Better.com Accepts Amazon Stock as Collateral for Homebuying

Amazon and online mortgage lender Better.com put together an arrangement allowing current or former employees sitting on stock to use their shares as collateral when buying a home, the Wall Street Journal reported.

Rather than selling their shares, which at Amazon typically comes in the form of restricted stock units, or RSUs, that vest over time, the person with stock can pledge against loans for a down payment.

There are two advantages to the employee (or former employee, given the thousands of people Amazon has laid off, at least some of whom might have RSUs). First, they don’t have to sell shares and take the immediate tax hit. Second, if the shares will gain additional value or vesting, the shareholders can still gain the appreciation.

The use of shares as a pledge for a loan is a common practice among wealthier people, as banks will use stocks or bonds to secure lending. However, there is a big difference. Under such a loan, a drop in the value of the collateral because of falling prices can trigger a margin call, under which the borrower has to either pledge additional amounts to cover the difference or pay down that amount in cash.

This also sounds a bit like crypto mortgages last year. The buyer puts down the entire price of the property in an agreed upon cryptocurrency. That sum sits with the lender. The buyer gets a mortgage for the property with typical rates in the 5% to 8% range. As with the lending against portfolios of high-net-worth individuals, if the market value of holdings dropped, the borrower would have to deposit more cryptocurrency to cover the difference or default. The attraction, at least then before so many crypto markets crashed, was that the crypto holder could secure a loan while watching the value of their portfolio continue to rise faster than the incrementally higher cost of the mortgage.

According to the Journal story, though, in the Amazon-Better arrangement, in which the borrower is protected if there is a drop in the stock price. Presumably, Better is making a reasonable calculation that Amazon shares, along with those of other companies, especially in the tech sector, would eventually return to their glory days. A 30-year mortgage gives plenty of time for that to happen. However, the borrowers are paying between 25 and 250 basis points over market rates for mortgages, so there can be a significant impact on the affordability of a property.

Although there is no mention of Better’s extending this program to other companies, it would seem a natural move, either for it or other mortgage lenders.