WITH the American economy minting new millionaires at a dizzying rate, it had to happen sooner or later: A specialized new mortgage money source designed solely to cater to the needs of rich people buying or refinancing big, opulent houses.
It's called LuxMac -- not to be confused with Freddie Mac or Fannie Mae, the nation's largest home mortgage sources for ordinary folks. LuxMac home loans start at $500,000, average $1.4 million, and have no upper-dollar limit. Fannie and Freddie, by comparison, top out at $227,150. LuxMac financing packages require no minimum down payment and no mortgage insurance. If you want a $1.5 million zero down-payment mortgage and you qualify, it's available. Fannie and Freddie, by contrast, generally require at least 3 percent down payments, and lots of mortgage insurance.
LuxMac borrowers sound like the sort of people who could start their own banks:
* Owners of young, high-tech companies that have just gone public, generating megabuck stock holdings virtually overnight.
* Professional basketball, baseball, football, golf and tennis stars.
* Doctors and lawyers with seven-figure annual incomes.
* Stock market pros, investment bankers, hedge fund managers, private investors, small-business owners and others cashing in on the biggest bull market ever.
Why do people who are already rolling in dough need any special mortgage help buying or refinancing?
Don't they have enough money to just go out and buy what they want?
They may indeed, says LuxMac President Michael A. Covino, "but it's usually a lot smarter for them to finance their house than to buy it" for cash outright.
For example, say you've made money in the stock market and now want to splurge on a new, custom-built dream house.
You sign a contract with a builder who'll deliver you a 10,000-square-foot mini-palace for $3 million.
But how do you pay for it?
You basically have two options: You can sell $3 million of your stock and hand it over to the builder.
Or you can find a way to finance a big chunk of the cost.
By selling your appreciated stock, you trigger capital-gains taxes at the federal and state levels in many areas.
In a state like New York, that means a 27 percent bite (20 percent federal, 7 percent state) out of your hard-earned assets.
Think of it as a 27 percent cost of obtaining the capital you need for the house.
Consider option two: You finance as much of the purchase as possible, on the most tax-advantaged terms, and you leave your stock portfolio intact, working for you. But who offers million-dollar-plus loans on $3 million houses? Some commercial banks who specialize in serving high net-worth individuals would be willing. But they'll probably insist on a substantial down payment, and may require you to turn over management of a big chunk of your investment portfolio to their trust department.
Enter LuxMac. Like Fannie and Freddie, LuxMac buys locally originated mortgages from a nationwide network of mortgage bankers, brokers and banks. It pays for them by turning them into securities via Wall Street, or it sells them in pieces or as whole loans to other private investors. (Unlike Fannie or Freddie, LuxMac is purely a private enterprise, with no government backing.)
A LuxMac package for the "typical" $3 million, nothing-down homebuyer might work like this, according to Covino: After extensive analysis of an applicant's financial and tax situations and a hard look at the real estate involved, LuxMac would underwrite a 15-year or 30-year $1 million first mortgage, and a $2 million credit line secured by the house.
The credit line could be drawn upon whenever needed during and following the construction project.
Interest payments on the $1 million first mortgage would all be tax-deductible, because that's the federal limit. The rate would depend on whether the borrower wanted a fixed or adjustable-rate option.
For the most creditworthy borrowers, the best fixed, 15-year rates recently have been in the neighborhood of 7.5 percent. Interest-only payments on the credit line would be tied to global short-term capital market index, the 6-month LIBOR (London Interbank Offered Rate), which tends to be below the prime rate at most U.S. banks.
For exceptionally large financings, LuxMac borrowers may also be asked to pledge stocks or other assets as collateral.
Covino, whose Tarrytown, N.Y.-based firm, Covino & Co., runs LuxMac with the help of 400-plus local originators around the country, refuses to reveal the identities of any of his borrowers. But he says "quite a few are names you would recognize" from the arts, professional sports, publishing and business. Covino says that last year he closed over 200 loans at an average $1.4 million, but he declines to provide more specifics.
"It's a small niche" in the marketplace, says Covino.
But it's a small niche that may just be an apt symbol of our times -- a Fannie Mae for the super-rich.
Pub Date: 5/17/98