A secured loan must be secured over a valuable asset. The asset could be a vehicle or an artifact, but usually, especially for mortgages, the asset the banks are interested in is your house. The loan will therefore be secured over your house.
In practice what this means is that while the deeds to the house are in your name, the bank can have their name put on the deeds that will give them a right to take and sell the house in the event that you default on your loan payments. Repossessing the house would require fair notice and a chance for you to make repayments, and they would also need a court order. But ultimately you could be thrown out and the bank would then sell it, take what they require to pay back their loan including fees and the rest they would pass on to you, if there is any.
However, banks and other lenders do not really want your collateral. It is too costly for them to take ownership of such collateral should you default on payments. Traditional lenders even have to fund allowance for loan loss accounts when the loan is funded and write down the assets value on their books when a loan becomes over due. Thus to cover their losses the accept mortgages and uses the following methods to evaluate the acceptability of the collateral.
Appraisal value
The appraised value of the collateral has to be above or at the least cover the amount of the loan. Additionally, if lenders have to take your collateral they will seek to liquidate it as soon as possible. Therefore, they would expect your collateral to cover the amount of the loan plus 20% to 50% depending on the collateral. This method protects the lender in several forms. First, should they realize substantial costs in reselling the collateral, they are covered. Second, should the borrower has a large financial stake in the collateral he less likely to treat the collateral lightly or ignore repayment.
Blanket UCC-1 Filling
Banks and some other lenders, in order to protect themselves from reduced future collateral value and other market risks, will take a blanket UCC-1 filling on all business assets including pledged and non-pledged collateral. This helps these lenders should the borrower walk away without ever making even one single payment; they would be able to cover their losses by liquidating all of the businesss assets.
Sale-ability of the collateral
The lenders prefer to accept collateral if it can easily be sold in to many different businesses. For example, a delivery van can be used by a number of businesses and industries. Thus, the bank could reasonably believe that it could quickly resell the van if it had to. Should the collateral be a machine that produces one unique product that only you sell, then this asset is less preferred because it is difficult to find buyers for the product. Hence, such collateral either attracts higher appraised value, more down payment or denial of the loan.
Type of land
Undeveloped land is very hard to lend against. Improved land is better as it is more saleable as long as it is not improved for a single purpose like a garage or mobile home park. Office buildings, warehouses, manufacturing spaces are the best because multiple businesses and industries can utilize these types of real estate; making them better for resell.
Thus a lender as well as the borrower needs to be careful while dealing with a secured loan. Lender risks his investment if the collateral is undervalued and the borrower may lose this home if he defaults on the loan.
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