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Updated 1 day ago on . Most recent reply

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Jose Ortega
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Loans using mortgage notes as collateral

Jose Ortega
Posted

Hi all,

I wanted to see if anyone out there has ever borrowed funds using a mortgage note as collateral. I know there are HELOC loans out there but that would be more for a mortgagor. In this case, my company would be lending the funds to a multi-family value add investor and I would like to see if there is any banks or private investors that would lend using the mortgage note my company would have as collateral.

Any information would be greatly appreciated.

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Chris Seveney
  • Investor
  • Virginia
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Chris Seveney
  • Investor
  • Virginia
ModeratorReplied
Quote from @Patrick Roberts:

Synovus and Regions had an appetite for this kind of thing in the past, but the fund I worked for had about $100m in assets at the time. Some small, local banks may have an appetite for this, but it literally varies by the bank/risk committee members and the only way to find out is in-person conversations - I dont know of any particular banks offhand. 

Typically, this kind of lending from banks/depositories is as a secured facility at the portfolio level and structured as a warehouse line. I havent seen these get approved when the total portfolio was less than $20m or so because banks usually wont go over 40-50% LTV on the portfolio and it takes a lot to underwrite these. Also, since this is effectively more CRE exposure, there might be an extra headwind there as well.

What I have seen in the past with this kind of thing is a warehouse facility that is used to fund the origination, and then the note is quickly sold either to an SPV consisting of raised investor capital, or to another third-party investment fund/bank that buys for yield, or securitized into a private label mbs/cmbs. The play for the originator entity is the points and fees - usually the asset itself (the note) has to be financed with equity capital rather than debt because the spreads are too thin to lever up unless you have a significant portfolio. Finding a bank that will finance a buy and hold small note portfolio is kind of a unicorn in the note world. 

@Chris Seveney runs a mortgage note fund and has likely come across this. He might be able to add some color. 


We've explored using mortgage notes as collateral, and while it's possible, especially with private investors or niche banks, it's far from simple or inexpensive. Most traditional banks won’t move quickly or at all unless you're already an established, well-capitalized borrower with strong financials.

We just received a term sheet from a small commercial lender, and here are a few key terms that illustrate what it takes to secure this type of facility:

  • Minimum Tangible Net Worth: $2 million

  • Required Liquidity: $400,000

  • DSCR Covenant: 1.75x maintained at all times

  • Interest Rate: 1-month SOFR + 3.75%, with a floor of 7.5%

  • Origination Fee: 1% of the line amount (in this case $200,000 on $20MM)

  • Unused Line Fee: 1% annually

  • Expense Deposit: $50,000 upfront, just to start diligence

  • Advance Rates: Only up to 75% on performing notes with strict LTV guidelines (max 50% loan-to-value from the bank's perspective)

Banks want full transparency on the collateral, borrower, and servicing structure. You'll also need third-party appraisals, environmental reports, and borrower credit files for each pledged note. These deals can be done, but they’re not fast and not cheap.

If you’re not already running a note fund or lender platform with strong performance history and compliance infrastructure, you’re likely better off exploring private capital partners or structured investors that understand the space.

  • Chris Seveney
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7e investments
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