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Margin Calls Mount On Loans Against Stock Portfolios Used To Buy Homes, Boats, “Pretty Much Everything”

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In a securities-based loan, the customer pledges all or part of a portfolio of stocks, bonds, mutual funds and/or other securities as collateral. But unlike traditional margin loans, in which the client uses the credit to buy more securities, the borrowing is for other purchases such as real estate, a boat or education.

The result was “dangerously high margin balances,” said Jeff Sica, president at Morristown, N.J.-based Circle Squared Alternative Investments, which oversees $1.5 billion of mostly alternative investments. He said the products became “the vehicle of choice for investors looking to get cash for anything.” Mr. Sica and others say the products were aggressively marketed to investors by banks and brokerages.

From the Wall Street Journal article: Margin Calls Bite Investors, Banks

Today’s article from the Wall Street Journal on investors taking out large loans backed by portfolios of stocks and bonds is one of the most concerning and troubling finance/economics related articles I have read all year.

Many of you will already be aware of this practice, but many of you will not. In a nutshell, brokers are permitting investors to take out loans of as much as 40% of the value from a portfolio of equities, and up to a terrifying 80% from a bond portfolio. The interest rates are often minuscule, as low as 2%, and since many of these clients are wealthy, the loans are often used to purchase boats and real estate.

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At the height of last cycle’s credit insanity, we saw average Americans take out large home loans in order to do renovations, take vacations, etc. While we know how that turned out, there was at least some sense to it. These people obviously didn’t want liquidate their primary residence in order to do these things they couldn’t actually afford, so they borrowed against it.

In the case of these financial assets loans, the investors could easily liquidate parts of their portfolio in order to buy their boats or houses. This is what a normal, functioning sane financial system would look like. Rather, these clients are so starry eyed with financial markets, they can’t bring themselves to sell a single bond or share in order to purchase a luxury item, or second home. Of course, Wall Street is encouraging this behavior, since they can then earn the same amount of fees managing financial assets, while at the same time earning money from the loan taken out against them.

I don’t even want to contemplate the deflationary impact that this practice will have once the cycle turns in earnest. Devastating momentum liquidation is the only thing that comes to mind.

So when you hear about margin loans against stocks, it’s not just to buy more stocks. It’s also to buy “pretty much everything…”

From the Wall Street Journal:

Loans backed by investment portfolios have become a booming business for Wall Street brokerages. Now the bill is coming due—for both the banks and their clients.

Among the largest firms, Morgan Stanley had $25.3 billion in securities-based loans outstanding as of June 30, up 37% from a year earlier. Bank of America, which owns brokerage firm Merrill Lynch, had $38.6 billion in such loans outstanding as of the end of June, up 14.2% from the same period last year. And Wells Fargo & Co. said last month that its wealth unit saw average loans, including these loans and traditional margin loans, jump 16% to $59.3 billion from last year.

In a securities-based loan, the customer pledges all or part of a portfolio of stocks, bonds, mutual funds and/or other securities as collateral. But unlike traditional margin loans, in which the client uses the credit to buy more securities, the borrowing is for other purchases such as real estate, a boat or education.

Securities-based loans surged in the years after the financial crisis as banks retreated from home-equity and other consumer loans. Amid a years long bull market for stocks, the loans offered something for everyone in the equation: Clients kept their portfolios intact, financial advisers continued getting fees based on those assets and banks collected interest revenue from the loans.

This is the reason Wall Street loves these things. You earn on both sides, while making the financial system much more vulnerable. Ring a bell?

The result was “dangerously high margin balances,” said Jeff Sica, president at Morristown, N.J.-based Circle Squared Alternative Investments, which oversees $1.5 billion of mostly alternative investments. He said the products became “the vehicle of choice for investors looking to get cash for anything.” Mr. Sica and others say the products were aggressively marketed to investors by banks and brokerages.

Even before Wednesday’s rally, some banks said they were seeing few margin calls because most portfolios haven’t fallen below key thresholds in relation to loan values.

“When the markets decline, margin calls will rise,” said Shannon Stemm, an analyst at Edward Jones, adding that it is “difficult to quantify” at what point widespread margin calls would occur.

Bank of America’s clients through Merrill Lynch and U.S. Trust are experiencing margin calls, but the numbers vary day to day, according to spokesman for the bank. He added the bank allows Merrill Lynch and U.S. Trust clients to pledge investments in lieu of down payments for mortgages.

