The Performance Mortgage: A Wonderful Tool

The popularity and usage of the Performance Mortgage is rapidly making inroads into the fabric of American real estate. We are becoming blessed with innovative lenders designing a variety of lending instruments that make modern real estate loans really work for our citizenry.

It was just a short while back when they designed the reverse mortgage that has played such a wonderful role for our retirees. Through the reverse mortgages they can borrow on their homes and have no payments to make. The interest accumulates and is paid off when the home is later sold. The retirees in essence are living off part of their equity but still remaining in their homes.

By using these mortgages an enormous number of foreclosures have been completely eliminated that would have happened and that no one wanted to make and are helping to make the final years of many people so much happier. In real estate these are called Single Pay Notes or Balloon Notes that are secured by the real estate. In the stock market they are called Zero Coupon Bonds or Strips that are secured by corporate assets or the Federal ones, Treasury Investment Growth Receipts (TIGRs), by the U.S. Government.

There have been many bonds like these over the years that come due in a single payment 10, 20 or 30 years out including the war bonds many of us purchased during the war years.

Other new mortgages that have come into play are ones where a person’s FICO credit score might permit them to borrow even over the actual value of their real estate. Others loans are being designed with lower payments at the beginning and increasing in time as perhaps the borrower’s capacity to pay increases or rents from their property increases. Many of these, in some way, are using the potential appreciation of the real estate as a factor in determining how to structure the loans. The growth in the value of the real estate may play a prominent roll and the proper loan structure eliminates or decreases foreclosure problems.

The Performance Mortgage is innovative as it allows the net income from a parcel of real estate to dictate the payments and as the income increases so does the payments. These work very well with a property that is only partially developed or underdeveloped or one with vacancy problems. By using a standard loan the income will not cover the payments which cause reverse cash flow, other problems and often foreclosure. Again, these are foreclosures that no one wants. Not the lender or the borrower.

By using a Performance Mortgage another innovative thing can take place. For years the Gnomes of Zurich and other wise lenders have known and made use of the fact that the growth in the value of the real estate is a huge asset. The lender usually does not share in this growth. However by properly structuring the loan, i.e. a performance mortgage, the lender can share in it. In the performance mortgage a percentage of the real estate profit on sale can be directed to the lender.

Now a loan on an under-developed property can be made and the payments based on a lower than normal income from the property. As it is developed and rents increase the payments increase. When it is sold and profits are realized, the loan is retired and the lender shares in a pre-determined percentage of the net profit.

From the lenders perspective many nice thing happen. They don’t have to keep looking for a place to put their capital. It not only is working but it is increasing in income. Potential problems like foreclosures are eliminated or reduced). The capital loaned is not “static” or and not a “fixed” where the it is subject to the ravages of inflation and the loss of spending power.

Nothing is ever a panacea but the Performance Mortgage is a real step in the right direction. Hats off to the “new breed of lenders”

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