Participation mortgage loans are ones where lenders will allow borrowers to share in a part of the resale proceeds or income proceeds. The lender is the one who participates in the income for the property that is mortgaged beyond past a fixed return. Alternately, the lender will receive a yield on the loan on top of the straight interest rates.
Basics Of Participation Loans
With a participation mortgage, the mortgagee (lender) has entitlements to share in the resale proceeds or the rental from a property that is owned by the loan’s borrower. The mortgage in this case will be evidenced by a bank or another fiduciary institution who will have the legal title of the mortgage loan in their ownership. They will be able to sell small fractions of the mortgage to investors or can make the investment available for certificate holders.
Benefits Of Participation Loans:
Over the last decade, the use of participation loans has gained popularity. There are various benefits to using a participation loan on top of the many due diligence and compliance items in which to evaluate. Below are some of the top reasons why a financial institution should consider the use of participation loans. They can be an integral part of balance sheet strategies.
•Larger Loans May Be Originated
The ability to sell participation loan portions can offer financial institutions the option of originating very large loans that were otherwise too large for them to fund alone. When a financial institution allows other institutions to participate in the loans, they can acquire the necessary funds to take on the mortgages. They lender will be able to stay in the legal lending limits they are having to follow.
The financial institutions who buy the loan participations will be able to share in a portion of the profits from the leading financial institution handling the loan. If the market is slow and a financial institution isn’t getting a lot of business on their own accord, it can be very profitable and beneficial to team up with other institutions in order to generate their own lending income to offer more loans.
Participation loan programs allow institutions to be able to diversify their assets. It will also allow them to take on less credit risks with their customers who may have a greater than average risk on their own. When a financial institution takes on numerous types of loans, they will be able to better handle any economic changes such as a natural disaster striking or a severe economic downturn.
•Better Customer Service
Selling off participation loans gives more control to financial institutions and allows them to keep more control over the relationships they have with their customers. Keeping the institution’s customers happy is better than sharing the relationship with different competing financial institutions instead.
•Servicing Responsibilities Shared
When an originating lender has the ability to handle all of the servicing, they can service the loan for all of their participants on their behalf. Unfortunately, many institutions do not have enough operational capacity in order to service many different loan participations. Many prefer to hire an outside servicer to take care of servicing the loans for the lead financial institution. The hiring of a servicer can help to significantly reduce the burden on the company’s administration team for the participating financial institutions.
Whether they are selling or buying, loan participation programs that are properly managed can be very beneficial for all who are involved. The loan participations can give the selling financial institution a tool to help manage regulatory limits, liquidity, interest rates, geographic concentration issues and credit problems with much more ease.
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