In a basic mortgage financing transaction, the lender makes a loan to the borrower, and the borrower grants to the lender a mortgage or deed of trust lien on the real property collateral and a security interest in the associated tangible and intangible personal property.
Sometimes and for a number of reasons, the lender is not willing to make its loan solely on the security of such real and personal property collateral and therefore requires that the borrower provide some kind of third party credit support for the loan. Two common forms of third party credit support in mortgage financing transactions are letters of credit and guaranties.
A letter of credit is basically an undertaking by a bank or other financial institution, made at the instance of its customer, to pay a stated amount of money to another party. In mortgage financings, letters of credit as additional collateral are seen most often in a couple of different circumstances. In the first, the borrower causes a letter of credit to be issued directly in favor of the lender as security for the loan in addition to the real property collateral.
In the second, the borrower assigns to the lender, as additional security for the loan, a letter of credit made in the borrower’s favor by another party, usually a tenant under a lease of the real property collateral. This second kind of letter of credit is sometimes referred to in this discussion as a “Tenant Letter of Credit” in order to differentiate it from a letter of credit issued for the borrower’s account.
A guaranty is an agreement by a third party, usually affiliated in some manner with the borrower, to assure payment of the borrower’s indebtedness to the lender and/or the performance of the borrower’s other obligations to the lender. The most common forms of guaranties used in mortgage financing transactions are probably repayment guaranties. Other frequently encountered kinds of guaranties include guarantees of a borrower’s obligation to construct improvements on real property collateral and guarantees of the so-called “carveouts” from limited personal liability under a non recourse loan.
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PDF Credit Support In Mortgage Financing Transactions Letters Of Credit And Guaranties
