Final answer:
Small Bank will obtain the first mortgage by paying off Charles' existing mortgage, ensuring their loan becomes the primary encumbrance. As an asset to the bank, the mortgage's value is sometimes assessed by the potential sale price in the secondary loan market.
Step-by-step explanation:
To ensure that Small Bank can hold a first mortgage on the house Darla is selling to Cindi, they will need to pay off Charles' existing mortgage. This is a common practice in real estate transactions where the buyer's lender requires a first lien position on the property. By paying off the previous mortgage, Small Bank removes the prior claim on the property and establishes their mortgage as the primary encumbrance. This way, Small Bank secures its interests, ensuring that in the event of default, they will be the first to recover any monies owed through the foreclosure process.
Mortgages are typically an asset to banks because they represent a legal obligation for the borrower to make payments over time. When assessing the value of these mortgages, banks and other financial institutions often estimate what they might expect to receive if they were to sell the loan in the secondary loan market. This market is where loans that have been originated in the primary loan market are bought and sold between financial institutions.
Regarding the given examples, when Freda decides to sell her house for a profit, or Ben's property increases in value creating equity, these scenarios demonstrate the potential financial benefits of homeownership and the importance of having a clear first mortgage for the lender.