Confessions of an L.A. Loan Officer How I’ve used LIBOR loans to help high achievers purchase homes in high-priced markets by Karen Crosby

May 13, 2009

Jack Webb as Sgt. Joe Friday would begin every episode of “Dragnet” with the words: “This is the city…Los Angeles, California.” He would then describe various pleasant facts about our metropolis before turning to the subject of crime, his area of expertise. “My name is Friday,” the Sergeant would say. “I carry a badge.”
Like Sgt. Friday, I love L.A. but I know things aren’t perfect here. Homes are expensive, especially in exclusive communities like Beverly Hills, Bel-Air, Santa Monica, and Malibu. When people want to buy one of these premium properties, that is where I come in with 20 years of mortgage experience. And I had a secret weapon: the LIBOR loan.

A LIBOR loan is an adjustable rate mortgage (ARM) whose monthly payment is a preset margin above one of the LIBOR indexes, such as the 1-Month LIBOR or the 6-Month LIBOR. These loans are typically for 30 years with an “interest only” phase for the first 10 years, resulting in lower payments during this initial period. A LIBOR loan is not to be chosen casually (frankly, no mortgage should be). When the index is low, payments follow suit. When the index is high…well, you get the picture. There are caps, pre-arranged interest rate limits should LIBOR go through the roof. I’ve been in business since the 1980s, and I’ve yet to see one of my LIBOR loans hit its cap. However, I’ve seen LIBOR loans drop to incredibly low payments and stay there month-after-month.

LIBOR borrowers need patience, cash reserves to cover payments when they rise, and a good plan on how to use the money saved during the months when rates are low. LIBOR-based products can work especially well for super-jumbo loans, mortgages in the $1 million-plus range. During the latest 10-year span, super-jumbo loans pegged to the 1-Month LIBOR have been less costly overall than their fixed rate counterparts. Super-jumbo is not an extravagance in many of the L.A. neighborhoods I serve; it’s a necessity. LIBOR-based loans have given my clients useful alternatives, helping them to buy the most suitable homes while controlling cash flow and freeing up funds for other needs and investments.

Smart, successful people use LIBOR loans. Let’s look at one of my clients, Mr. X, a well-known entertainer and producer (getting back to Joe Friday, I also change the names). Mr. X picked out an incredible second home in a resort community: $26 million purchase price, 50% down, leaving a loan amount of $13 million. I recommended a loan based on the 1-Month LIBOR because Mr. X had better things to do with his money at any given time than put it into this property. Mr. X agreed. It has been nearly a decade since the transaction, and the 1-Month LIBOR has been very cooperative. The average monthly payment (1-Month LIBOR plus margin, “interest only” phase) has been 4%, approximately $45,000. Yes, that’s still a lot of money payable every 30 days, but if you saw the estate, you would say what Mr. X said to me: “Well done.”

This is the city…Los Angeles, California. Or perhaps, Palm Beach, Florida, or New York, New York, or London, England. Anywhere you find high achievers purchasing homes in high-priced markets, you’ll find an opportunity to explore a LIBOR loan. This is not a mortgage for someone who grabs antacids (or, heaven forbid, something stronger) every time rates blip. It’s a mortgage for someone who can be both calm and aggressive. If this sounds like you, then maybe it’s time to become LIBORATED. If you’re anywhere near L.A., I can help. My name is Crosby. I carry a BlackBerry. (Cue theme: “dum-da-dum-dum”)

Karen Crosby (karencrosby.com) is an award-winning mortgage professional based in Los Angeles’ San Fernando Valley. She specializes in complex, high-end residential real estate transactions. Her key areas of expertise include developing successful relationships with business management firms, real estate companies, accountants and financial consultants.