The mortgage note industry plays a crucial role in the financial ecosystem, enabling transactions involving secured loans for residential and commercial properties. Whether you are a seasoned investor or new to the field, understanding the terminology is essential for navigating this complex industry. Here’s a detailed overview of key industry terms to enhance your understanding.

1. Mortgage Note

A real estate note, also known as a mortgage note, is a legal document that outlines the terms of a loan secured by a property. It includes details such as the loan amount, interest rate, payment schedule, and consequences of default. The mortgage note is the financial promise to repay the loan.

2. Promissory Note

Promissory notes, often used interchangeably with a mortgage note, are a written promise to pay a specified sum of money under agreed terms. While the mortgage secures the loan to the property, the promissory note is the borrower’s promise to pay.

3. Loan-to-Value (LTV) Ratio

The LTV ratio is the percentage of the loan amount compared to the appraised value of the property. It’s a critical metric for assessing the risk of a mortgage, with lower LTVs typically indicating safer investments.

4. First Lien Position

A loan in the first lien position has priority over other claims or liens on a property. In case of foreclosure, the holder of the first lien gets paid before other creditors.

5. Second Lien Position

A loan in the second lien position is subordinate to the first lien. In foreclosure scenarios, second lienholders are only paid after the first lienholder is satisfied, making these loans riskier.

6. Performing Notes

A performing mortgage note is a mortgage note where the borrower consistently makes payments on time. Performing notes are generally less risky and more desirable for investors.

7. Non-Performing Notes (NPNs)

Note investing involves various strategies, including non-performing notes, which are loans where the borrower has fallen behind on payments. While riskier, these notes often sell at a discount, offering opportunities for investors to add value through resolution strategies.

8. Note Servicer

A note servicer is a third-party company that manages the administration of mortgage notes, including collecting payments, sending statements, and handling customer inquiries.

9. Balloon Payment

A balloon payment is a large, lump-sum payment due at the end of a loan term. Loans with balloon payments often have smaller monthly payments leading up to the final payoff.

10. Interest-Only Loan

An interest-only loan allows borrowers to pay only the interest for a specified period, followed by larger payments that include principal. These loans can be attractive for investors focusing on cash flow.

11. Discount Rate

The discount rate is the rate used to calculate the present value of future cash flows from a note. Investors use this to determine the current market value of a mortgage note.

12. Due Diligence

Mortgage note investing involves thoroughly reviewing a mortgage note and its associated documents, including payment history, property valuation, and lien position, to assess its value and risks.

13. Foreclosure

Real estate note investing involves the legal process of foreclosure, where a lender takes possession of a property after the borrower defaults on a loan. Investors purchasing non-performing notes often aim to avoid foreclosure through loan modification or other strategies.

14. Partial Purchase

A partial purchase allows investors to buy a portion of a note’s payment stream. For example, an investor might purchase the next five years of payments while the seller retains the remainder.

15. Loan Modification

Loan modification refers to changes made to the terms of a loan to help a borrower avoid default. This can include adjusting the interest rate, extending the term, or reducing the principal balance.

16. Exit Strategy

An exit strategy is the plan for how an investor will realize returns on a note, such as selling the note, refinancing, or converting a non-performing note into a performing one.

17. Real Estate Owned (REO)

Real estate investors should be aware that REO properties are those that have been foreclosed upon and are now owned by the lender. These can present opportunities for investors to purchase property at a discount.

18. Assignments of Mortgage

This is the transfer of a mortgage note from one holder to another. It involves legal documentation that details the rights and obligations being assigned.

19. Collateral File

The collateral file contains all the documents related to a mortgage note, including the promissory note, mortgage or deed of trust, title policy, payment history, and information crucial for evaluating property value.

20. Escrow Account

An escrow account holds funds for property taxes and insurance, ensuring they are paid on time. Escrow accounts are often managed by the note servicer.

Expanded Glossary of Key Industry Terms in the Mortgage Note Industry

21. Amortization

Amortization refers to the gradual repayment of a loan through regular, scheduled payments of principal and interest. An amortization schedule outlines each payment and the remaining balance after each installment.

22. Deed of Trust

A deed of trust is a legal document that secures a loan using real estate as collateral. It involves three parties: the borrower, the lender, and a trustee who holds the legal title until the loan is repaid.

23. Equity

Equity is the difference between the current market value of a property and the remaining balance of the mortgage loan. It represents the homeowner's financial interest in the property.

