What do Jay-Z, Beyoncé, and billionaire hedge fund managers have in common besides enormous amounts of money?
Answer: Enormous Mortgages
Jay-Z and Beyoncé just bought a house for $88 million and financed $53 million because they were tight on cash :). Actually, their financial advisor probably told them it was smart to leverage themselves at a rate of 3.4%. Their lender was Goldman Sachs and their monthly payment is $200,000.
The above info was in a recent WSJ article about massive mortgages for the super-rich. The article can be found here, and as always, we can send key excerpts to non-subscribers.
Next question: What do Johnny Depp, Mike Tyson, Nicolas Cage, Donald Trump, and Michael Jackson all have in common?
Answer: They all went broke despite having enormous wealth prior to going broke.
They went broke because of massive over-spending, declining income, plummeting asset prices and/or a lack of liquidity.
Wealthy people can have a very high net worth but still get into deep financial trouble if most of their assets are illiquid (in real estate and oil wells for example).
This is particularly a problem in soft markets or recessions. Incomes can dry up quickly too, if you get too old to box, for example, or if your box-office appeal wanes.
This brings me to the point of this blog: No matter how wealthy someone might appear to be, large loans still need to be carefully underwritten because even the wealthiest of people can get into trouble easily.
I thought of this blog topic because someone in our office suggested that Goldman Sachs probably didn’t even need to underwrite Beyonce’s mortgage, but I am sure they did because of the size of the loan and because of how quickly even huge fortunes can turn.
I also was reminded of some of our wealthy borrowers who sometimes tell us we don’t need to underwrite their large loans so carefully when we most definitely do.
Photo courtesy of: The Fader.
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