cross-defaulting clause

cross-defaulting clause

A provision in many mortgages that a default in any mortgage on the property, or any loan by the same lender to the same borrower, will constitute a default in the one containing the clause, even if all note payments are current on that particular mortgage. Used as a method for early triggering of remedies before things are allowed to deteriorate to a point that could seriously impair the value of the collateral.

Example: A borrower may default on a second mortgage but not suffer foreclosure because the second mortgage holder believes the property has insufficient equity to make it worthwhile. Technically, this does not affect the first mortgage lender, but is a good indication of worsening financial conditions and possible cessation of routine property maintenance by the borrower, pos- sible insurance cancellations, potential lawsuits from other creditors which might force a bank- ruptcy, and other matters generally unpleasant to contemplate by the first mortgage holder. It may be preferable to declare a default immediately and proceed to foreclosure rather than wait until the borrower misses payments on the first mortgage.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.