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1

Mortgage Loans

*Mortgages provide a steady earnings stream that support insurance liabilities well. Mortgages meet the primary objective of maintaining a tight asset/liability match with a well-diversified core of investments.

Is an amount of money, loaned at interest for a specified term, secured by real estate and by its improvements such as buildings and infrastructure.

Real estate lending by insurance companies is primarily concentrated on commercial property, where as residential loans, those on homes for four families and fewer, are largely the province of banks.

Promissory Note: represents the promise to pay and is secured by the mortgage on the real estate.
*Mortgagor = Borrower
*Mortgagee = Lender

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subordinated lien-holder

*is paid out of such proceeds only after the first lien-holder and all other superior lien-holders are paid. If there are insufficient proceeds to pay the subordinated lien-holder, the remaining balance may only be collected when additional collateral or personal recourse is specifically included in the loan documentation.

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Conventional Commercial Loans

*The majority of commercial mortgage loans made are conventional whole loans, where the lender provides the entire loan amount at a specified interest rate for a determined period of time.

* The lender’s ability to recover in the event of a default will be limited to the value of the mortgaged real estate. Only in circumstances where the lender has negotiated additional credit support, can you seek to recover losses incurred, which exceed the value of the property. Typical types of credit support include letters of credit and personal guarantees from the borrower. LTV no more than 80%.

Prepayment of a conventional mortgage loan is discouraged through prepayment penalties. When prevailing market interest rates are lower than the rate on the loan being repaid the borrower has to make up the interest rate differential and the lender is essentially “made whole” for a potential loss of interest.

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Subordinated Loans

A mortgage that ranks after the first in priority is a subordinated loan. Properties may have two or more mortgages as liens at the same time. The first mortgagee generally requires that its approval is obtained before additional financing can be put in place.

*Wrap-around Loan: Is a special variation on a second mortgage. In this form, the new lender assumes the original or first mortgage and has the responsibility of collecting all payments and remitting a portion of these payments to the first lender.

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Conventional Residential Loans

Most residential mortgage loans are conventional mortgage loans, which allow the lien-holder to look only to the value of the mortgaged property and the net worth of the borrower for repayment in the event of default. No prepayment penalty. LTV should not exceed 80%.

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FAH Loans

*This agency does not make loans; it only insures them. For this protection the borrower must pay an annual insurance premium to the FHA of 0.5 percent of the outstanding principal amount of the loan. Upon default, the lender has the option either

1. of assigning the mortgage to the FHA and receiving cash and/or securities equal to the loan amount at the date of the default or
2. of foreclosing on the mortgaged property.

The FHA establishes standards for property that can be insured and maximum terms, interest rates, and amounts for the insured loans.

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VA Loans

*VA loans are partially guaranteed by the VA, and the VA in turn imposes certain qualifications for property that may secure the loan and restrictions on the terms of the loan.

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Privately Insured Loans

in recent year, Private insurance companies have sold insurance that guarantees a part or the entire principal of a conventional loan.

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Residential Loans

Loans are secured by single-family houses or by one-to-four family residential properties.

*Loans that exceed 80 percent of market value generally require the borrower to purchase mortgage insurance

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Commercial Loans

Loans are secured by shopping centers, office buildings, industrial buildings and *multifamily residential properties.

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Construction Loans

Loans are made to finance the construction of residential or commercial property. Security for these loans is the structure being built and the land
on which it is situated.

*In some cases, the construction loan lender will agree in advance to provide long term or intermediate financing when the structure is completed and in service. However, if this is not the case, the construction loan lender will usually require evidence that the borrower has arranged for long term financing from another lending institution. *This arrangement is commonly called a commitment.

*Construction funds are advanced as the work progresses. The borrower must submit evidence of costs incurred and demonstrate that there are adequate funds not yet disbursed in the loan to complete the project.

* When the structure is completed and put in service, the construction loan is paid off from the proceeds of the long term financing, whatever its source.

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Development Loans

*Loans on developed building lots and loans to finance the acquisition and development of unimproved land. Development loans are secured by unimproved land and the improvements made to the land.

Land development usually refers to the installation of improvements necessary to make unimproved building sites ready for the construction of structures.

development loans are funded periodically and are paid off either when construction loans for the structures are funded or after building is completed and long term residential or commer- cial loans are obtained on the properties.

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Undeveloped Land Loans

*Loans on secondary undeveloped land that is not to be developed in the foreseeable future

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Farm Loans

Loans that are secured by farmland including produce farms, standing timber, vineyards, orchards and dairy farms. The standing crop and the chattel, as well as the improvements on the land are usually part of the security for the loan.

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Purchase Money Loans

*Loans that result when life insurance companies purchase real estate or, as lenders, may acquire real estate through foreclosure on mortgage loans.

When such property is sold by the life insurance company, part or all of the consideration that the company receives may be a mortgage loan on the property. * A mortgage loan received as part or all of the purchase price for real estate owned previously by a life insurance company, is called a purchase money loan.

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Mezzanine Real Estate Loans (MRELs)

* Are secured by a pledge of direct or indirect equity interests in an entity that owns real estate. MRELs do not include a security. MRELs is a nonadmitted asset.(unless specifically identified as an admitted asset in the Manual)

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Governmental Regulations Affecting Mortgage Loans

*Require life insurance companies to invest only in first lien mortgage loans and in some cases, only certain types of first lien mortgage loans.

