Abstract

Commercial banking forms of doing business are not devised from pure whim. They are born in the minds of pragmatic men to deal with the commercial needs that a dynamic economy is constantly creating. As expansion begets a need, the need begets a form. "Interim financing" is such a form.

An attempt at more precision will be found in a later part of this paper, but it is well to understand at the outset what kind of form interim financing is, in general, and what need it purports to serve within the housing industry. Certainly the bedrock element is the residential real estate mortgage. This is given by an owner to a mortgage banking company in return for the latter's loan. Typically, the mortgage company has a very limited capital and neither wishes nor is able to carry long term mortgage investments on a permanent basis. The mortgage company, then, endeavors to sell its interest in the mortgage to, let us say, a*life insurance company. The insurance company may be anxious to add this item to its real estate investments portfolio. For reasons of company policy and state insurance laws, however, it will insist on a completed structure ready for occupancy plus full documentation before any disbursement of funds is actually made.

At this point two alternatives are open to the mortgage company. First, it can hold on to the mortgage until the permanent investor's conditions are met. The waiting period, though, may be up to a year and a few such holdings would freeze the entire lending power of the mortgage company. This cuts squarely against the grain because a mortgage company depends on mortgage servicing charges for a large share of its income. When the number of mortgage accounts it has to service goes up, so does the mortgage company's gross income. Therefore, the velocity at which it engages in mortgage lending can well be more important than the rate of interest it may happen to charge. Thus is the mortgage company brought to its second alternative: the commercial banker.

Under this alternative, the mortgage company can offer to pledge the owner's mortgage to the commercial banker, as security for a short term loan. This is sought to cover the "interim" period ending with the permanent investor's disbursement of funds in payment for its purchase of the mortgage. If the commercial banker agrees to make the loan, he is engaged in interim financing.

While the elements which go to make up interim financing—e.g., residential construction, mortgages, assignments, pledges, negotiable instruments, statutory liens, federal mortgage insurance and guaranty, risk of loss insurance and title insurance—are individually the subjects of a great body of legal and business writing, the activity itself as a recognized form of commercial banking is still in process of development. Due to unsettled definitions and a lack of appreciation of the special risks, considerable distrust and discussion at cross-purposes have been evidenced. The lack of integrating literature draws comment. Given the circumstances it seems appropriate to conduct an examination into the topic sounding more in breadth than in depth. Where particularization is thought necessary the laws and conditions of Arizona will be looked to.

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