BACK TO BASICS ON MORTGAGE NOTES

Not so many decades ago, banks loaned money to people to buy a house and then kept the loan. Because the bank held on to the mortgage note, they made sure that the buyer put in a reasonably large down payment and had the ability and character to repay the loan. Of course, we all know how that has changed, especially over the last decade.

It’s time to pick up the better habits of that era. The securitization of mortgage notes and loans, including the splitting up of loans into tranches, went way too far. Too many people along the chain had their hands in the money pie, with nobody taking responsibility for making a good loan. Incredibly, some of these bad business models still continue.

The new era should be regulated along two segments. First, banks could give loans and then either keep each loan or sell the real estate note in nearly its entirety to a mortgage note buyer. If a bank does sell a note to another bank or mortgage buyer, the bank must keep some minimal amount of the mortgage note – say 10% -- to ensure that they have followed proper underwriting guidelines and carry part of the risk.

The second segment would be the private mortgage note arena. In this case, the selling party (usually a private individual) “carries” the mortgage note, and the buying party makes regular payments to the seller. The seller is more likely to make sure that he is protected in case of default than would a faceless securitization program. If the seller decides to sell the note, he could sell the real estate note to a particular mortgage note buyer or get offers from a multitude of mortgage buyers. In deciding to sell the note, or even part of it, the original seller has cash to use for other activities, and the mortgage note buyer gets a return on their investment. The mortgage buyer creates a direct relationship with the payer by means of the real estate note.

Both of the above approaches would bring down the volume of real estate transactions to a more realistic level. Keeping the real estate note in one piece or, at worst, two to three pieces, helps ensure that both the party holding or selling the note and the mortgage note buyer have done their due diligence and created a bona find mortgage note.

Alan Noblitt is the owner of Seascape Capital Inc., which buys real estate notes. He may be reached at (858) 672-4678 or toll-free at 1-800-634-4697. If you would like to learn more about real estate notes and read informational articles, visit www.seascapecapital.com.


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