A form of Mortgage or Trust Deed which acts like the Contract-for-Deed described above is the Wrap-Around Mortgage, (or All Inclusive Trust Deed – A.I.T.D.). In effect, these instruments are used to insulate the Buyer from the original loan terms and liabilities while providing the seller a way to stretch out taxes on gain and other tax advantages on mortgaged property.
Both mortgages and deeds of trust can be ’wrapped’ by additional liens. In lien theory states this is called a ‘Wrap-Around Mortgage’. In a title theory state it is called an ‘All Inclusive Deed of Trust’. In either jurisdiction, it has the same effect of protecting the original lender’s priority position.
It can also be used to either increase the yield when it calls for a higher interest rate than the original debt, or of overcoming an unreasonably high interest rate by calling for a lower rate than might have been incorporated in the original note. This makes property more marketable during periods when interest rates have dropped such as was the case in the period from 1992 through 1994.
In certain instances the AITD is used to enable the Seller to continue to be the maker of record with the original tender, while at the same time selling the property to another party without triggering any default on an otherwise non-assumable Mortgage or Trust Deed.
Wrap Around loans can provide a much higher degree of leverage to increase the lender’s rate of return on money loaned. This happens because the buyer effectively is borrowing the money originally placed on a property, then he re-lends it to the seller at a lower interest rate. For example, the buyer taking over a loan at 8% on the original note, but paying the seller a higher interest rate (e.g. 13%). In this way the Seller earns an additional 5% on the original lender’s money; plus, the Seller gets the benefit of all the amortization on the underlying loans. Multiply this by several hundreds of thousands of dollars in loans and the yield can make a person warm on a cold night.
It’s not hard to see why lenders get testy when they encounter this situation. Of course we must not overlook the fact that the AITD can also be used to LOWER interest rates when the current rate is below that prevailing at the time of the original loan. In this situation the Seller is in effect subsidizing the interest rate since, in the reverse of the above illustration where the Seller’s interest rate might be 13%, but he’s had to offer the buyer 8% on the AITD, he’s PAYING a 5% differential to make the property attractive to the Buyer at lower interest rates.
A major difference between the Wrap-Around Mortgage and the Contract-for-Deed is that, under the Wrap-Around Mortgage (or AITD), fee simple title transfers from Seller to Buyer. Thus, depending upon the terms of the transaction, the Buyer can have full liability for payment imposed upon him or her by the Seller. On the other hand, since the title has already transferred from Seller to Buyer, acts of the Seller can no longer jeopardize the Buyer’s interests. In this way, while the loan might be more risky, the title is more secure.
From Jack Miller's BUYING HOUSES FROM A TO Z seminar manual, now available in any digital format Or Paperback.
