Mortgaged Collateral: An asset or a liability????
Mortgaged Collateral: An asset or a liability????
I do a lot of lending on multiple collateral, usually either a portfolio of several pieces of real estate, or a small business combined with one or more parcels of real estate.
Very frequently I am able to give a 100%, or even 110% LTV loan, to a borrower who has excellent DEBT COVERAGE. This debt coverage can come from predictable business income, or NOI from real estate collateral, or for that matter from many other sources.
NOI is important to determining capitalized value, but it is also often the source of most of the available debt coverage. Obviously if I as a lender am getting a first mortgage, by definition all of the NOI is available for debt coverage and no further analysis is needed.
If however I am taking collateral subject to one or more senior mortgages, things get more complicated quickly. Obviously the amount of the first mortgage is very important: a large first mortgage means that the collateral contributes little or no equity to the project, and also any debt coverage provided by that collateral is subject to getting wiped out by foreclosure, Thus, both LTV and debt coverage are not certain.
A high interest rate on a first mortgage taken subject two is very bad for several reasons: (1) debt coverage is reduced since more NOI is going to be consumed servicing that mortgage; (2) the chances of foreclosure are greatly increased since the likelihood that the borrower will be unable to keep that mortgage current are greatly increased; (3) fewer end buyers are available to take that collateral subject to an onerous first mortgage; (4) even if the collateral subject to a high interest rate first mortgage is excess collateral and not important to either LTV or debt coverage a foolish borrower might be tempted to apply money to servicing it that he could instead be paying me.
A private lender holding that first mortgage being taken subject to is also unacceptable for reasons other than interest rate since he is more apt to decide to foreclose or call the loan than an institutional mortgagee.
A very low rate first institutional mortgage IS HOWEVER AN ASSET RATHER THAN A LIABILITY since (a) keeping it current is easy and in the borrower's best interest; (b) it gets paid down more quickly; (c) there is a far lower chance of the mortgage loan getting called, despite the fact that the holder is usually legally entitled to accelerate upon assumption or even a technical default.
pl goduti. Wedgestone Real Estate Advisors