Fidelity Investments of Boston is allowing customers to pledge a large percentage of their Fidelity brokerage accounts as security for mortgage loans from GMAC Mortgage Corporation. Called the Fidelity Pledged Asset Program, Fidelity began testing the new service last fall and introduced it to the public on March 23.
The Fidelity Pledged Asset Program offers customers mortgage financing on as much as 100 percent of the price of a home. The Fidelity customer does not directly owe Fidelity anything on the pledged amount. His obligation is to GMAC. His Fidelity account is merely used as a guarantee for the down payment.
The program allows customers to continue to invest their money at the same time as they use it to secure down payments.
Besides its financial rewards, the program is also meant to be a convenience. It enables customers to obtain a mortgage indirectly through Fidelity from GMAC. And GMAC is offering customers the full range of mortgages they would find at any bank, including fixed, adjustable and balloons. Based in Horsham, Pa., GMAC is a subsidiary of General Motors Acceptance Corporation. Fidelity customers receive preferential mortgage rates but have no edge in being extended mortgages.
Fidelity hopes its Pledged Asset Program will solidify its customer relationships.
"It is meant to be a service to customers who have mapped out an investment plan with a Fidelity broker, since they don't have to disrupt any of that planning" by withdrawing money from their account, said Sara Adelizzi, a vice president with Fidelity Brokerage Services. A significant outlay in cash for a down payment, be it $20,000 or $100,000, can seriously disrupt a customer's financial plan, she said.
The amount that a customer can pledge, called a margin, is regulated by the Securities Exchange Commission, Adelizzi said. It depends on the level of risk associated with the types of securities in an account. But even with an equity account, a customer could pledge as much as 50 percent of their holdings, she said. The pledge could be even higher with an account containing more stable securities, such as bonds.
Should the market value of the customer's Fidelity account decline, Fidelity may ask the customer to invest more money or sell some of his securities.
Here is how the plan works. A customer who has, for example, a $150,000 account with Fidelity may be interested in purchasing a $250,000 home. Ordinarily, if that customer has no other savings other than his Fidelity account, he would need to withdraw $50,000 from Fidelity to come up with the 20 percent down payment on the home. With this new plan, GMAC will allow the customer to take out a 100 percent mortgage on the home, pledging $50,000 of the customer's Fidelity account as down payment. Instead of being left with a $100,000 account with Fidelity and a $200,000 mortgage, the customer can keep his $150,000 account with Fidelity intact and owe GMAC $250,000 for his mortgage.
Given the robust rate at which mutual funds have been growing and the low prevailing interest rates, the Pledged Asset Program is an appealing financing option. GMAC is currently quoting 30-year fixed loan rates for loans up to $240,000 starting at 6.625 percent. Meanwhile, Fidelity's flagship Magellan Fund, load-adjusted, is up 21.87 percent for the past 12 months.
"No other mortgage financing program gives home buyers the same benefits and flexibility," said Mike O'Brien, president of GMAC Mortgage, in a news release.
Merrill Lynch and Dean Witter also allow customers to use their mutual fund investments as security on mortgages, Adelizzi said, But Fidelity is the first discount brokerage firm to do so.