Why banks won’t loan for stocks?

New / Eng Oemgee
Oct 28, 2018 42 Comments

I invest pretty much all my savings in the stock market (1M+ currently invested in Vanguard index funds) but... why is that banks make it incredibly easy for people to borrow cheap money for houses or businesses, whereas if I went to Bank of America asking them for a loan to invest into Bank of America stocks they’d laugh in my face? Doesn’t investing in the stock market have a collateral just as good as a house? So why would a bank forfeit such opportunity? Don’t they themselves believe in their own stock?

Also, keep in mind this is a thought exercise: I wouldn’t actually leverage myself into a 7 figure stock market position, it just makes me wonder if the stock market is actually a good investment vehicle as everyone else preaches.

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TOP 42 Comments
  • Shopify / Eng 38d
    Isn’t this what a margin account is for?
    Oct 28, 2018 3
    • New / Eng Oemgee
      OP
      But that’s completely different and much more expensive. It doesn’t have nearly any guarantees as getting a mortgage.

      In case of downturn, the broker issuing your margin will likely call you on that! In case of a mortgage, just keep paying and the bank will happily leave you alone even if your house drops in value.
      Oct 28, 2018
    • Valorem Trynasmash
      Margin call yikes not even close to a loan!!! Never trade on margin unless you know what you’re doing.
      Oct 28, 2018
    • New / Eng Oemgee
      OP
      Exactly. Not even close.
      Oct 28, 2018
  • Facebook Totalcomp
    You can certainly get a loan with a large enough equity portfolio as collateral, and there are ways to create a loan yourself by getting creative with financial securities. It's less common, so you have to find someone who understands it, and they'd need some way to ensure you didn't sell the stocks, and the loan to value ratio might be lower.

    Some drawbacks from the banks perspective are that it's uncommon and thus more complicated, and that the ownership of stocks doesn't replace another fixed expense. If you've been paying rent every month for years you can obviously keep paying the same amount as a mortgage. That same swap isn't happening with an outright collateralized loan.

    The simplest way to get a loan is to just trade your entire portfolio for a derivative contract who's value is determined by an equivalent amount of stock. Eg you could sell x shares of spy and then enter into a forward contract to buy it back in a few years at the same price (plus a fixed interest rate).
    Oct 28, 2018 13
    • Citibank / Eng Sprinkleme
      You’re comparing apples and oranges. Mortgages are sold to GSEs in lots of 100. All other loans (including these Loans) are portfolio loans. Banks will collateralize a portfolio at a floating or FIXED rate(usually under 70% LTV, closer to 50% for optimal rates). Everything you said was “inaccurate”.
      Oct 28, 2018
    • Facebook Totalcomp
      You're just repeating what I said and calling it "inaccurate." seems like you're just being a dick for sport.
      Oct 29, 2018
    • Citibank / Eng Sprinkleme
      If you can’t understand my explanation for inaccuracy then that’s the explanation.
      Oct 29, 2018
    • Facebook Totalcomp
      Sprinkleme, I know this stuff quite well. I don't need a condescending "explanation." you clearly have nothing useful to add.
      Oct 29, 2018
    • Citibank / Eng Sprinkleme
      Totalcomp, Not sure why you think I’m being a dick or condescending by simply disagreeing with you. You seem very thin skinned. We will agree to disagree, like gentlemen.
      Oct 29, 2018
  • Facebook Nzlk50
    If this isn’t a humblebrag I don’t know what is
    Oct 28, 2018 0
  • Microsoft / Eng ek saaya👤
    Don't bank with BoA.
    Oct 28, 2018 0
  • Facebook Eurgev
    Because banks don't carry your mortgage loan. They sell it to the federal government ASAP. Bank is risking very little and mostly just earning fees.

    Many people are surprised to know that close to 100% of home loans are actually issued by the federal government (indirectly through the banks). For all purposes, US home mortgage market is nationalized. So much for land of capitalism!
    Oct 28, 2018 4
    • Amazon / Eng n0v
      Conforming loans are paid by Freddie/Fannie, but jumbo loans are not conforming and are usually portfolio loans held by the banks or collateralized. In places like Bay area, a small percentage of loans are conforming.
      Oct 28, 2018
    • Facebook Eurgev
      Yep. 90% of mortgages are backed by government. https://www.pennymacusa.com/blog/understanding-the-roles-of-fannie-mae-and-freddie-mac. It was close to 100% about 5 years ago.

