Art as Collateral

The Wall Street Journal takes a quick look at the rising popularity of securing loans with fine art.  The rationale from the collector standpoint is its quicker than a mortgage on real estate and maintains liquidity.  What is nice, although at the second to last paragraph in the article, is the statement on the need for an appraisal, and typically re-appraisal annually for the proper margins of loan to collateral value to be maintained. At least appraising is noted, perhaps an article like this a few years would fail to mention the importance of appraising.

The Wall Street Journal reports

Many institutions say demand is rising. J.P. Morgan Private Bank says the dollar amount of loans secured by clients’ assets for real-estate purposes increased 20% last year. At Wells Fargo Private Bank, about one-third of all the loans on its books are secured by clients’ liquid assets, such as investment accounts. Moreover, applications for these loans—used for a variety of purposes, including purchasing homes—are submitted daily. It also receives one to two requests per month for art loans, up from one to two a year in 2010. “There’s definitely been a surge of people using art as collateral for loans,” says Suzanne Gyorgy, global head at Citi Private Bank’s Art Advisory and Finance Group.

Many lenders will accept other tangible assets as collateral as well. Tom Clarke, U.S. head of capital advisory at J.P. Morgan Private Bank, says this can include gold bars and private jets that clients own outright.

Lenders for their part are encouraging the trend. U.S. Bank’s Ascent Private Capital Management, whose clients have at least $50 million in net worth, says it’s building a program around art-backed loans that it plans to launch next year. (It currently considers art loans on a case-by-case basis.) And PNC Wealth Management says it has been talking to its clients more about loans secured by investment portfolios as an alternative to mortgages.

Lending thresholds vary, but if the loan is being secured by an investment portfolio, clients can borrow up to 95% if that account is comprised of cash, up to roughly 85% if it’s bonds and up to roughly 75% with diversified stocks. With art, most lenders will provide up to 50% of a work’s appraised value.

Still, these secured loans carry significant risk. Interest rates are mostly variable, potentially exposing the borrower to rate increases. Borrowers typically get one to three years to repay—though they can apply to renew the loan. Monthly payments are often interest only, and at the end of this period borrowers have to be prepared to pay the entire principal balance. If borrowers are suddenly unable to pay, they could be at risk of losing part or all of the asset, though most lenders say they’ll look for solutions to avoid this situation.

Source: The Wall Street Journal