Mortgage note

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.^[1]

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%.^[2]

Importance

In the United Kingdom, mortgage-related debt amounts to over £1 trillion.^[3] 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.^[4] $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.^[4]

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 call 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 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^[5] has gained increasing acceptance in the national foreclosure crisis of 2008-2009.^[6]

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.^[7]

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.

References

1. ^ Stacy, Mitch (2009-02-17). "Homeowners' rallying cry: Produce the note". Associated Press. http://www.google.com/hostednews/ap/article/ALeqM5hLOuvy9fguykC2NydTDrkqqyybvQD96DHN5G0. 
2. ^ Wiedemer, John (2001). Real Estate Finance, 8th Edition. Prentice Hall. p. 57. 
3. ^ Thornton, Philip (2006-06-30). "UK mortgage debt soars through £1 trillion". The Independent. http://www.independent.co.uk/news/business/news/uk-mortgage-debt-soars-through-1631-trillion-406097.html 
4. ^ ^{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 
5. ^ https://secure.consumerlaw.org/conference_training/post_conf.shtml
6. ^ http://www.massrealestatelawblog.com/2011/09/08/sjc-to-consider-produce-the-note-foreclosure-defense/
7. ^ 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.