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Daily Real Estate News  |  May 19, 2005  |   Letters of Credit Fuel Speculative Buying Investors are getting a chance to purchase luxury condominiums along the Gulf of Mexico with minimal cash out of pocket, as lenders increasingly allow them to use letters of credit in lieu of cash downpayments. Letters of credit demonstrate the investor's commitment to make future payments—with the bank assuming the financial burden for those that do not own up to this promise—but critics believe they fuel speculative buying. Developers in many markets are forced to hold unit presales in order to obtain the necessary construction financing. Investors respond by making a small cash payment and then obtaining a letter of credit for upwards of 20 percent of the downpayment in order to finalize the sale and get a cash refund from the developer. "If these letters of credits are being given in markets that have a high share of investor purchasing, then it seems speculative, and it's something I'd pay attention to," says Doug Duncan, chief economist for the Mortgage Bankers Association.

Source: The Wall Street Journal (05/19/05); Dunham, Kemba J.

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