Clients may be able to borrow only 40% or less of the value of concentrated stock positions or as much as 80% of a bond portfolio. Interest rates for these loans are relatively low—from about 2% annually on large loans secured by multi million-dollar accounts to around 5% on loans less than $100,000.

80% against a bond portfolio. Yes you read that right. Think about how crazy this is with China now selling treasuries, and U.S. government bonds likely near the end of an almost four decades bull market.  
 

About 18 months ago, he took out a $93,000 loan through Neuberger Berman, collateralized by about $260,000 worth of stocks and bonds, and used the proceeds to buy his share in a three-unit investment property in the Bushwick section of Brooklyn, N.Y. He says that his portfolio, up about 3% since he took out the loan, would need to fall 25% before he would worry about a margin call.

Regulators earlier this year had stepped up their scrutiny of these loans due to their growing popularity at brokerages. The Financial Industry Regulatory Authority put securities-based loans on its so-called watch list for 2015 to get clarity on how securities-based loans are marketed and the risk the loans may pose to clients.

“We’re paying careful attention to this area,” said Susan Axelrod,head of regulatory affairs for Finra.

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I think the window for “paying close attention” closed several years ago.

All I have to say about this is, good lord.

by Mike Kreiger

How To Avoid Fake Vacation Rentals

https://i0.wp.com/img.grouponcdn.com/deal/ugCmyYXxRmCQz4LXFNsV/j6-960x582/v1/c700x420.jpg by Vanessa Grout

The home-sharing economy is heating up. Inevitably, more and more of us have been getting fleeced on fake vacation rentals.

Vacation planning often begins with excitement, optimism and nowadays the Internet. The online search leads far into a world of glossy photos, descriptive blurbs and, of course, countless promises of customer satisfaction. Even if you’re not inclined to rent a stranger’s house, you may find that for the most popular destinations, traditional hotels are booked or inadequate. So renting a vacation home is a natural alternative. According to the Vacation Rental Managers Association, 24 percent of leisure travelers report having stayed in a vacation home, up from around 11 percent in 2008.

Before the Internet, the search for a private vacation rental was slow and impractical. It involved trading a lot of phone calls, mailing printed packages and coordinating to solve all kinds of problems. Hoteliers like Marriott, Hilton and Hyatt Hotels built empires based on the wealthy traveler’s desire for luxury and reticence to deal with this process.

Then along came online portals like VRBO, Airbnb and Craigslist. All of a sudden, we’re in the mood to share.

For the most part, the rise of all of this house sharing has been positive. Sophisticated channels like Airbnb and HomeAway try especially hard to protect renters by providing secure payment, user comments and star ratings. But even they are not immune from deceit.

Vacation rental scams come in many different forms. Some Web portals are run by technologists with no connection to the actual real estate. Through smart search engine optimization, these sites attract users, and then sell the lead to the true agent, who offsets the cost with higher rent.

Sure, it looks like the perfect spot for a vacation. But will it be there when you arrive?

The worst rip-offs seduce would-be vacationers with fabulous pictures of fictitious properties. Once the renter is hooked, the phony landlord collects an up-front “security deposit” and runs for the hills. Victims are left unaware they’ve been cheated until weeks later, when they show up at the address with their luggage in hand.

Other variations on the scam are only slightly less fraudulent. Some fakes use the bait-and-switch method by showing unavailable properties, only to divert the renter to another, less desirable spot. Other tricksters may double-book a property, then send whichever vacationer arrives last to a second-rate backup, along with sincere apologies.

You’re too sharp to be ensnared in any of these scams, right? Real estate is my business, so I used to believe the same thing. Then I tried renting a vacation home in Aspen, Colorado, for a summer holiday.

I found many remarkable online listings — only to discover after contacting their presumed representatives that the properties were always booked. After many failed tries and long phone calls I realized I was being conned. I stopped browsing and hired a high-quality local real estate broker to show me real listings.

My experience could have been worse — some friends from Germany were recently snared here in Miami. Fortunately, they insisted on withholding their security deposit from their seemingly delightful contact until after completing a property inspection. Still, she pressured these visitors to wire funds — right up to the time they were driving to the property after their long flight. Having stood their ground, they arrived at the home, which appeared exactly as it did online. Unfortunately, it was occupied by its unsuspecting owner — who had no intention to rent. Of course, my friends never again succeeded in connecting with their agent and had to scramble to locate a hotel room.

