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New stock-as-collateral mortgage for Amazon workers comes with key caveats

Amazon employees can now use their company stock to buy homes under a new mortgage program rolled out this week by lender Better.com.

The so-called Equity Unlocker mortgage allows current and former workers of the e-retail giant to pledge company stock as collateral toward a down payment on a home purchase without selling their equity stake. The product, geared toward Amazon employees who have historically been compensated in restricted stock units, provides another way to come up with a down payment, which is often a big obstacle for some homebuyers.

But Amazon borrowers should consider two important aspects of this arrangement — how the equities are valued and the restrictions on selling pledged stock — that could make the mortgage less attractive.

“Pledged-asset mortgages aren't unheard of and appear in the market from time to time,” Keith Gumbinger, vice president of HSH.com, told Yahoo Money. “As you might expect, these sorts of arrangements are more common in wealth management or private banking environments. That this is limited to Amazon stock and Amazon employees does make it rather limited in scope, more like an employee benefit offer.”

Amazon workers walk outside Amazon’s LDJ5 sortation center in New York City. (Credit: Brendan McDermid, REUTERS).
Amazon workers walk outside Amazon’s LDJ5 sortation center in New York City. (Credit: Brendan McDermid, REUTERS).

Here’s how it works

To get started, a borrower will need an official pre-approval letter, which can be obtained through Better.com. During this step, the borrower must disclose the estimated value of their shares and get connected with a home advisor. Qualifying applicants are also required to have a minimum FICO score of 680, the company noted on its website.

Next, a mortgage loan consultant from Better will reach out to confirm if a borrower has “sufficient shares” to use collateral against the loan. To qualify, the collateral value must be equivalent to 20% of the home’s purchase price. If the shares drop in value, the terms of the mortgage remain the same, according to the company.

The rate on the loan will be 0.25 to 2.50 percentage points higher than the Fannie Mae market rate, depending on the terms of the loan. The mortgage can be for a primary residence, investment property, or second home located in eligible states. Primary residence or second homes must have a mortgage equal to or less than $3 million, while investment properties are limited to an amount less than or equal to $2 million.

Finally, the borrower pledges their shares as collateral when closing the loan. If a borrower defaults on the loan, Better can force the sale of the pledged equity stake without contacting the borrower.

Key caveats

(Credit: Getty Images)
(Credit: Getty Images)

There are two major considerations that borrowers should know before taking on this type of loan, according to Gumbinger.

The first relates to the valuation of the pledged stocks. Borrowers will need to offer quite a lot. Equity is counted at 50%, according to Better, so to cover a $100,000 down payment, a borrower must pledge $200,000 in Amazon stock.

Since the mortgage requires a 20% down payment, borrowers must pledge stock that is worth 40% of the home’s purchase price if they plan to use only stock for the down payment. Better does allow a mix of cash and pledged stock for the down payment.

“That low valuation provides Better with a great bit of protection,” Gumbinger said. “The value of the pledged Amazon stock could theoretically drop 50% and there would still be a 20% down payment/equity stake if the homeowner defaulted and the property was foreclosed upon.”

But that is a lot of stock to come up with.

“So you may have to lock up a lot of shares to cover a 20% down payment,” Gumbinger said. “Whether that's good or bad, it’s hard to say, personal finance being, well, you know, personal.”

Another important consideration of pledging shares is that it can be hard to get them back to sell. According to Better, shares “may not be sold, repledged, or subject to other liens” until the loan is repaid or refinanced. A borrower can only sell pledged shares if the proceeds are used to pay down a percentage of the mortgage principal.

“That the homeowner can't liquidate the stock without selling the home or refinancing could mean missing out on a chance to convert holdings into cash as needed,” Gumbinger said, “or potentially missing the chance to sell shares at maximum value.”

What’s next

Punta Gorda, Florida, Coldwell Banker, real estate office, man looking at property listings and homes for sale . (Credit: Jeffrey Greenberg/Universal Images Group via Getty Images)
Punta Gorda, Florida, Coldwell Banker, real estate office, man looking at property listings and homes for sale . (Credit: Jeffrey Greenberg/Universal Images Group via Getty Images)

According to Better, the product is immediately available to qualifying Amazon employees in Florida, New York, and Washington state. The company plans to launch the program in 26 states during the second quarter of 2023 — eventually making it available nationwide.

The new home loan comes months after Better laid off thousands of its employees last year as the housing market slowed when affordability challenges, kicked off by rapidly rising mortgage rates, caught up with home buyers. Its mortgage production volume as of Sept. 30 of last year plunged 76% from the same period in 2021, according to a HousingWire report.

Mortgage rates have more than doubled from a year ago, and home prices remain elevated and out of reach for some buyers. In the last year, lenders have expanded their jumbo loan offerings, non-qualified mortgages, reverse mortgages, and home equity products to drum up more business as the market cooled. Last month, Better.com introduced its "one-day mortgage" program as it weathers the housing downturn. The Equity Unlocker mortgage for Amazon employees adds to those offerings.

Editor's note: This version of the article clarifies that the down payment can also include a mix of cash and pledged stock.

Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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