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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., ...
, 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 (more particularly, a financing instrument and a debt instrument), in which one party (the ''maker'' or ''issuer'') promises in writing to pay a determinate sum of ...
secured by a specified
mortgage loan A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
. 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 primary functions which distinguish money ar ...
plus
interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
at a specified rate and length of time to fulfill the promise. While the
mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
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, 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 liable to pay interest on that ...
, the mortgage note states the amount of
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
and the rate of
interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
, and obligates the
borrower A debtor or debitor is a 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 counterpart of this ...
, who signs the note, personally for repayment. In
foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan. Formally, a mort ...
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 country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. With an area of , Australia is the largest country by ...
, as example, a mortgage note is a secured (senior debt) debt security (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 Australian Securities Exchange Ltd or ASX, is an Australian public company that operates Australia's primary securities exchange, the Australian Securities Exchange (sometimes referred to outside of Australia as, or confused within Australia as ...
, 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 phrase that literally means "with an equal step" or "on equal footing". It is sometimes translated as "ranking equally", "hand-in-hand", "with equal force", or "moving together", and by extension, "fairly", "without pa ...
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 Australian financial services businesses. It is a legal requirement ...
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 (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 with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.W ...
(ARM) * an
amortization schedule An amortization schedule is a table detailing each periodic payment on an amortizing loan (typically a mortgage), as generated by an amortization calculator. Amortization refers to the process of paying off a debt (often from a loan or mortgage) ov ...
longer than the maturity date indicates a balloon payment mortgage * 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 loan * a payment adjustment frequency less than the interest rate adjustment frequency implies a mortgage which allows for negative amortization


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 in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the ...
whole or as part of a
mortgage-backed security A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment b ...
. 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, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
, 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., ...
bond market The bond market (also debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, bu ...
, 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 of the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
, 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 on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased ...
, i.e., the risk that the borrower will default * You will foreclose and get your money back * prepayment risk (borrowers have a
call option In finance, 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 at a set price. The buyer of the call option has the right, but not the obligation, to buy ...
, 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 (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...
,
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.Ginnie Mae 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 (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
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 ...
. 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, although 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 United States bankruptcy courts are courts created under Article I of the United States Constitution. The current system of bankruptcy courts was created by the United States Congress in 1978, effective April 1, 1984. United States bankruptcy c ...
. 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