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In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, a mortgage note (also known as a ''real estate lien note'', ''borrower's note'') is a
promissory note A promissory note, sometimes referred to as a note payable, is a legal instrument ''Legal instrument'' is a legal Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of ...
secured by a specified
mortgage loan A mortgage loan or simply mortgage () is a loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money ...
. Mortgage notes are a written
promise A promise is a commitment by someone to do or not do something. As a noun ''promise'' means a declaration assuring that one will or will not do something. As a verb it means to commit oneself by a promise to do or give. It can also mean a capacity ...
to repay a specified sum of
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a ...

money
plus
interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...

interest
at a specified rate and length of time to fulfill the promise. While the
mortgage A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a ...
deed or contract itself hypothecates or imposes a lien on the title to real
property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, r ...
as security for a
loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money avai ...
, the mortgage note states the amount of
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
and the rate of
interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...

interest
, and obligates the
borrower A debtor or debitor is a legal entity, legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counter ...

borrower
, who signs the note, personally for repayment. In
foreclosure Foreclosure is a legal process in which a lender A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark A party is a gathering of ...
proceedings in certain jurisdictions, borrowers may require the foreclosing party to produce the note as evidence that they are the true owners of the debt.


In Australia

Technical product definitions can vary between countries. In
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, sma ...

Australia
, as example, a mortgage note is a secured (senior debt)
debt security A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any form ...
(also known as secured credit bond) which can be issued in relation to an entire specified credit transaction (so one isolated and entire loan transaction) or parts thereof. Whilst Australian debt securities are very diverse, mortgage notes by definition refer to transactions that are underpinned by registered mortgage over real property collateral, which offer distinct advantages to secured parties such a indefeasibility, which do not extend to unregistered mortgages. For the first time in October 2019, through an announcement to the
Australian Securities Exchange The Australian Securities Exchange is Australia's primary securities exchange. It is owned and operated by ASX Limited, with the exchange also commonly referred to as the ASX. While the exchange and the operating companies are separate, they ar ...
, fractionalised mortgage notes named "MNotes" were offered as debt securities. In that instance the distinct difference was the structuring of these securities. Instead of one mortgage note per entire transaction, now 1 MNote is issued for every $1.00 of a specified secured credit bond, ranked
pari passu ''Pari passu'' is a Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of ...
with other MNotes issued in respect of one specified transaction and attracting a coupon based on the overall assessment of risk of such underlying transaction. Just like with fixed rate bonds and other debt securities coupon (the yield offered as return) and principal become due upon maturity of the mortgage note or MNote. Yield on mortgage notes and/ or MNotes is reflective of terms offered, liquidity, credit quality,, ranking and type of property collateral. Like other investment instruments offered within Australia, mortgage notes can only be issued by registered managed investment schemes and/ or holders of an
Australian financial services licence Australian Financial Services Licence (AFSL) is a legal licence provided by the Australian Securities and Investments Commission (ASIC) enabling the operation and activities of Australia, Australian Financial services Businesses. For any Australian ...
outlining all investment terms and conditions


Determinants of mortgage type

For the most part, it is the mortgage note which determines the "type" of mortgage: * if the note has a fixed interest rate and payments, then the loan is a
fixed-rate mortgage A fixed-rate mortgage (FRM) is a fully amortizing mortgage loan A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals ...
(FRM) loan * a fixed interest rate with adjusting payments is a Graduated Payment Mortgage (GPM) * a floating interest rate and payment amount indicates an
adjustable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or oth ...
(ARM) * an
amortization schedule An amortization schedule is a table detailing each periodic payment on an amortizing loan (typically a mortgage loan, mortgage), as generated by an amortization calculator. Amortization refers to the process of paying off a debt (often from a loan ...
longer than the
maturity date Maturity or immaturity may refer to: * Adulthood Biologically, an adult is an organism In biology, an organism (from Ancient Greek, Greek: ὀργανισμός, ''organismos'') is any individual contiguous system that embodies the L ...
indicates a
balloon payment mortgage A balloon payment mortgage is a mortgage which does not fully amortize Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal and interest Interest, in finance and economics ...
* when the payment schedule calls only for interest and no principal, thus leaving behind the full principal due at maturity, the loan is an
interest-only loanAn interest-only loan is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a debt and is usually li ...
* a payment adjustment frequency less than the interest rate adjustment frequency implies a mortgage which allows for
negative amortization In finance, negative amortization (also known as NegAm, deferred interest or Graduated payment mortgage loan, graduated payment mortgage) occurs whenever the loan payment for any period is less than the interest charged over that period so that the ...


