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Subordinated Mortgages

DESCRIPTION:

• A subordinated mortgage is a direct loan that is in a subordinated collateral position to the primary lender.
• Some subordinated mortgages are "near equity" in that they may be partially or completely forgiven over time.

FUNCTION:

• Subordinated mortgages enhance the primary lender's collateral position.
• Since nonpayment on a mortgage can result in project default, it is important for the first mortgage holder to ascertain the likely requirements of the subordinated mortgage lender in the event of default.
• Revolving loan funds operate as subordinated mortgages.

QUALIFICATION AND USE CRITERIA:

• Qualifications depend upon meeting quantifiable social objectives of the program such as housing low-income people, creating jobs through business expansion, etc.
• Rules often apply regarding variables such as the portion of the total project eligible for a subordinated mortgage, minimum equity investment, rental payments of tenants, etc.

PROGRAM STRUCTURE:

• Subordinated mortgages are often used in conjunction with other enhancement programs.
• Subordinated mortgages often carry an interest rate subsidy. Deep interest rate subsidies may be an indication that the subordinated mortgage lender is unlikely to foreclose if loan payments are missed.

DOWNLOADABLE DOCUMENTS (PDF):

• Economic Development Administration Economic Adjustment Assistance (Title IX)
• Federal National Mortgage Association Simultaneous Second Mortgage
• Small Business Administration (SBA) 504 Debenture Loans

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