Legal Definitions - submortgage

A submortgage occurs when a lender, who already holds a mortgage as security for a loan they made, uses that original mortgage as collateral to obtain a new loan for themselves from a different lender. Essentially, it's a mortgage on a mortgage. The original mortgage document, which represents a claim on someone else's property, becomes the asset pledged as security for the lender's own borrowing.

• Example 1: An Individual Lender's Need for Liquidity

  Sarah, a private investor, provided a mortgage loan to a friend, Mark, to help him purchase a small apartment. Sarah holds the mortgage on Mark's apartment as security for the loan. A few years later, Sarah faces an unexpected medical emergency and needs a substantial amount of cash quickly. Instead of demanding early repayment from Mark or selling his mortgage at a discount, Sarah approaches her bank. The bank agrees to lend Sarah the money she needs, using the mortgage Sarah holds on Mark's apartment as collateral for Sarah's new loan.

  This illustrates a submortgage because Sarah, the original mortgagee (holder of Mark's mortgage), pledges that mortgage to her bank (the submortgagee) to secure a new loan for herself.

• Example 2: A Real Estate Firm's Capital Needs

  "Horizon Properties LLC," a real estate development firm, sold a commercial building to a buyer and provided seller financing, meaning Horizon Properties holds the mortgage on that building. This mortgage is an asset on Horizon Properties' books. Later, the firm identifies an opportunity to acquire another prime piece of land but needs immediate capital to close the deal. Horizon Properties approaches "MegaBank," a larger financial institution, for a short-term loan. MegaBank agrees to provide the loan, taking the mortgage Horizon Properties holds on the commercial building as security.

  This is a submortgage because Horizon Properties LLC, the original mortgagee (holder of the commercial building's mortgage), uses that mortgage as collateral to obtain a new loan from MegaBank (the submortgagee) for its own business needs.