Imagine that you have an affluent client in Silicon Valley seeking a $2 million home as an investment property. The 60-year-old entrepreneur has built a successful technology company, but rarely takes a paycheck. She needs the liquidity that a mortgage would provide so she can add the home to her portfolio, keep most of her cash in the business, and avoid withdrawing from other investments.
Because she does not have a W2 form and other documentation of full-time employment, she is denied what’s called a qualified mortgage (QM). Yet, she can well afford the debt.
This situation is all too real for many wealthy real estate investors, multimillionaire retirees, and other individuals “of means” who are frequently knocked out of the QM market. This is due to strict requirements that are set forth by the Consumer Federal Protection Bureau (CFPB) — the federal oversight organization created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank was enacted in 2010 in reaction to the 2008 mortgage crisis.
Though intended to help borrowers by making mortgage terms and product options more transparent, the requirements established by the CFPB have inadvertent repercussions for affluent individuals, who can’t always submit standard paperwork like a W2 and who aren’t simply looking to complete a primary home-buying transaction.
Redeploying Liquidity as a Market Hedge
These affluent individuals often take on mortgage debt as part of a broader wealth management strategy that requires increased liquidity. They need the extra leverage to nimbly redeploy their money in response to market trends.
As another illustration, suppose you are advising a 68-year-old retired couple with a $10 million portfolio of residential properties and equities.
Though the husband and wife have accumulated enough assets for a comfortable retirement, they would like to purchase another property as a CPI (Consumer Price Index) hedge. Through the years, they’ve become accustomed to using debt to grow their wealth. However, now that they are no longer working, they’re challenged to find a bank that will write them a mortgage.
The Role of Non-Agency Mortgages
In both of these examples, the solution to your clients’ challenges may be a non-agency (non-QM) loan. Because this kind of mortgage is privately funded, lenders are able to go beyond strict government parameters—developing their own underwriting guidelines to meet the specialized needs of affluent borrowers. For example:
- Loan amounts can be higher ($3 million is not atypical)
- Interest-only mortgages are allowed
Using Common Sense
Taking a common-sense approach, non-agency lenders look beyond standard qualification criteria (such as a predictable annual salary for full-time work). Instead, they take a more holistic view of borrowers’ aggregated assets, such as bonds, mutual funds, stocks, retirement accounts and personal bank accounts.
For instance, a non-agency lender may decide that borrowers are likely to be good credit risks if they have sufficient assets to cover a mortgage for five years and if they have paid all their bills on time for the past 12 months.
Non-agency lenders will delve deeply into customers’ bank statements (often a full year’s worth), 1099s, and other documentation and assets to support their final decisions.
Partners in Stewardship
What if you, as an advisor, were unsure whether this form of leverage is suitable for a particular client at a particular point in time? A non-agency lender may be a good partner here, too.
Consider a third example: A wealthy 70-year-old widow from Boston decides to sell her existing home, and then buy a multi-family home as both her new primary residence and another source of continuing income. She wants to live downstairs and rent the upstairs units, and she will need a mortgage to finance the purchase.
In this case, the non-agency lender can have the property appraised, and then use synthetic analysis and modeling to determine the rent she should expect to receive. The lender can also help evaluate whether the rent will cover both the mortgage debt and her lifestyle needs.
This kind of scenario illustrates the value of non-agency lenders, financial planners and wealth planners working together and consulting one another as one team. Partnerships of this kind are especially important now, as the dynamics of the real estate market begin to change, and questions about a new Biden administration tax code are the subject of continued conversations.
These discussions have implications for stewarding the retirement plans and dreams of affluent baby boomer/senior clients with complex portfolios. Curating non-agency mortgage financing to increase and harness liquidity isn’t merely a transaction; it can be a critical part of wealth planning — one client at a time.
John Lynch is founder and CEO, PCMA Private Client Lending, serving high-net-worth clients with bespoke lending solutions. He can be reached at firstname.lastname@example.org.