Broker Plan Only as Good as the Market

Question: I can either put 20% down to avoid mortgage insurance or I can invest the 20% in stock held by my stockbroker, who would then finance 100% of the value of the house with no mortgage insurance.

Assuming the rate and points are the same, is the broker plan a good or bad idea?

Answer: Your securities broker and a number of others have home loan plans by which they accept the deposit of securities in place of a down payment.

If you purchase a house for $200,000, for example, the broker will lend you the entire $200,000, provided you deposit securities worth $40,000 with the broker.

For the broker, the securities provide essentially the same protection against default as a down payment and discourage the customer from shifting the account to another broker.

These plans delay the accumulation of equity in the house indefinitely.

The customer begins with no equity, and if the payment covers only the interest for the first 10 years, which is a common feature, the only equity buildup that occurs is from appreciation in the value of the property.

The theory behind this is that the consumer’s overall wealth will grow more rapidly if the maximum amount is invested in securities.

In the example, the consumer is in effect borrowing an additional $40,000 to invest in securities. Whether this turns out to be a good or bad idea depends on the yield earned on the securities relative to the mortgage rate.

It doesn’t make sense to borrow $40,000 at 7% to invest in government bonds yielding 5.5%. The consumers who do this are investing in common stock, which they expect will yield 12% to 20%, which has been the case for some years.

If this continues to be the case, the securities plan will turn out well. If the stock market collapses, of course, it will turn out to have been a bad idea.

New Mortgage Servicer Must Be Checked Out

Q: My mortgage company is going bankrupt. What happens to my mortgage?

A: If you’re hoping that your mortgage might go away, forget it. Your debt is a valuable asset of the bankrupt firm that will be transferred to some other firm. And that means that the firm receiving your payment will change.

The firm that receives your payment is the loan servicer, and it might or might not own your mortgage.

Most loans today are serviced by specialized servicing agents that do not own the loans they service but that collect a fee under a contract with the owner.

Transfers of servicing occur with some frequency, occasionally because the servicing firm goes bankrupt, as in your case, but more commonly when the servicing contracts are sold.

Regardless of the reason, transfers of servicing involve a risk to the borrower because there are connivers who pretend to be the new servicing agent and try to induce borrowers to send their payments to them.

You can prevent this from happening by confirming the legitimacy of the new firm before sending them any money.

Under federal law, a firm that is relinquishing the servicing of a mortgage to another firm must notify the borrower of the name of the successor firm along with a physical address, toll-free telephone number and a specific date when the changeover will be effective.

The notice you receive from the new firm should conform to the information you received from the old firm.

If there is any discrepancy between the information provided by the alleged new servicing agent and the information from the old one, and if you can’t clarify it to your satisfaction over the telephone, don’t send them any money.

Instead, open a new bank account and deposit your payment in that account. This will assure that you won’t get ripped off and will provide evidence of your good-faith effort to meet your obligation.

Jack Guttentag is a syndicated columnist and professor of finance emeritus at the Wharton School of the University of Pennsylvania. Questions or comments can be left at mtgprofessor.com. Distributed by Inman News Features.