Cautionary tale - junior mortgage lending in Washington gone bad.

Investing in Washington real estate development can include making direct loans to the developer.  In return, the developer typically gives the investor a note and deed of trust against a particular project.  

I am reminded of a particular investor who, many years ago, gave a lot of money to a single, very busy Washington commercial developer.  In return, the investor received notes with generous interest rates and mortgages against a dozen parcels in active development.  The investor was unsophisticated when it came to real property law and falsely believed the mortgage meant the investment was adequately protected.  It was not.  

The developer, in question, was a credit risk and primarily financed all its projects with institutional hard money loans.  As to each project, the investor received a junior mortgage behind one or more institutional hard money loans with high rates of interest and penalties imposed upon default.

The developer ran into financial issues and all projects stalled.  Upon default, the institutional hard money lenders began charging default interest and penalties.  The senior debt against each development ballooned and swallowed the equity.  Some of the properties were foreclosed.  Others were sold from single asset receiverships.  None of the sales returned money to the junior debt holders.  With the projects lost, the developer went defunct.  The investment, secured by junior mortgages, turned out to be complete loss.

It is a reminder that not all mortgages in Washington are created equal.  For those lending in junior positions, the terms of the senior secured debt matters just as much as the outstanding balance.  Hard money loans, or loans that allow the borrower to draw and increase the principal, can balloon very quickly. 

The terms of the senior debt can typically be discovered from a title report and review of the recorded mortgage instrument.  The borrower can also be asked to produce his or her loan agreements with senior lenders and statements of balances. Washinton counsel can assist those looking to invest in mortgages, or make secured loans, in ensuring the investment is protected in the event of a default.