Mortgage notes as investments

Like bonds, mortgage notes offer investors a stream of payments over a period of time. Mortgage notes are traded on the
secondary market The secondary market, also called the aftermarket and follow on public offering, is the financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finan ...
whole or as part of a
mortgage-backed security A mortgage-backed security (MBS) is a type of asset-backed security An asset-backed security (ABS) is a Security (finance), security whose income payments and hence value are derived from and collateralized (or "backed") by a specified pool of unde ...
. Unlike bonds, mortgage note prices are quoted as a percentage figure, e.g., 95 for 95%.


Importance

In the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
, mortgage-related debt amounts to over £1 trillion. In the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
bond market The bond market (also debt market or credit market) is a financial market A financial market is a market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an i ...
, mortgage-related debt amounts to $6.5 trillion and accounted for 23% of the market as of December 31, 2006. In 2006, $1.93 trillion of mortgage debt was issued on the US bond market; this is roughly the
GDP Gross domestic product (GDP) is a monetary Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the ...
of the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain,Usage is mixed. The Guardian' and Telegraph' use Britain as a synonym for the United Kingdom. Some prefer to use Britain as shorth ...

United Kingdom
, and is larger than any other debt category.


Risks

The risks associated with mortgage notes are very similar to those of bonds: *
credit risk A credit risk is risk of default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance) In finance Finance is the study of financial institutions, financial markets and how they ope ...
, i.e., the risk that the borrower will default * You will foreclose and get your money back * prepayment risk (borrowers have a
call option A call option, often simply labeled a "call", is a contract, between the buyer and the seller of the call option, to exchange a security Security is freedom from, or resilience against, potential Potential generally refers to a currently un ...

call option
, i.e., they can pay the debt back early) For a fee, guarantors such as
Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise A government-sponsored enterprise (GSE) is a type of financial services corporation created by the United St ...
,
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded A public company, publicly traded company, publicly held company, publicly listed company, or public limited company A public limited com ...

Freddie Mac
, and
Ginnie Mae The Government National Mortgage Association (GNMA), or Ginnie Mae, is a government-owned corporation A state-owned enterprise (SOE) or government-owned enterprise (GOE) is a business enterprise Business is the activity of making on ...
guarantee mortgage backed securities against homeowner default risk, thus reducing the credit risk associated with mortgage notes.


Investors

Mortgage note buyers are companies or investors with the capital to purchase a mortgage note. If someone is holding a private mortgage, these investors will give cash and take over receiving the monthly payments that were being paid to the previous owner. A mortgage note for these investors are home loans or
mortgages A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a ...
that are secured by
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...

real estate
. Mortgage notes could be anything from $10,000 to tens of millions of dollars. Note buyers can buy notes on nearly any type of property, though owner-occupied single family houses tend to get the best pricing. A note buyer will offer a certain price based on their perceived risk factors, which include the amount of equity in the property, the payer's credit, the type and condition of the property and surrounding area, elements of the note, etc. Most U.S.-based note buyers will only buy in the 50 states, though some do advertise as being able to buy notes in Canada.


Comparison to other investments

The advantage of a mortgage note over other investments is that a mortgage note will allow one to collect the interest on a monthly basis. There are no sales commissions or fees taken out of a mortgage note investment.


Produce the note defense in foreclosure proceedings

The chain of title of a promissory note is very important to every homeowner in America. The inability to show a complete chain of title and ownership of a promissory note from Lender A to Lender B to Lender C, etc. has become a major impediment in mortgage servicers ability to foreclose on properties in judicial foreclosure states and in relief of stays in Federal Bankruptcy Court. The issue of standing (in other words, the question of who has the legal right to sue), is the foundation of the produce-the-note strategy, which forces a lender prove that it has a legal right to sue. Attorneys estimate that the documents belonging to as many as 50% of the mortgages made between 2001-2008 have been lost or destroyed, leading to demands by borrowers that the foreclosing party produce the note as evidence of the debt. Consumer advocates claim that almost all entities attempting to foreclose on homeowners are not the Real Lender, but rather a Servicer collecting monthly payments for a mortgage backed security (MBS) Trust. Therefore, courts have determined that Servicers are not the Real Party in Interest and possess no legal standing to seek relief from the courts.


References

{{DEFAULTSORT:Mortgage Note Banking Mortgage Investment Legal documents Interest-bearing instruments