*Regulations limit the loan to market value ratio of new and existing mortgage loans from 66 2/3 to 80 percent, unless the mortgage loans are insured or guaranteed by the FHA or VA.

Some jurisdictions prohibit a concentration of investments in mortgage loans with any one borrower or in any one property. Some jurisdictions prohibit or limit investments in mortgage loans when a person or entity affiliated with the insurer is the borrower.

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Basket clauses

*Allow investments to be made, up to a certain percent of invested or total admitted assets, in assets that do not otherwise meet regulatory requirements. If their domiciliary jurisdiction regulations have a basket
clause, a life insurer with a business purpose for doing so can make a limited amount of mortgage loans that do not meet regulatory requirements without a reduction in surplus.

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Normal Documentation for Mortgage Loans

The Investment Department and the company’s Investment Committee are responsible for assessing opportunities to make mortgage loans, for making commitments for investments in new mortgage loans, for disbursing mortgage loan proceeds, and for monitoring the status of previously paid-out mortgage loans.

The assessment process (commonly called underwriting) helps to ensure the safety of mortgage loan principal. The underwriting process generates certain important documentation, which should be preserved. When the loan is funded, normally at a closing, other documentation is generated. Certain important documentation is also accumulated over the life of the loan.

The Accounting Department or a separate control function of the Investment Department or the Treasurers Department should be responsible for receiving all cash, issuing all checks, and accounting for all cash receipts and disbursements and other transactions related to a company’s investment in mortgage loans.

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Documentation Generated During the Underwriting Process

* Required documents are:
• Loan application
• Credit report: *A report that provides the borrower’s past credit history and current credit standing. *If the loan is on commercial income-producing property, the company usually also obtains credit reports on the principal tenants and copies of the leases.
• Borrower’s financial statements,
• Verification of the borrower’s employment
• Verification of Deposit
• An appraisal
• Environmental report: *An environmental review of the property which the company would order depending on the age, history of usage, location, and other factors.

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Appraisal

The appraisal value is used to determine that the loan to market value ratio is in compliance with regulatory requirements. *It also is used to determine any nonadmitted mortgage loan amount.

*Even if a company maintains its own appraisers, independent appraisals are obtained as a check on the quality of company appraisals. Some jurisdictions require independent and certified appraisals. Appraisers use three approaches to determine the property’s value:
• Cost - *determines a value that represents the current cost of reproducing a property less depreciation.
• Income - determines a value that represents the property’s net earning power. *It is based upon capitalization of net income.
• Market Data - determines a value from the recent sales of comparable properties in the same market as the property being appraised.

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Generated when loan funds are distributed

*
• original promissory note
• the mortgage: * those most commonly encountered are regular mortgages, deeds of trust, equitable mortgages, deed absolute given as security for debt, and deed to secure a debt.
• evidence of its first lien on the property used as security: * lender’s title insurance policy offers greater protection to the company than an attorney’s title search and opinion.
• survey of the property: A survey from an approved engineer or surveyor ensures there are not encroachments related to the mortgage property.
• closing statement
• property insurance policy
• assignment of rent if appropriate for income-producing property

• any participation agreement agreed to between the borrower and lender:

• and others: * These include the assignment of mortgage or deed of trust where loans are purchased, assignments or liens on life insurance policies, escrow agreements, lot release agreements, partial release agreements, construction loan funding schedules, and releases of mechanics liens in the case of construction and land development loans.

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Evidence of its first lien on the property used as security

*An attorney’s opinion and an abstract of title, a lender’s title insurance policy, or an owner’s title insurance policy is obtained to protect the company against having an imperfect lien against the mortgaged property.Therefore, a lender’s title insurance policy offers greater protection to the company than an attorney’s title search and opinion.

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Participation Agreement

*An agreement the company receives part of the gross or net income being generated by income-producing property upon which the company has granted a mortgage.

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Acquiring Mortgage Loans Through
Secondary Markets

Buying participation in a block of existing loans or buying existing loans from another life insurance company or another financial institution.

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Acquiring Mortgage Loans Through
Block of Loans During Acquisition or Mergers.

Obtaining a block of loans when it acquires or merges with another life insurance company.

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Acquiring Mortgage Loans Through
In Lieu of cash in a reinsurance transaction

Receiving loans in lieu of cash from ceding insurance companies to fund policy reserves on policies acquired by the reinsurer in a reinsurance transaction.

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Acquiring Mortgage Loans Through
Brokers.

Historically, mortgage bankers and direct placements were primary sources of new mortgage loans. However, with the advent of secondary market activities, bond brokerage houses and investment bankers have entered the field of selling and placing
mortgages.

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Acquiring Mortgage Loans Through
Participation or Joint Venture Loans

Life insurers have increased sharing loans with other life insurers to take part in larger projected loans while spreading risks and diversifying types of loans (i.e., shopping centers, office towers, etc.).

30

Acquiring Mortgage Loans Through
Participation Certificates

Essentially these are pass-through certificates whereby a trustee holds all mortgage documents in trust, sells off interests in the underlying mortgages, collects the mortgage payments, and remits its portion to each holder. The GNMA is probably the most widely recognized issuer of this type of mortgage interest. Another kind of instrument is the CMO.