Hi Amy,
I do not think that stock option exercise can be used for mortgage payments. The mortgage lenders will only accept salary for meeting their lending criteria. They will use sales commission and other cash bonuses but with reluctance, and only with a note from the employer stating the expected level of commissions and bonuses. No employer is willing to state the expected level of the company stock.
So how do people qualify for the hefty Silicon Valley real estate ? Mostly it comes from large down payments. Most Silicon Valley residents have benefited from the huge appreciation from their earlier dwelling, and they use the equity from the old house and pour that into the new house. People have also borrowed against their 401k funds. Obviously cashing in the stock option and then using the proceeds for the down payment is also common.
Where you can get into trouble is using margin to come up with the down payment. Typically people borrow money from the broker to come up with the exercise price of the stock option. If you sell the stock immediately and used the proceeds to payoff the broker, and come up with the down payment for a new house, you are still fine, since you are on margin for a very brief period. Typically in a rising market people hesitate to sell the stock outright. You are tempted not to sell the stock, and thus not to pay off the broker. Given the fact that most of the younger employees have no experience of a down market, I am sure that several of them went on margin to exercise the option and borrow further for the house down payment, leaving them heavily leveraged. When the stock crashed suddenly, they got margin calls.Unfortunately if your portfolio consists of only one stock, the margin requirements are tougher.
Company employees tend to have a false sense of security. They think that they know the company business, and will know about problems ahead of the market, and will be able to bail out in time. However even the top management is unable to predict the stock price consistently. The market and external business factors always surprise everyone.
Margin is a two edged sword. If your timing is right, it gives spectacular gains. Otherwise it can wipe out your portfolio and your net worth.
Obviously most Silicon Valley companies need to have some kind of counseling, to prevent this situation from affecting employee productivity for long. Typically at times like since this, the employee turn over also rises, since the `golden handcuffs' have vaporized.
The older Silicon Valley employees that I know are doing OK. They were thinking of retiring by cashing their stock option wealth. Now their retirement plans are on indefinite hold. This could be a positive for Intel, since their more experienced personnel will be around a little longer.
Regards |
