Wrap-Around Mortgage

Wraparound Mortgage

A second mortgage that a borrower takes out to guarantee payment on the original mortgage. In this situation, the borrower makes payments on both mortgages to the wraparound lender, which then makes payments on the original mortgage to the original lender.

Wrap-Around Mortgage

A mortgage loan transaction in which the lender assumes responsibility for an existing mortgage.

Usually, but not always, the lender is the home seller. For example, S, who has a $70,000 mortgage on his home, sells his home to B for $100,000. B pays $5,000 down and borrows $95,000 from S on a new mortgage. This mortgage “wraps around” the existing $70,000 mortgage because S will continue to make the payments on the old mortgage.

Awrap-around can be attractive to home sellers because they may be able to sell their home for a higher price. In addition, if the current market interest rate is above the rate on the existing mortgage, the seller can earn an attractive return on the cash foregone from the sale. For instance, if the $70,000 mortgage in the example has a rate of 6% and the new mortgage for $95,000 has a rate of 8%, S earns 8% on his $25,000 investment plus the difference between 8% and 6% on $70,000. The total return is about 13.5%. I have a spreadsheet on my Web site that calculates the yield on a wrap-around.

But the high return carries a high risk. The new mortgage owned by S is a riskier asset than the house he previously owned. The new owner has only $5,000 of equity in the property. If a small decline in market values erases that equity, the owner has no financial incentive to maintain the property. If the buyer defaults on his mortgage, S will be obliged to foreclose and sell the property in order to pay off the old mortgage.

Only assumable loans are legally able to be wrapped. Assumable loans are those on which existing borrowers can transfer their obligations to qualified house purchasers. Today, only FHA and VA loans are assumable without the permission of the lender. Other fixed-rate loans carry “due on sale” clauses, which require that the mortgage be repaid in full if the property is sold.

Sometimes wrap-arounds arise on loans with due-on-sale clauses without the knowledge of the lender. This is looking for big trouble. See Assumptions/Illegal Assumptions/Wrap-Arounds.

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References in periodicals archive ?
4-acre development now secures a 20-year wrap-around mortgage of $800,000 held by D&B Hospitality.
This will require a seller to step in with a second and or a wrap-around mortgage.
A form of seller financing, a wrap-around mortgage occurs when a purchaser makes payments on the previous owners' debt as well as an additional loan that amounts to the purchase price.
The company's mortgage loan portfolio earns significantly higher than average interest rates and participates in future property appreciation because of its willingness to offer non-commoditized products uniquely structured for the borrowers' needs -- specifically 90% LTV wrap-around mortgage financings and bridge loan financings.
A seller can avoid the excess debt relief problem by using a wrap-around mortgage.
Cobalt Capital provided a $740,000 wrap-around mortgage to finance the deal.
Cohen & Associates continued to serve as managing agent for both the lender in control and the co-op board, helping the board to refinance its wrap-around mortgage with the sponsor and making sure the building was no longer overleveraged.
Although the cooperative corporation, in a prior lawsuit, was successful in invalidating a larger wrap-around mortgage held by the sponsor, it was still in difficulty in meeting the debt service requirements of the underlying first mortgage held by the East New York Savings Bank, which was still valid.
Proceeds were used by the cooperatives to refinance their existing underlying mortgages, which included in each case a first mortgage held by The Aetna Life Insurance Company of Hartford, Connecticut and a second wrap-around mortgage held by the cooperatives' sponsor, a partnership consisting of the New York City developer Mendik Realty and The Equitable Life Assurance Society of New York.
These are the sponsors, he said, who collected money due on a wrap-around mortgage and did not pay the underlying mortgage.
He discusses creative financing techniques such as wrap-around mortgages.
Wrap-Around mortgages are loans in which the lender assumes responsibility for a borrower's existing mortgage, while creating a new and additional loan for the borrower.