In the US a mortgage note is a promissory note associated with specified mortgage loan; it is a written promise to repay a specified sum of money plus interest at a specified rate and length of time to fulfill the promise. While the mortgage itself pledges the title to real property as security for a loan, the mortgage note states the amount of debt and the rate of interest, and makes the borrower who signs the note personally responsible for repayment. In foreclosure 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.
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 (ARM)
- an amortization schedule 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 whole or as part of a mortgage-backed security. Unlike bonds, mortgage note prices are quoted as a percentage figure, e.g. 95 for 95%.
Importance
In the United Kingdom, mortgage-related debt amounts to over £1 trillion. In the United States bond market, mortgage-related debt amounts to $6.5 trillion and accounted for 23% of the market as of December 31, 2006. $1.93 trillion of mortgage debt was issued on the US bond market in 2006; this is roughly the GDP of the 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, i.e. the risk that the borrower will default
- interest rate risk
- prepayment risk (borrowers have a put option, i.e. they can pay the debt back early)
For a fee, guarantors such as Fannie Mae, Freddie Mac, and Ginnie Mae guarantee mortgage backed securities against homeowner default risk, thus eliminating 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 that are secured by real estate. Mortgage notes could be anything from $10,000 to $1 million or even tens of millions of dollars.
Comparison to other investments
What is the advantage of a Mortgage note over a Tax lien or Tax deed Certificate? A Mortgage note will allow you to collect the interest on a monthly basis. Tax lien and Tax deed certificates are only paid when the Lien or Deed is redeemed.
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, who has the legal right to sue, is the foundation of the produce the note strategy making a lender prove that it has a legal right to sue.
The strategy was first promulgated by consumer advocate, Nye Lavalle, in the mid-nineties and in white papers presented at the 2000 National Consumer Law Center conference in Broomfield, Colorado has gained increasing acceptance in the national foreclosure crisis of 2008-2009. Most recently, lawyers April Charney, Chris Hoyer and Neil Garfield have advocated the strategy that is increasingly being used by consumers and their lawyers.
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.
Quotes
"... since the major housing organizations began keeping records in the 1960s, there has never been a year in which the average existing U.S. residence lost value. Not a one." FORTUNE Magazine, August 12, 2002
"Twenty-eight states haven't had a down year for real estate since 1990. 11 haven't since 1985. What's more, from 1985 through the first quarter of 2002, five states in the Rustbelt-Illinois, Indiana, Michigan, Ohio, Wisconsin-have never even had a single down quarter. Name a Mutual Fund that has produced 69 straight positive quarterly returns." FORTUNE Magazine, August 12, 2002
"It is striking that after the longest, strongest bull market in history, the average American built more wealth owning a home than investing in the stock market."
Denver Post, March 14, 2002
References
- ^ Stacy, Mitch (2009-02-17). "Homeowners' rallying cry: Produce the note". Associated Press . http://www.google.com/hostednews/ap/article/ALeqM5hLOuvy9fguykC2NydTDrkqqyybvQD96DHN5G0 .
- ^ Wiedemer, John (2001). Real Estate Finance, 8th Edition . Prentice Hall. p. 57.
- ^ Thornton, Philip (2006-06-30), "UK mortgage debt soars through £1 trillion", The Independent , http://news.independent.co.uk/business/news/article1147434.ece
- ^ a b "U.S. Bond Market Issuance Increases in 2006; Equity, Higher Credit Risk Asset Classes Top Performers" (PDF), Research Quarterly , February 2007 , http://www.bondmarkets.com/assets/files/Research_Quarterly_0207.pdf
- ^ https://secure.consumerlaw.org/conference_training/post_conf.shtml
- ^ Branson, Michael (2009-02-24). "Produce Me The Note Or No Foreclosure Today". Huliq News . http://www.huliq.com/2818/77786/produce-note-will-it-save-your-house-foreclosure .
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