February 18, 2000

Options for stock-rich, cash-poor homebuyers

By TOM KELLY
The Real Estate Advisor

So, you can pay Uncle Sam now, or you can pay him later. The big decision is when should you roll the dice, pay the gain and continue on with your life.

The working mother with six kids had worked her New York accent to a fever pitch in the crowded supermarket. Her oldest daughter was now engaged to be “maahreed” to a Boston lawyer and the big event would take place on Cape “Caad” in June.

“Not only that,’’ the woman said, “but her company offered to give her 1,000 more stock options if she moved from New York to Boston. What timing! “So she sez, ‘Ma, I can’t even afford ‘em because of the taxes.’ So I sez, ‘Here I am honey! Here I am!’’

The woman is certainly not alone. Parents are watching their young professional children come unexpectedly into wealth all over the country. Technology and Internet companies are recruiting the best and the brightest men and women with stock-option incentives never before imagined. The practice continues as the need to be “first to market” becomes paramount in competitive start-ups. Creative minds - and strong bodies - can find places in success-story businesses.

The front-line employees are only part of the picture. Day betting (day trading) has also created a bolder, wealthier individual willing to take chances. Although this set seems perched on a precarious plateau, it continues to roll with the tech-heavy Nasdaq and produce consumers who now find themselves stock rich and cash poor.

Investment firms are falling over themselves trying to produce financial programs that lure the young with options. Merrill Lynch has had one home-finance vehicle in place since 1993 and its popularity is rising with the markets.

The Merrill Lynch Mortgage 100 Program offers borrowers the chance to "pledge" stock as collateral, thereby "borrowing” up to 100 percent of the purchase price or current value of the home, without cashing the stock.

The borrower must initially pledge in stock or other securities at least 39 percent of the mortgage amount into a separate account. Since all securities fluctuate, the securities pledged usually must have "cushioned" market value of 139 percent of the pledged amount. That sounds complex, but it's really not. For example, let's say you wanted 100 percent financing on a $300,000 home. Merrill Lynch would lend you all the money if you pledged approximately $152,100 in securities with the

company ($300,000 times 39 percent = $117,000, times 139 percent = $162,630.)

“The idea is to have a client’s assets continue to work for them,’’ said Peter Stanton, executive-vice president of Merrill Lynch Credit Corp. This program looks great - as long as the stock holds its value. If, for instance, you "pledge" Costco stock and the warehouse giant’s share value plummets, you will need to add to the pledge account. And if you default on your loan, the securities in the pledge account could be cashed to cure the debt.

What about the person who simply wants to own the roof over his head? Often, this homeowner sleeps better at night knowing he his chipping away at the mortgage mountain and consistently earning and equity stake in his personal residence.

“That’s one of the questions that we are asked most often,’’ Stanton said. “If the goal is to pay off the house faster, then we ask our customers to consider letting their amounts grow. By letting their money accrue now, they are better able to pay off their home faster.’’

Not only is there a lure to keep stocks in place for appreciation, but there is also the penalty of capital gains tax once the stock is sold. The reductions in the Taxpayer Relief Act of 1997 brought the maximum down to 25 percent tax liability for most stock sales. Eventually, when stocks are cashed, the gain is due.

Previous columns:

• What lies ahead for real estate?, 02-11-2000
• Selling that vacation property, 02-04-2000
• Definition of fixture isn't fixed, 01-28-2000
• New forces changing housing market, 01-21-2000
• Why buy when you can rent?, 01-14-2000
• One analyst can move mountains, mortgages, 01-07-2000
• A look at house of tomorrow, 12-23-1999
• Home for holidays has a new meaning, 12-17-1999