The brokerage unit of Fidelity Investments has joined with GMAC Mortgage Corp. to let borrowers secure the down payment portion of their loans without liquidating their investments.
The program lets people borrow 100% of their home's purchase price and pledge for the down payment with securities in their Fidelity account. They are not charged interest on the pledge, and they avoid taxes that could be triggered by selling appreciated securities.
Other lenders' low-down-payment programs offer rates as low as 3% and are targeted at low- to moderate-income customers. But Sara Adelizzi, a vice president of Fidelity Brokerage Services Inc., said, "This is a program for folks who have the means to fulfill the down payment requirement.
"With the other programs, the lenders get their money somehow-the borrowers have to be mortgage-insured, or the rate is usually higher if the risk is higher," she said. "This is an alternative to taking those types of loans. A family member can even pledge their security assets for your down payment."
Customers can continue to trade, redeem, or exchange pledged assets as long as a required equity level is maintained in the account.
If the securities' market value declines, the customer may be required to deposit more money or securities. If the customer fails to do so, Fidelity may be required to sell all or a portion of the pledged assets.
"If you have a deposit in your account of $150,000, you can usually borrow about half, or $75,000," Ms. Adelizzi said. "But if a borrower defaults on the loan, GMAC can take the amount of the down payment pledge to cover" its loss.
For example, if a $250,000 loan were foreclosed and the home sold by GMAC Mortgage for $300,000, GMAC would owe the borrower the $50,000 "profit." But if the home were sold for only $225,000, the borrower would owe GMAC $25,000 out of the pledged securities.
Ms. Adelizzi said that Fidelity's program with GMAC Mortgage is exclusive and the brokerage company would not seek additional lender- partners.
She added that all GMAC Mortgage lender and application fees are waived for Fidelity customers and that servicing of loans made under the program will never be sold.
The loan products offered include fixed-rate, adjustable, and balloon mortgages, and they can be for purchase or refinancing.
Assets held in Fidelity retirement accounts are ineligible for use in the program.
Merrill Lynch & Co. has a similar, eight-year-old program but funds its own mortgage loans through Merrill Lynch Credit Corp. However, Merrill requires that its customers keep separate collateral accounts for their mortgages.