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Beyond The Limits Of Cash or Credit

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High-End Los Angeles Real Estate—It's "Mansion Envy!"
Cash No Longer Needed

You've heard the age-old irony of the rich and famous: Their wealth and status earn them endless comps—free meals, hotel stays, lift tickets at Verbier. But how about getting comped the down payment on a $10 million estate? It happens.

The bull market on both coasts is leading gutsy well-heeled Los Angeles buyers to spare their passbooks and spoil their portfolios. It's called cross-collateralization.

Simply put, a cross-collateral home loan uses another asset—a piece of real estate, stocks and bonds, even a jet—in lieu of cash for the down payment.

This doesn't happen much in the middle class (though in the mid '90s, lots of people took an equity line of credit against their first home to raise the cash for an inexpensive second residence).

But in the land of the seven- and eight-figure price tags, cross-collateralization is no big deal.

Both Merrill Lynch and the Boston Company routinely advertise for high-end buyers. "We collateralize loans against securities," says Richard Applegate a manager at Merrill Lynch.

"They represent a way to make a 100% loan to value—in other words, a way for the borrower not to make a down payment."

The Boston Company's Mark Winthiser adds, "A borrower transfers stock to us, and we hold it as collateral." For example, a $1 million home purchase, which might normally require a $250,000 cash down payment, can be secured with about $350,000 worth of stock (typically valued at 70 cents on the dollar).

There are a few stipulations: The stock must be traded on the New York Stock Exchange or NASDAQ, it must trade for at least $10 a share, it cannot be part of a pension plan (no IRAs or 401Ks), and the borrower must not be deemed a company insider under SEC Rule 144—which could render the stock unsellable by the lender.

If you think cross-collateral loans sound risky, try lending millions to borrowers who don't have a Lear jet, a burgeoning portfolio, or even enough credit to get a gold card.

El Segundo-based Hawthorne Savings specializes in "dynamite collateral," where the house itself is the buyer's only chip on the table and, says Hawthorne CEO Scott Braly, "at the end of the day, you are perfectly prepared to foreclose.

"That's bad news for the buyer-and for the bank, too, in the case of some pricey, tough-to-assess properties. At the very high end," says Braly, "houses worth more than $5 million-the stuff that sits up behind the hedges and up the long driveways-are very hard to value." The lender gets stuck with the property, whether it's a golden palace or a white elephant.

(Reprinted from Los Angeles Magazine, January 1999.)