Why aren’t authorities cracking down? Perhaps because the dollar figures involved in each case simply aren’t enough to justify an intercontinental examination. The victims, by definition, don’t live anywhere near the jurisdiction of the reported crime. Most often, the crooks don’t either.

So how do you protect yourself? Here’s a list of 10 ways to combat this scam:

  1. Don’t be fooled by photography. In particular, be wary of the nicest-looking, most Photoshopped property photos. Ask the owner for additional photos — an honest lessor will always have them. Or ask your agent to use technology like FaceTime or Skype to show you the property live. At the very least, use Google GOOG -0.11% Earth and Google’s Street View feature to confirm that the property you’re renting actually exists at the address advertised. You can also use those Google tools to get an unvarnished look at the property’s exterior.
  2. Be careful of the cheapest properties. If prices seem too good to be true, they probably are. If you don’t have a feel for what a reasonable price is in an area, get one. Scammers often go after people who aren’t that savvy. And drive a hard bargain — not just to get a better deal, but also to detect odd behavior from the other party.
  3. Never pay with cash. The preferred methods of payment among criminals are cash and cash-transfer services like MoneyGram and Western Union WU 0%. Use a credit card instead — Visa, MasterCard and American Express will all allow you to recover money you lose to fraud. Reputable sites like Airbnb will hold your security funds in escrow. They play middleman, making sure you’ve put the funds in place before you get keys. (Some portals offer insurance against fraud — but it’s expensive and may not cover much; read the policy closely.)
  4. Use a trusted local agent. Yes, you should expect to pay them. But they can show you bona fide listings or go look at the properties that you’ve seen on the Internet for you. Be sure to check their license.
  5. Confirm legitimacy. For ownership and all documents, confirm that the owner’s name on the lease is the same as the one shown on public property appraiser records. Then have a lawyer review the lease, just like you would a full-year agreement.
  6. Read the comments. The feedback from previous renters that appears on sites like Airbnb and VRBO is invaluable. And in some cases, you’re even allowed to pose questions to other users.
  7. Trust your instincts. If you apply some skepticism to the process, you’re more likely to see red flags. You’re also more likely to catch suspicious behavior. My Germans looked back after their experience and realized their phony realty agent had exhibited all kinds of weird tics. They were so excited about their trip to Miami that they failed to pick up on them.
  8. Take your time. No need to rush. For long vacations, consider going ahead of time to check out the property, or not renting a house for the first week — stay at a hotel for a few nights. It will give you an opportunity to see the property you’re renting in person before turning over your security deposit.
  9. Be a regular. If you rent a home you like, stick with it. You’ll develop a relationship with the owner if you go back to the same place year in, year out — and avoid the risk of being scammed on a new property. If you’re traveling to a new place, try to find a friend who lives there and will give you honest feedback on potential rentals, good neighborhoods, etc.
  10. Beware group think. If you’re vacationing with a half-dozen other people, everybody tends to figure that somebody else is paying attention to the details and making sure the group isn’t getting ripped off. Then, when the amazing six-bedroom place you all rented together is nowhere to be found and your security deposit evaporates, everybody’s pointing fingers.

High Stakes in Dracula’s Transylvania

House hunters are turning to Romania’s central region of Transylvania, popularized by the tale of Count Dracula. Restrictions were lifted this year on local purchases of local real estate by European Union nationals. Bran Castle, above, in Bran, Brasov county, is marketed as the home of Count Dracula, but in reality it was a residence of Romanian Queen Marie in the early 20th century.Romania draws foreign buyers looking for historic mansions and modern villas in resort areas

by Martin M. Sobczyk

Count Dracula, the central character of Irish author Bram Stoker’s classic vampire novel, eagerly left for England in search of new blood, in a story that popularized the Romanian region of Transylvania. Today, house hunters are invited to make the reverse journey now that Romania is a member of the European Union and that restrictions were lifted this year on purchases of local real estate by the bloc’s nationals.

Britain’s Prince Charles, for one, unwinds every year in Zalanpatak. The mud road leading to the remote village stretches for miles, with the clanging of cow bells accompanying tourists making the trek.

