Corss-Collateralization and Blanket Mortgages
CA · Member since 2011 · 762 posts · 182 votes
Does anybody know of a good read to better understand cross-collateralization and blanket mortgages?
I get the basic idea of offering more than one property as collateral for a loan, and have actually done a loan with one note and two deeds of trust as collateral, but the more I think about it the more complicated it gets.
Some example questions: Can you have one note and one deed of trust with two legal descriptions, or do you need two DOT's each with its own legal. Do you need two title insurance policies or can it be done on one. Does each dot secure the entire amount of the note or only part, when does each dot get released. You could, theoretically, have one note secured by one dot, one note secured by multiple dots, multiple notes secured by one dot, multiple notes secured by multiple dots. You could have one note secured by multiple dots, each dot given by a different entity. The list goes on.
1. Can you have one note and one deed of trust with two legal descriptions, or do you need two DOT's each with its own legal.
Both can be done. You can have multiple properties identified in the same security instrument and recorded against each property or you can have more than security instrument. In a situation where the terms of the security instrument might be different, say in a silent second lien on a home might have different language and thus be a different document. When the security language is the same it tends to be the same document which lists all of the properties that are secured via the legal description. Every property will its own recording of the instrument even if the instrument is identical among the population.
2. Do you need two title insurance policies or can it be done on one.
If the property is not adjacent the title insurer would issue two separate policy jackets as the terms of the insurance might be different from property A and B. In a contiguous set of property they can list the entire set in one policy. You would see different policy terms referencing lien positions. Whether the lender obtains a lenders policy for junior lien potions is up to their desire. If what is being insured is different between property A and B you will typically see two policies.
3. Does each dot secure the entire amount of the note or only part, when does each dot get released.
DOT/Mortgages are not partial security so the collective set of property is pledged for the full obligation of the note. If a lender put a lien on a investment property and a primary residence as a cross, both properties are offered as collateral for the entire note amount and its full payment.
4. You could, theoretically, have one note secured by one dot, one note secured by multiple dots, multiple notes secured by one dot, multiple notes secured by multiple dots.
Yes, Yes, Sort of - multiple notes only tends to show up with participation loans where multiple investors come together as a mortgagee. Typically you do not really go out and have a "new" note attach to an existing DOT/Mortgage. The language of most security instruments is unique to the specific note structure at origination.
5. You could have one note secured by multiple dots, each dot given by a different entity.
Not really. Multiple lenders would not really come together like that. Any investor who puts money into the funding of the loan will want their interests protected in some manner. This happens with a participated funding. In those deals you might have a "A, B and C Note" which aggregate into the entire loan balance under one DOT/Mortgage. Typically these are only for large loans. The security instrument in that type of deal will list one mortgagee as the primary or lead lender. Usually the A note position. The investors can agree to participate in the "front" of the deal or in the "back" of the deal which sort of dictates this structure.
If you wanted to read up on the matter, I think you might want to look at structured finance. I do not think you will get to far seeking a book under cross collateral or blanket mortgages.
Hope that helps.
1. Can you have one note and one deed of trust with two legal descriptions, or do you need two DOT's each with its own legal.
Both can be done. You can have multiple properties identified in the same security instrument and recorded against each property or you can have more than security instrument. In a situation where the terms of the security instrument might be different, say in a silent second lien on a home might have different language and thus be a different document. When the security language is the same it tends to be the same document which lists all of the properties that are secured via the legal description. Every property will its own recording of the instrument even if the instrument is identical among the population.
2. Do you need two title insurance policies or can it be done on one.
If the property is not adjacent the title insurer would issue two separate policy jackets as the terms of the insurance might be different from property A and B. In a contiguous set of property they can list the entire set in one policy. You would see different policy terms referencing lien positions. Whether the lender obtains a lenders policy for junior lien potions is up to their desire. If what is being insured is different between property A and B you will typically see two policies.
3. Does each dot secure the entire amount of the note or only part, when does each dot get released.
DOT/Mortgages are not partial security so the collective set of property is pledged for the full obligation of the note. If a lender put a lien on a investment property and a primary residence as a cross, both properties are offered as collateral for the entire note amount and its full payment.
4. You could, theoretically, have one note secured by one dot, one note secured by multiple dots, multiple notes secured by one dot, multiple notes secured by multiple dots.
Yes, Yes, Sort of - multiple notes only tends to show up with participation loans where multiple investors come together as a mortgagee. Typically you do not really go out and have a "new" note attach to an existing DOT/Mortgage. The language of most security instruments is unique to the specific note structure at origination.
5. You could have one note secured by multiple dots, each dot given by a different entity.
Not really. Multiple lenders would not really come together like that. Any investor who puts money into the funding of the loan will want their interests protected in some manner. This happens with a participated funding. In those deals you might have a "A, B and C Note" which aggregate into the entire loan balance under one DOT/Mortgage. Typically these are only for large loans. The security instrument in that type of deal will list one mortgagee as the primary or lead lender. Usually the A note position. The investors can agree to participate in the "front" of the deal or in the "back" of the deal which sort of dictates this structure.
If you wanted to read up on the matter, I think you might want to look at structured finance. I do not think you will get to far seeking a book under cross collateral or blanket mortgages.
Hope that helps.
