Posted by Michael Morrongiello American Note on December 15, 1999 at 19:15:47:
Here is my take on some of your questions:
- Most note funders do not like to see an underlying 1st lien that represents much more than a 3 to 1 ratio in terms of the size of the 1st lien to the 2nd lien. eg. A $75K 1st lien would be 3 x the size of a $25K 2nd lien.
2nd lien notes that are outside those boundaries really have limited marketabilty.
In genral most note funders want to purchase 1st lien poistion notes.
The equity lending side of the mortgage industry has many other flexible 2nd lien programs including lose up to 125% or more of a property’s value.
It all depends on the credit profile of the proposed payor. Some lenders will go up to 80% LTV and allow for a 2nd lien for the other 20% making the combined financing 100% CLTV. Most note funders are not too receptive being asked to purchase a note where the payor has nothing at risk. However if the LTV is under 65% and the credit is strong that is even feasible sometimes.
Balloon payments and interest rate increases on a seller held 2nd lien are typically not a major issue for most lenders. Note funders as well are primarily concerned with the 1st lien note that presumably there are buying?
Somewhere around 50% LTV to 65% LTV a note can be generated and sold with the emphasis primarily on the3 collateral. However other factors have to be looked at as well (payor down payment, payor credit, seasoning, etc.)
It is preferable to have a due on sale clause provision contained in the mortgage and note. Otherwise in evaluating a deal based on a payor who has good credit, if no clause exists, the note funder may end up with a “deadbeat” (trying to be politically correct) payor who “assumes” the debt.
Most note funder do not want a prepayment penalty in their note and encourage early prepayment. WHY?
Because they are buying the note at a discounted pay price. If the note pays early this “pops” their return somewhat.