What is a bailee letter?

A bailee letter is a communication used in real estate warehouse lending that notifies the recipient of mortgage or loan notes that a third party has a security interest in the notes. The letter allows interested investors to review the notes, while protecting the security holder's interest in the notes.

A note is a binding pledge to repay money loaned. If the money is not repaid, the note holder's recourse is foreclosure; however, if another party has a security interest in the note then that party has priority in foreclosure. The bailee letter notifies the potential purchaser how the security holder's interest may be released.