Participation notes are generally one note with a lead lender and a participstion agreement among the other lenders, not several notes or multiple lenders.
Cross collateralization is done with relase amounts with each property for each DOT. Saying several notes on one DOT are subordinate liens, not necesssrily a cross colateralization issue.
Title insurance is per property, not by the note or DOT and to the extent of the collateralized amount or value accepted.
These are not really a good way to go for most investors and the details, especially release amounts are critical for a small investor who expects to turn properties. It can be a real PITA and having to substitute collateral to keep loans open.
Good luck if you think it works for ya!
That was a very broad question, let me be more specific.
I have a guy that wants to borrow money to do fix and flip, but he doesn’t have any cash, but he does have two free and clear rentals. He could make fix and flip offers contingent on hard money financing and use the purchase as collateral, but he wants to make all cash offers to be more competitive.
I could write two separate notes and two DOT's and get two title polices, one for each property, which I'm inclined to do because I understand it and I could sell the notes separately.
How else could I structure this?
Okay, you're the lender! I used a "Future Advance, Interest Only, Blanket Mortgage". You make the borrower the construction company with a personal guarantee. The future advance note is made at the maximum loan amount and funds are disbursed upon request. Any principal reduction over the term is credited (depending on state law where you are the lack of earning interest can be offset with a disbursement fee). I'd suggest you talk to a bank attorney as this is a commercial note and is not an off the shelf note you would find. Down side is computing interest on outstanding balances and accounting/servicing.
You could make it easier requiring an amortized payment and simply disburse the entire loan amount up front, but I would still make it a future advance loan so that you can extend future credit without having a new loan closing and modify the note with an addendum or subordinate notes. A future advance blanket mortgage can be one note.
There is one deed of trust with additional collateral described in attachments that can be released without releasing the original deed of trust. Additional properties can be added after they are purchased by adding the new legal description and filing it to the book and page of that property.
Basically that's it, but I really suggest that since you and your borrower need to work together you consider a partnership arrangement where you loan money to the partnership (LLC) since lending money to "your" company will keep you from being a commercial lender and your LLC could keep you in a passive tax position. Don't know the amount of dollars we are talking about here.
This is not exact but the loan amount would be roughly $200k, $100k against one rental (valued at $200k) plus $100k against the other rental (also valued at $100k) … 50% LTV is very comfortable. All properties are owned by borrowers LLC so all loans would be to the LLC with personal guarantees.
I’ve thought about Future Advance Blanket Mortgages but I’m having a hard time seeing the advantage over separate mortgages and notes. It seems to me that with a blanket mortgage/dot every property needs a separate title policy so there is no, or very little, cost advantage. Every time a property is released or added there is some kind of new papers drawn and recorded so there is no, or very little, administrative advantage. I did this one time in the past (one note and two dots) and there was very much heightened attention to detail with the closing agent, in other words it was a pain. And, if separate, notes could be sold easier. I’m not criticizing these techniques, I find the fascinating actually. On the up side, fees are less for borrower (bad for broker) since only one origination.
Partnering with borrower via an LLC is another subject with separate issues. I haven't done one but I would just throw out there that that can be accomplished with a Shared Appreciation Mortgage avoiding much of the liability associated with ownership.
The angle from which you are reviewing this deal is getting cloudy.
As Bill points out, the use of future advances might make sense for the deal if you intend to allow your capital to be redeployed. You are the only one who can answer that question.
You already know you are willing to go to a max LTV of 50%. You seem to have an idea of rate. How long do you want your money to be out? Upon maturity how do expect the borrower to pay you back? Refinance or sell the property?
I am not really seeing where it makes sense to make an open ended loan. There seems to be only two properties, which sound like the initial funding will max the LTV out. So any future advance would have to be preceded by a principal pay down. The plan of future properties has been mentioned but I am not clear what that plan really is.
For this deal, it is starting to seem like a matter of lender preference opposed to some strategic insight as whether to cross the properties or make two loans. If one of the properties is inferior to the other, then perhaps it starts to make sense to cross them, but they seem to be similar and your not really over extending credit at 50% LTV.
I think you are hung up on title fees and recording fees, which yes they can be expensive but in the scheme of things should not really be blowing the deal. If they are, well the deal might not be that strong then. I have no idea why you would mention any type of broker fee...aren't you working with the borrower directly? If so, who cares about broker fees, there shouldn't be any?
The retrade value of a crossed loan or a single loan in regards to $200k properties is not really going to make all that much of a difference. There are buyers out there for both structures and similar pricing. Your value is going to come from the yield and the equity insulation in the deal, both of which you seem to be in decent shape on.
It does seem like you are underwriting this with your own takeout as selling off the note. This is OK, but I would mention to not forget to get a handle on how the borrower is going to get out of this loan and when. If he is selling the property, then you get paid off, why is that not the primary take out? If he plans on holding the property, then why is he not looking at pursuing a conventional loan down the road somewhere? Why are you not forcing the borrower to have an exit plan opposed to you creating them for him? It is great to have a backup plan, but the borrower should be driving that care.
All I'm saying is that the cost and work of a blanket mortgage is the same as separate mortgages, so why do a blanket mortgage.
Because the more properties that a borrower ties up in a mortgage, the less likely he is to walk from the deal and leave you holding a partially finished property.
That's the overriding reason, the rest is just paperwork.