Amazon and Better.com have initiated an investment shift drive – Buy a new home. Keep your stock. In this scheme, Amazon employees can pledge (not sell) their vested company shares toward the down payment of a home instead of selling their stock for cash. – Better.com
Vested Share – Share vesting is the process by which an employee, investor, or co-founder is rewarded with shares or stock options but receives their full rights over time – as per an employment contract or shareholders’ agreement.
The programme offers another means to raise a down payment, which is sometimes a significant challenge for prospective homeowners. It targets Amazon employees who have typically received compensation in restricted stock units.
A borrower will require a formal pre-approval letter to begin, which may be acquired through Better.com. The borrower must engage with a home advisor at this time and provide the anticipated worth of their shares. According to the company’s website, qualified candidates must also have a minimum FICO score of 680.
A mortgage loan consultant from Better will reach out to the borrowers to confirm if they have enough shares to use against the loan. To qualify, the collateral value must be equivalent to 20% of the home’s purchase price. The terms of the mortgage are the same if the shares drop in value.
The rate on loan will be 0.25 to 2.50 percentage points higher than the Fannie Mae market rate, depending on the terms of the loan. It is possible to get a mortgage for a primary residence, investment property, or second home. 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.
Concluding, 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. Yahoo Finance
1. Amazon workers in New York, Washington, and Florida will have access to company shares to finance a down payment on a home.
2. The programme will charge a higher interest rate for secured loans.
3. Amazon’s stock price will be evaluated, but once the loan is locked in, the conditions won’t alter. Investopedia
What is Share Pledging?
Share pledging is when a borrower pledges shares of a publicly traded company as collateral for a loan. The lender holds the shares until the loan is repaid in full, at which point the shares are returned to the borrower. During the pledging period, the borrower retains ownership and voting rights over the shares, but the lender has the right to sell the shares if the borrower defaults on the loan. Share pledging is common among business owners and investors looking to raise funds for their ventures.
How could a share pledge be tricky?
Share pledging can be tricky because it involves the borrower putting up their shares as collateral, which means they could lose control of their ownership and voting rights if they default on the loan. Here are some key caveats to keep in mind:
- Valuation Risk: The value of shares pledged as collateral can be volatile, which means that if the value of the shares drops below the loan’s value, the lender may demand additional collateral or sell the shares to recover their money.
- Control Risk: The borrower’s control over the shares pledged as collateral is limited, which means they may lose their voting rights and control over the company if they default on the loan. This can be especially problematic if the borrower is a majority shareholder.
- Margin Calls: If the value of the shares drops significantly, the lender may issue a margin call, which means that the borrower will have to provide additional collateral or repay the loan in full. This can be a challenge for borrowers who may need more readily available funds.
- Legal Risks: Share pledging involves complex legal agreements and documentation, meaning borrowers should be aware of the risks and seek legal advice before entering into such arrangements.
- Disclosure Requirements: In some jurisdictions, borrowers may be required to disclose their share pledging arrangements, which can affect the company’s reputation and share price.
Overall, share pledging can be a valuable tool for raising funds, but it is crucial to understand the risks and take appropriate precautions to protect yourself and your investments.