      Bay Area will be lower of course.
      Oct 28, 2018
    • New DuQvV7x
      “Backed by the government” and “issued by the government” are 2 very different things.
      Oct 28, 2018
    • Facebook Eurgev
      Doesn't matter. Either way the issuer has little to zero risk once government is backing it.
      Oct 28, 2018
  • Amazon / Eng jNeo42
    It sounds like you have an excellent idea for a startup. You can put your $1m+ into an even better investment.
    Oct 28, 2018 2
    • New / Eng Oemgee
      OP
      Mmm it’s more like “should I pull my 1M+ out of the market and put it into real estate since even banks consider it a better investment than their own stock?”
      Oct 28, 2018
    • Valorem Trynasmash
      If you take 1mm and use a portion of it as leverage you could technically get a loan for 1mm while the bank rides most of it. You take the profit when you sell as long as you keep putting the profit into real estate so you don’t get taxed. It’s a game you won’t win until you die but people have become millionaires with it. Research it though as I’m not the best resource since I’m still working my way towards getting that leverage :D.
      Oct 28, 2018
  • Google Vdzlw
    Because the federal government heavily subsidizes the housing market and the GSEs own half or more of the mortgage market. It's an artificial market that's why rates are lower.
    Oct 28, 2018 1
    • Facebook bfcc
      This. Jumbo loans is when govt doesn't assume risk anymore. So around the first 400k is artificially backed by govt.
      Oct 28, 2018
  • Uber / Eng gxEn21
    what interest rate can you pay for it?
    Oct 28, 2018 0
  • New DuQvV7x
    No. Investing in the stock market does NOT have a collateral as good as mortgages.

    You must either be young, or oblivious of market movements of the last 20 years.
    Oct 28, 2018 4
    • New / Eng Oemgee
      OP
      Wait, didn’t average houses drop 40%+ in 2009? That seems to me aligned with the worst drawdown stocks can usually have (40-50%)
      Oct 28, 2018
    • New DuQvV7x
      Actually, no.

      Case-Shiller National dropped by 10% while the stock market (S&P specifically) dropped by 45%.

      In 2000, the Nasdaq drop by 60% and took 10 years to break even. The associated risk would make this product quite costly.
      Oct 28, 2018
    • New / Eng Oemgee
      OP
      So I ask the same question to you as well: is real estate a better investment vehicle than the market, and should I put my 1M there, or is it just a “less volatile” one? Too lazy to compare the 20y returns of your index vs a sp500 including dividends.
      Oct 28, 2018
    • New DuQvV7x
      Yes, RE makes more sense than the market. 10 year bull market notwithstanding.

      I don’t know enough about you to recommend where to put your money.

      But, speaking as someone who retired largely due to RE holdings, I’m very bullish on RE.
      Oct 28, 2018
  • CA Technologies / Other wRHm21
    Starts at 5.9%
    Oct 28, 2018 2
    • Uber / Eng gxEn21
      That's too low for personal loan I guess
      Oct 28, 2018
    • New DuQvV7x
      Nope. That’s the “standard” SOFI rate for 5yr unsecured loans.
      Oct 28, 2018
  • Amazon / Eng n0v
    Some banks will loan against stock. I think firsttech credit union does, for example. And Chase will with enough assets.
    Oct 28, 2018 0
  • LinkedIn / Eng
    Gill Bates

    LinkedIn Eng

    BIO
    [Insert epic sax here]
    Gill Batesmore
    It's definitely possible to get a loan that's backed by securities, but usually the terms aren't that attractive. The big issue with those is that the value of the securities can change quickly (eg. if you had a loan backed by Enron stock) and the loan can't be repackaged and sold to other entities.
    Oct 28, 2018 0
  • CA Technologies / Other wRHm21
    You can do that for crypto. Heard about salt lending ?
    Oct 28, 2018 0

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