Re: Performance Mortgage–what it is? - Posted by Jim Beavens
Posted by Jim Beavens on May 24, 1999 at 16:56:35:
In order to understand what a performance mortgage is, you first have to understand what a “regular” mortgage is. Bronchick gives a good definition of this, which I’ll paraphrase here.
When you go to a bank, you do not get a mortgage, you get a loan. Now what do you give to the bank in exchange for this loan? You give a mortgage, or a security interest. So you can picture this as a simple trade; the bank gives you gobs of money, and in return you give it a little piece of paper that promises to pay it back at a certain rate and for a certain term, or the bank is entitled to the property that is being loaned against. So a mortgage doesn’t necessarily have anything to do with money, it’s simply a promise to do something in writing. So in that regard ALL mortgages are performance mortgages, it’s just that the vast majority of them relate to a borrower performing on their loan payments.
So now look at what you want to accomplish with a performance mortgage. Without borrowing any money, the mortgagor (giver) is simply making a promise, and if that promise is broken, then the mortgagee (receiver) is entitled to foreclose as outlined in the mortgage.
So if I was buying a property subject to the existing mortgage and the seller didn’t trust my ability to make their mortgage payments, then I could offer to give them a performance mortgage that would outline my promise to pay in writing, and the failure to do so would give them the right to foreclose. Or if I was lease-optioning a house, and I didn’t trust the seller to honor the option in a year or two when I wanted to exercise, then I could ask him to give me a performance mortgage as part of his promise to honor our agreement. Again, failure to perform under this promise would give me the right to foreclose on the property.
Hope that helps, and I hope I didn’t mangle the legal stuff in my attempt to keep it in layman’s terms.