24. Escrow Shortage

An escrow shortage occurs when there are insufficient funds in an escrow account to cover property taxes or insurance premiums. Lenders may require borrowers to make up the difference or increase their monthly escrow payments.

25. Fixed-Rate Mortgage

A fixed-rate mortgage has a fixed interest rate that remains constant throughout the life of the loan, ensuring consistent monthly payments.

26. Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage has an interest rate that may change periodically based on an index rate. This can result in fluctuating monthly payments.

27. Chain of Title

The chain of title is the documented history of ownership and transfers for a property. It ensures there are no disputes or claims against the property's title.

28. Loan Servicing Rights (LSRs)

LSRs refer to the rights to manage a loan, including collecting payments, managing escrow accounts, and communicating with the borrower. These rights can be sold or transferred between entities.

29. Default

Default occurs when a borrower fails to meet the terms of their loan agreement, such as missing payments. Defaults often precede foreclosure or loan modification.

30. Prepayment Penalty

A prepayment penalty is a fee charged to borrowers for paying off a loan early. This fee compensates the lender for lost interest payments.

31. Recasting

Recasting is the process of recalculating a borrower’s monthly mortgage payment based on a large lump-sum payment made toward the principal. This typically results in reduced monthly payments.

32. Collateral Assignment

Collateral assignment refers to transferring the rights to a mortgage note to another party as security for a debt or obligation. The original owner retains ownership but grants a claim on the collateral.

33. Performing Loan Portfolio

A performing loan portfolio is a collection of loans where borrowers are making payments on time. These portfolios are highly desirable in the secondary market due to their lower risk.

34. Credit Risk

Credit risk is the possibility that a borrower will default on their loan obligations. Investors assess this risk when purchasing notes to determine potential returns.

35. Reserves

Reserves refer to funds set aside by lenders or servicers to cover potential losses or unexpected expenses, such as defaults or maintenance on foreclosed properties.

36. Judicial Foreclosure

Judicial foreclosure is a foreclosure process that requires court approval. It is typically longer and more expensive than non-judicial foreclosure but is required in certain states.

37. Non-Judicial Foreclosure

Non-judicial foreclosure allows lenders to foreclose on a property without court intervention, provided the deed of trust includes a power-of-sale clause. It is generally faster and less costly than judicial foreclosure.

38. Hard Money Loan

A hard money loan is a short-term loan secured by real estate. These loans are often used by investors or developers and typically have higher interest rates and shorter terms.

39. Buyback Clause

A buyback clause is an agreement that allows the seller of a mortgage note to repurchase it under certain conditions, such as a borrower defaulting within a specified period.

40. Partial Payments

Partial payments occur when borrowers pay less than the full amount due. Lenders may apply these funds to interest first, with the remainder applied to the principal or held in suspense.

41. Forbearance

Forbearance is a temporary agreement between the lender and borrower that pauses or reduces payments to avoid default. This option is typically offered during financial hardships.

42. Underwriting

Underwriting is the process of evaluating a borrower's creditworthiness and the risk of extending a loan. It involves analyzing income, credit history, and the property’s value.

43. Payoff Statement

A payoff statement is a document provided by the lender that outlines the total amount required to pay off the loan, including principal, interest, and any fees.

44. Seasoning

Seasoning refers to the length of time a mortgage note has been active. Seasoned notes, which have an established payment history, are often more attractive to investors.

45. Real Estate Investment Trust (REIT)

Real estate investing involves various strategies, and a REIT is a company that owns or finances income-producing real estate. Mortgage REITs, specifically, invest in mortgage loans or mortgage-backed securities.

46. Loan Sale Agreement

This agreement outlines the terms and conditions under which a mortgage note is sold from one party to another, including pricing, representations, and warranties.

47. Servicing Transfer

A servicing transfer occurs when the responsibility for managing a mortgage loan is moved from one servicer to another. Borrowers are notified of this change but continue to make payments as usual.

48. Subprime Loan

A subprime loan is offered to borrowers with lower credit scores or higher risk profiles. These loans often come with higher interest rates and stricter terms.

49. Trust Deed Sale

This is the process of selling a mortgage note secured by a deed of trust. The new owner acquires the right to receive payments and enforce the note terms.

50. Mortgage-Backed Security (MBS)

An MBS is a type of investment that pools multiple mortgage loans and sells shares to investors. Investors receive payments based on the performance of the underlying loans.