of financing called stock-collateralized loans.
The loans, which use investment portfolios as collateral, are non-recourse, so if a borrower’s portfolio drops in value over the course of the loan term, he is allowed to walk away from the loan owing nothing — though he still owns whatever he used the loan to buy. Greene and others involved with stock-collateralized loans say they’re increasingly being used to finance residential and commercial real estate purchases. It’s a measure of the tight credit markets that this alternative is gaining some traction.
While some mortgage brokers are wary of the loans, Greene and others involved with them believe they are part of the solution to what’s been ailing potential buyers, who can’t get access to conventional financing or can’t complete projects without cheap capital.
Greene believes the mortgage brokers who are wary of the loans “are the ones that simply don’t understand them.”
Brooke Jacob, the CEO of Suffern, N.Y.-based mortgage company Everest Equity, said that loans are “a very tough sell.”
Stock-collateralized loans, she said, “are a trend that lenders would like to popularize, but borrowers are correctly wary of. On the surface, the non-recourse feature makes these loan products attractive. However, in my experience borrowers are not willing to pledge their stock portfolios — or any other marketable liquid asset for that matter — to obtain financing.”
Greene’s career reflects the tumult that’s got these strategies in the crosshairs. In 2002, Greene created a division for his family firm Sheldon Greene & Associates called Condo Hotel Center. Within a few years, the firm — which focused on commercial hotel transactions — was closing more than $50 million a year in condo-hotel sales through his Web-based brokerage.
But the condo-hotel business started to dry up in 2006, and Greene says he was increasingly dealing with many customers who had “no financing to close on their purchases. We realized in order to survive we needed to come up with another way to make money.”
Greene said the loans range from under $100,000 to hundreds of millions of dollars. “You still have the benefit of ownership if the value of the stock crashes because you can walk away and still own your real estate.”
Pennsylvania-based HedgeLender is a loan brokerage that specializes in stock-collateral loans. Vice president Fred Wahler said that 90 percent of their business now involves real estate transactions.
“Developers are approaching equity partners and saying, ‘Use your portfolio and get a non-recourse loan instead of putting up cash,'” he said, adding that they also appeal to foreign nationals, who are traditionally limited in terms of the financing they can receive in the U.S.
“We are part of the solution to what’s gone wrong with the economy,” said Wahler. “The credit markets are still very depressed. Many people are taking loans with us to buy real estate. The economic effect of that is all good for HedgeLender. We’re now a liquidity tool. Where the banks say no, we say yes.”
Ross Weinstein, a managing partner at the Union Square Mortgage Group, believes the loans sound extremely questionable.
“I am all for people finding a way to find a way to finance real estate purchases,” he said. “But when I hear something like this I rewind three years and go back to a time where people said, ‘I can’t afford this, but give me money for it.'”
Weinstein continued: “When the lead pitch is no-recourse, that you can walk away, it’s irresponsible. Who knows what’s going on behind the scenes in terms of how the portfolios are being managed? It scares me.”
The typical stock-collateralized loan term is much shorter than for traditional mortgages, and the origination fees tend to be higher. Wahler said that loans can be approved within 10 days, and that the average loan terms run between one to three years.
Jacob, at Everest, said the economic climate should make people skeptical.
“Especially in a declining economic environment, prudent buyers/owners want to maintain as much of their liquidity as possible,” she said. “Relinquishing cash position in the name of obtaining non-recourse financing is a very tough sell.”
Greene, however, says the loans are absolutely on the up-and-up, and that they’re made more attractive by the fact that you can buy anything aside from other marginable securities — such as stocks — with them.
“This is one of the few loans aside from a home equity loan where you can use the money for everything except for illegal purposes,” he noted.