Mortgage note
Encyclopedia
In the US a mortgage note is a promissory note
associated with a 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 obligates 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.
, 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%.
, 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.
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.
or mortgages that are secured by real estate
. Mortgage notes could be anything from $10,000 to tens of millions of dollars.
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.
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.
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 in no legal Standing to seek relief from the Judicial Courts.
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
associated with a specified mortgage loan
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
; it is a written promise
Promise
A promise is a commitment by someone to do or not do something.In the law of contract, an exchange of promises is usually held to be legally enforceable, according to the Latin maxim pacta sunt servanda.- Types :...
to repay a specified sum of money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
plus interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
at a specified rate and length of time to fulfill the promise. While the mortgage itself pledges the title to real property
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
as security for a loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
, the mortgage note states the amount of debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
and the rate of interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
, and obligates the borrower, who signs the note, personally responsible for repayment. In foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
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)Fixed rate mortgageA fixed-rate mortgage is a mortgage loan first developed by the Federal Housing Administration where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float." Other forms of mortgage loan include interest only...
loan - a fixed interest rate with adjusting payments is a Graduated Payment Mortgage (GPM)Graduated payment mortgage loanA graduated payment mortgage loan, often referred to as GPM, is a mortgage with low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards young men and women who cannot afford large payments now, but can realistically expect to do...
- a floating interest rate and payment amount indicates an Adjustable Rate Mortgage (ARM)Adjustable rate mortgageA variable-rate mortgage, adjustable-rate mortgage , 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. The loan may be offered at the lender's standard variable...
- an amortizationAmortization (business)In business, amortization refers to spreading payments over multiple periods. The term is used for two separate processes: amortization of loans and amortization of intangible assets.-Amortization of loans:...
schedule longer than the maturity dateMaturity (finance)In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....
indicates a balloon payment mortgageBalloon payment mortgageA balloon payment mortgage is a mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size. Balloon payment mortgages are more common in commercial real estate than in... - 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 amortizationNegative amortizationIn finance, negative amortization, also known as NegAm, deferred interest or graduated payment mortgage, occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases...
Mortgage notes as investments
Like bondsBond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, mortgage notes offer investors a stream of payments over a period of time. Mortgage notes are traded on the secondary market
Secondary market
The page applies to the finanical term; For the merchandising concept, see Aftermarket .The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold....
whole or as part of a mortgage-backed security
Mortgage-backed security
A mortgage-backed security is an asset-backed security that represents a claim on the cash flows from mortgage loans through a process known as securitization.-Securitization:...
. Unlike bonds, mortgage note prices are quoted as a percentage figure, e.g. 95 for 95%.
Importance
In the United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, mortgage-related debt amounts to over £1 trillion. In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
bond market
Bond market
The bond 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, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...
, 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
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, and is larger than any other debt category.
Risks
The risks associated with mortgage notes are very similar to those of bonds:- credit riskCredit riskCredit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Other terms for credit risk are default risk and counterparty risk....
, i.e. the risk that the borrower will default - interest rate riskInterest rate riskInterest rate risk is the risk borne by an interest-bearing asset, such as a loan or a bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa...
- prepayment risk (borrowers have a call optionCall optionA call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller...
, 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 loansMortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
or mortgages that are secured by real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "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; an item of real property; buildings or...
. Mortgage notes could be anything from $10,000 to tens of millions of dollars.
Comparison to other investments
What is the advantage of a Mortgage note over a Tax lienTax lien
A tax lien is a lien imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes....
or Tax deed Certificate? A Mortgage note will allow you to collect the interest on a monthly basis. Tax lien
Tax lien
A tax lien is a lien imposed by law upon a property to secure the payment of taxes. A tax lien may be imposed for delinquent taxes owed on real property or personal property, or as a result of failure to pay income taxes or other taxes....
and Tax deed certificates are only paid when the Lien
Lien
In law, a lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation...
or Deed
Deed
A deed is any legal instrument in writing which passes, or affirms or confirms something which passes, an interest, right, or property and that is signed, attested, delivered, and in some jurisdictions sealed...
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
Nye Lavalle
Nye Lavalle is an American sports marketing executive, futurist, and social scientist turned consumer and investor advocate and activist. He is known for his studies on American sports, culture, charities, and media conducted during the 1980s and 1990s...
, in the mid-nineties and in white papers presented at the 2000 National Consumer Law Center
National Consumer Law Center
The National Consumer Law Center is an American nonprofit organization specializing in consumer issues on behalf of low-income people. Legal services, government and private attorneys, as well as community organizations, work with the center to advocate for consumer reform.The National Consumer Law...
conference in Broomfield, Colorado has gained increasing acceptance in the national foreclosure crisis of 2008-2009.
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 in no legal Standing to seek relief from the Judicial Courts.