This can be a good program for someone who wants to keep their money invested and avoid the tax consequences of cashing out of investments, Musci says.
As an added bonus, the pledged assets are counted as a downpayment, so there is no private mortgage insurance (PMI) on the loan. On the flipside, however, the assets are pledged collateral and can be seized by Schwab in the event the borrower defaults on the loan. Borrowers may also be called upon to add money to their investment accounts if their value dips. And in a frightening facet of this type of loan, Schwab reserves the right in the event of a margin call to sell securities and makes it clear that investors won't be entitled to decide which assets are sold.
While Schwab does not portfolio its loans, it does retain servicing, so your clients will deal only with Schwab over the life of their mortgage. As important, Schwab, like Thornburg, does not charge a yield spread premium, which can cost consumers additional fees ranging from 25 to 250 basis points of their mortgage.
LPL Financial Services, based in San Diego and Boston, got into the mortgage business in 2003 and wound up buying the brokerage service it was using in 2004 because the idea really caught fire in the field. "We did it to meet demand from our financial advisors, who really want to be the central point for clients, regardless of the product," says Tom Berry, LPL's senior vice president of private client services.
LPL brokers its mortgages through a cadre of lending institutions, so clients pay administrative and processing fees to both LPL (a flat $450 fee) and the underwriting bank. However, the firm has done away with the yield spread premium and replaced it with a flat, albeit 1% fee.
Reps and advisors who refer business to LPL are paid 50 basis points of the client's mortgage. Although they can waive this fee, they rarely do, Berry says.
Demand has been so great that LPL has had to limit the number of advisors accepted into the mortgage program, which requires three-hours of online training; so far only 10% of its 6,000 advisors have been enrolled. Advisors with wealth management practices are most likely to be targeted for enrollment. "We've done so many loans ($175 million in the past 12 months) we didn't feel we could roll it out to everyone without running the risk of overwhelming the system," Berry says. "But we're doing a 12-city training program in 2005 to bring more people onboard. We believe that debt management is critical to the advisors-client relationship, and this is one way we're addressing that."
