Once a Mortgage, Always a Mortgage - The Use (and Misuse of) Mezzanine Loans and Preferred Equity Investments
![handle is hein.journals/stabf11 and id is 82 raw text is: Once a Mortgage, Always a
Mortgage -The Use (and Misuse of)
Mezzanine Loans and Preferred Equity
Investments
Andrew R. Berman*
Since the beginnings of English common law, property owners have used
the mortgage as the principal instrument to finance real estate acquisitions, provide
liquidity, and raise additional capital.' And if a first mortgage proved insufficient,
the owner simply borrowed additional funds secured by a second mortgage on the
same property. Although the mortgage first developed in agrarian England to
finance acquisitions of farmland,2 over the centuries it has proved particularly adept
at satisfying the financial needs of owners with all types of real property.
To this day, the mortgage remains one of the most common and successful
techniques to finance both residential and commercial real estate transactions in the
United States.3 As the mortgage market continued its exponential growth over the
Associate Professor of Law, New York Law School, and former Real Estate Partner,
Sidley, Austin, Brown & Wood. I would like to acknowledge research support provided by
New York Law School and the helpful comments and encouragement of George Lefcoe,
William Nelson, and my NYLS colleagues, including Stephen Ellman, Karen Gross, Seth
Harris, Kenneth Kettering, Arthur Leonard, and David Shoenbrod.
1 In his oft-quoted treatise, COMMENTARIES ON AMERICAN LAW, James Kent defines a
mortgage as the conveyance of an estate, by way of pledge for the security of debt, and to
become void on payment of it. 4 JAMES KENT, COMMENTARIES ON AMERICAN LAW 138-139 (Jon
Roland, ed., 0. Halstead 15th ed. 2002) (1826). As others have noted, this definition is broad
enough to cover almost any form of mortgage but includes two essential elements:
conveyance of land and security for a loan. LEONARD JONES, A TREATISE ON THE LAW OF
MORTGAGES OF REAL PROPERTY, Ch. 1, § 16, at 21 (7th ed. 1928).
2 4 RICHARD R. POWELL, POWELL ON REAL PROPERTY § 37.05[1] (Michael Allan Wolf ed.,
Matthew Bender 2004) (1949) (describing the historical development of the mortgage as a
localized transaction in an agrarian setting).
3 Residential mortgage financing now represents a multi-trillion dollar market with
banks and other financial institutions making over $3.75 trillion of residential mortgage loans
in 2003, compared to $1 trillion in 2000, and $500 billion in 1995. According to the Federal
Housing Finance Board, by the end of 2003, residential mortgage debt increased 40% since
2000, jumping from $5.6 trillion in 2000 to nearly $8 trillion in 2003. Mortgage and Market
Data, 1-4 Family Mortgage Originations 1990-2002, available at
http://www.mortgagebankers.org/marketdata/index.cfm?STRING=http://www.mortgagebank](ViewImageLocal?handle=hein.journals/stabf11&div=8&collection=journals&method=preview&ext=.png&size=3)
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Once a Mortgage, Always a Mortgage - The Use (and Misuse of) Mezzanine Loans and Preferred Equity Investments
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