finra

FINRA

 

 

FOR RELEASE:
CONTACTS:
Monday, May 3, 2004
Nancy Condon 202-728-8379
Herb Perone 202-728-8464

 



NASD Alerts Investors of 100 Percent Mortgage Risks

Washington, D.C.—NASD today issued an Investor Alert to inform investors about the often overlooked risks associated with 100 percent loan-to-value ratio mortgages, also known as pledged-asset mortgages. At brokerage firms that offer these mortgages, customers can pledge their stocks, bonds, mutual funds and other securities in lieu of a down payment for a mortgage.

 

While brokerage firms often tout the advantages of 100 percent mortgages - such as allowing investors to avoid private mortgage insurance or liquidating their securities to come up with a down payment - they may overlook, or consign to the fine print, the risks associated with these mortgages.

 

"These 100 percent mortgages are not suitable for everyone, and investors should approach them with extreme caution," said Mary L. Schapiro, NASD Vice Chairman and President of Regulatory Policy and Oversight. "Many investors aren't aware of the considerable risks involved. We're especially concerned that they don't understand that the securities they pledge in lieu of a down payment may be liquidated if the value of those securities drops below a certain level, or if they default on their mortgage."

 

A typical pledged-asset mortgage requires the investor to pledge securities in his or her brokerage account in lieu of a down payment. The amount of securities pledged can vary, depending on the type of securities and the terms of the mortgage. If the value of the securities pledged drops below a minimum amount set by the brokerage firm, the firm may issue a "collateral call" - a demand that the investor deposit additional cash or securities.

 

Some of the risks associated with 100 percent mortgages explained in the Investor Alert include:

  • The firm can force the sale of securities in an investor's account to meet a collateral call.
  • The firm can sell the pledged securities to meet a collateral call without informing the investor.
  • The investor is not entitled to choose which securities in his or her account are sold to meet a collateral call.
  • The investor is not entitled to an extension of time to meet a collateral call.
  • Defaulting on the mortgage could result in the investor losing both the house and the pledged securities.

The often higher costs of 100 percent mortgages as compared to conventional mortgages are also explained in detail in the Investor Alert, which can be accessed at http://www.nasd.com/Investor/Alerts/alert_100percent_mortgages.htm.

 

NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business—from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.