Skip to main content

WARNING: An Ownership Pledge In a Mortgage Transaction May Be Dangerous

Martin A. Schwartz

Over the last few years, certain nontraditional lenders and a few banks have asked for a pledge of the ownership interest in borrowers as additional security to their mortgage on the property. The typical reason provided is that this allows the lender to avoid a long and costly foreclosure if the borrower fails to make its mortgage payments.

While the above is true, it also allows the lender to substitute a nonjudicial proceeding for a judicial proceeding. A foreclosure is a judicial action and an equitable proceeding. This means that it is unlikely that a judge in a foreclosure action will allow a property to be forfeited for anything other than a serious default which materially impairs the lender’s security. So a failure to provide income statements or the borrower’s or guarantor’s financial statements is unlikely to allow a lender to acquire the borrower’s equity in the property through a foreclosure.

In addition, in the event of a dispute with the lender over the administration of the loan, the time period required to complete a contested foreclosure, typically about a year, allows for the possibility of refinancing and taking an existing difficult lender off the property.

Enforcement of a pledge does not involve any court or judge to monitor the fairness of the proceeding. In many cases, the entire proceeding can be completed in 30-60 days. Any failure to comply with the terms of the loan documents typically allows the lender to accelerate the debt after a 10-day notice and schedule a sale of the ownership interest. The speed of such proceedings, while favorable to a lender, makes it impossible to refinance a difficult or unsavory lender off the property and may even impair a well-capitalized borrower’s ability to repay the debt by truncating the period to acquire the necessary liquidity.

In today’s lending environment, where loan to value ratios are typically in the 50-60% range, a borrower’s equity interest in its property is substantial, and borrowers should be wary of providing an ownership pledge in addition to a mortgage. Any such pledge may involve a potential forfeiture of their investment if they fail or are unable to perform all of the covenants in the loan documents.

Click here to read more on this topic.

YOU MIGHT ALSO LIKE
Client Alert February 2, 2023
On December 15, 2022, the Environmental Protection Agency published a final rule recognizing ASTM E1527-21 as the new standard for performing a Phase I Environmental Site Assessment (“ESA”). With this final rule, the “-21 standard” will become the governing standard to satisf...
Press Release January 27, 2023
In collaboration with the University of Miami (UM), Bilzin Sumberg is pleased to announce the commencement of “Bilzin Sumberg University”. The inaugural 12-month leadership development program addresses competencies for Bilzin Sumberg partners to be successful today and in the future.
Press Release January 26, 2023
Bilzin Sumberg is proud to announce it has been awarded the 2023 Chief Justice’s Law Firm Commendation Pro Bono Service Award in recognition of the firm’s outstanding efforts in support of pro bono services in the state of Florida.
VIEW MORE