1st Mortgage Matters
A 1st mortgage loan (or first mortgage) is the primary loan secured by a property. It takes precedence over any other loans or liens on the property, meaning it has the first claim on the property in case of foreclosure. These loans are also referred to as ‘Senior Secured’ loans.
What is the capital stack?
The capital stack or capital structure, relates to how capital is supporting a business, financing an asset, and/or funding its operations. As it applies to private credit, the capital structure refers to how an asset is financed, and the ranking or priority of the participants in the capital stack. i.e. when the asset is sold, who gets the sale proceeds first, second and last.
The 1st Mortgage Lender is at the at the top of the capital stack and will always be paid first from any sale proceeds ahead of the 2nd mortgage lender and asset owner (equity).
The 2nd Mortgage Lender is ranked 2nd on the capital stack, does not have any rights to sell the asset or control the sale process and will be paid second from any sale proceeds.
The Asset Owner (Equity) is ranked at the bottom of the capital stack, has no control over the 1st mortgage lender and will be paid last from any sale proceeds.
Why Does 1st Mortgage Matter?
1st mortgage loans that rank first in the capital structure provide the greatest buffer against a fall in asset valuations.
1st mortgage loans provide investors with a strategy that focuses on capital preservation and stable investment returns. This is particularly the case in comparison to 2nd mortgage loans which are subordinated in the capital structure and have a much greater risk of impairment.