Analysis of Fulano Loan

Protection of MHIBC

In anticipation of extending the loan , due diligence has to be taken in evaluating how to protect the bank's interests while factoring in the relationship and influence Mr.Fulano has to the instuition.The following is a discussion on the possible options in protecting MHIBC's interests.

Option 1: Second Mortgage

Mr.Fulano's offer of a second mortgage amounting to up to $500,000, the value the properties appraised for; less the first mortgage and related fees, would on the surface be sufficient collateral however this would be ignoring the prevailing macro economic conditions. The value appraised is not necessarily the market value of the properties and thus would bring into question the market appropriate value of the real estate and whether it would be sufficient to cover the first mortgage and subsequently the second should the need to dispose the properties arise. The ability to dispose the assets in a timely fashion needs to be taken into consideration in the depressed market as exemplified by his inability to dispose of his residential real estate investments. A second mortgage on its own would not suffice to protect the interests of the bank.

Option 2: Lien on Product and Profits on Sales

Solarco intends to distribute frozen foods which are perishable and hence carry the risk of going bad before they are sold and realize any financial benefit. Taking into cognizance that this product is a novelty in the United States and has no firm orders in place poses the question whether there will be any demand for the product in the volumes Mr.Fulano has on hand. There is no evidence that Mr.Fulano has performed any market research raising the risk level of the enterprise.