Elsewhere in the world, the heir to the British throne occupies great castles and sprawling mansions. In rural Romania, he resides in a small old cottage. His involvement, since 2006, in the restoration of a few local farmhouses has given the hamlet global popularity and added a sense of excitement about Transylvania living.

A living room in Bran Castle, a Transylvania property marketed as Count Dracula’s castle. The home is for sale, initially listed for $78 million.A living room in Bran Castle, a Transylvania property marketed as Count Dracula’s castle. The home is for sale, initially listed for $78 million.

Transylvania, with a population of more than seven million in the central part of Romania, has a number of high-end homes on the market. And, yes, one is a castle. Bran Castle in Brasov county is marketed as the home of Count Dracula. In reality it was a residence of Romanian Queen Marie in the early 20th century. In 2007, the home was available for $78 million. The sellers are no longer listing a price, said Mark A. Meyer, of Herzfeld and Rubin, the New York attorneys representing the queen’s descendants, but will entertain offers.

Foreign buyers had been focused on Bucharest, where there was speculative buying of apartments after the country joined the EU in 2007. But Transylvania has been luring house hunters away from the capital city.

A guesthouse on the property in Zalanpatak, Transylvania, that is owned by Britain’s Prince Charles. His presence has boosted interest in Romanian real estate.A guesthouse on the property in Zalanpatak, Transylvania, that is owned by Britain’s Prince Charles. His presence has boosted interest in Romanian real estate.

Transylvania means “the land beyond the forest” and the region is famous for its scenic mountain routes. Brasov, an elegant mountain resort and the closest Transylvanian city to the capital, has many big villas built in the 19th century by wealthy merchants. A 10-room townhouse from that period in the historic city center is listed for $2.7 million. For $500,000, a 2,200-square-foot apartment offers rooftop views of the city and the surrounding mountains.

A seven-bedroom mansion in the nearby village of Halchiu, close to popular skiing resorts, is on the market for $2.4 million. The modern villa features two huge living rooms, a swimming pool, a tennis court and spectacular views of the Carpathian Mountains.

The village, founded by Saxons in the 12th century, has rows of historic houses across the street. Four such buildings were demolished to make way for the mansion, completed in 2010.

A $2.4 million mansion is for sale in Halchiu village.A $2.4 million mansion is for sale in Halchiu village.

“Rather than invest a million or more to buy an existing house, the wealthy prefer to build on their own because construction materials and work is cheaper,” said Raluca Plavita, senior consultant at real-estate firm DTZ Echinox in Bucharest.

Non-EU nationals can’t purchase land outright—although they may use locally registered companies to circumvent the restriction—but they can buy buildings freely, said Razvan Popa, real-estate partner at law firm Kinstellar. High-end properties are out of reach for many Romanians, who make an average of $500 in monthly take-home pay.

The country saw a rapid inflation of real-estate prices before 2008, on prospects of Romania’s entry to the EU and the North Atlantic Treaty Organization, as well as aggressive lending by banks. Values then fell by half during the global financial crisis.

The economy is stronger now, with the International Monetary Fund estimating 2.4% growth this year. But the country is still among Europe’s poorest. Its isolation during the dictatorship of Nicolae Ceausescu gave it a bad image.

The interior of the seven-bedroom Halchiu mansion, which was built on the site of four traditional Saxon homes.The interior of the seven-bedroom Halchiu mansion, which was built on the site of four traditional Saxon homes.

“Interest in Romania isn’t comparable with Prague or Budapest where some may be looking to buy a small apartment with a view of Charles Bridge or the Danube,” said Mr. Popa, the real-estate lawyer.

The international publicity around Prince Charles’s properties offers a counterbalance to some of the negative press Romania has received in Western Europe, which is worried about well-educated Romanians moving to other countries to provide inexpensive labor.

The Zalanpatak property is looked after by Tibor Kalnoky, a descendant of a Hungarian aristocratic family. The 47-year-old studied in Germany to be a veterinarian and, after reclaiming family assets in Romania, has managed the prince’s property and has hosted him during his visits.

These occasional visits are enough to attract scores of tourists throughout the year to the formerly obscure village in a Transylvanian valley. The fact that few street signs lead there, that the property offers no Internet or TV and that cellphone signals are absent for miles, seems only to add to the mystery of the place.