Is Mortgage Lending a Form of Asset-Based Lending?

Asset-based lending is often loosely defined as lending secured by some sort of asset that can be seized and sold in the event of default. But such a loose definition creates confusion. For example, your home can be foreclosed on if you do not make your monthly payments. Does that make mortgage lending a form of asset-based lending?

It does, but only if you subscribe to the loosest definition of the term. If you adhere to the strict definition of asset-based lending, mortgage lending does not apply. It is not even on the same plane.

Commercial vs. Retail Lending

Asset-based lending is characterized by several different things that sets it apart from mortgage lending. The first is easily observed by comparing commercial and retail banking. Asset-based lending is strictly for commercial purposes; mortgages are retail products.

When you need a mortgage, where do you go? You go to a bank or credit union. Or maybe you go to a mortgage broker who represents private lenders. Either way, you are engaging in what is considered a retail transaction.

Asset-based lending is reserved for commercial transactions. It is for companies looking to expand their businesses or manage cash flow. Asset-based lending is for real estate investors looking to fund new property acquisitions.

Asset-Based Approval

Another significant difference between the two types of lending is observed in how loans are approved. In a mortgage-lending scenario, lenders rely on a combination of property value and the borrower’s good faith and credit to make approval decisions. Property value plays a role only inasmuch as it influences how much one can borrow based on established loan-to-value (LTV) ratios.

In an asset-based scenario, the borrower’s full faith and credit is irrelevant. Lenders do not look into credit histories and scores. They do not require borrowers to document their financials. Approvals are made based solely on the value of the collateral being offered.

Actium Partners is a hard money firm located in Salt Lake City, UT. They make hard money loans primarily to real estate investors. Their loans are strictly asset-based. If the risk of a transaction is limited and collateral has a high enough value, Actium will move forward. Otherwise, they will not.

Asset Value Matters

The confusion surrounding mortgage lending has to do with the fact that banks can seize and sell properties when borrowers do not make their payments. With mortgage lending, asset value is not so important. Yet it is critical to asset-based lenders.

Asset-based lenders need to be absolutely sure that the value of the assets being offered as collateral is substantially higher than the amount being loaned. To say that asset value matters to such lenders is an understatement of huge proportions.

It should also be noted that lenders prefer certain types of assets over others. Given a choice between real estate and business equipment, a lender will choose real estate every time. As an asset, real estate retains value and is easy to dispose of. The same is not true of business equipment.

You Could Lose in Both Cases

The one thing mortgage lending and asset-based lending have in common is the potential to lose in either case. If you take out a mortgage and do not make your payments, the chances are pretty high that you will lose the house. Likewise, not making the payments on an asset-based business loan will likely result in forfeiting your collateral.

Despite this one similarity, mortgage lending is not asset-based lending. It is retail lending through which the bank or credit union maintains a financial interest in the mortgaged home until the debt is paid off.