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.