Private/hard money lenders entertaining the idea for a mortgage pool must take the first step of providing sufficient justification for it.
Below is a quick look at five key advantages a mortgage pool can provide your practice: diversification, simplicity, expediency, stability, and independence.
Diversifying your portfolio is a fundamental precept when it comes to investing—as the old saying goes: “Don’t put all your eggs in one basket.” The same holds true when it comes to the financial portfolio of your organization. If you have a diverse portfolio in which investors own a fractional share of a large aggregate of mortgages, the inherent risk profile each individual is expected to bear is significantly reduced due to their investment in a variety of loans pooled by the fund.
By implementing a mortgage pool, your fund can navigate the unfortunate events you experience from time to time in the financial industry. You will be able to weather the occasional default or non-performing loan much more efficiently than if you did not have a mortgage pool. As an added bonus, the pool will continue to generate positive cash flow despite these negative events taking place, made possible by its diversification.
Lenders that do not utilize mortgage pools must provide an overwhelming amount of documentation to their investors in order to satisfy their due diligence obligations. This is one of the biggest complaints we see from non-mortgage pool owning lenders. It can be a tedious and time-consuming process that distracts lenders from taking care of more pressing matters.
When a lender utilizes a mortgage pool, it is essentially a one-time sale: the investor commits their financial assets to the shared pool, those funds roll over repeatedly, and the investor is not individually implicated in the underwriting process associated with each and every loan decision for which a portion of their investment is being utilized. This streamlines the entire process and saves both lenders and investors alike a substantial amount of time and money.
The mortgage pool approach equates to a more expedient loan funding process. In simple terms, the faster the loan funding is completed, the more deals you can transact—which ultimately results in an increased return on investment at the end of the day. If your lending practice has the reputation in the local area as possessing the financial resources to offer loans and quickly close on them, then you will quickly find yourself being the go-to lender, which is great news for the future of your business. And because you get to underwrite the deals, you’re in the driver’s seat when it comes to dictating the initial rules that you must adhere to in negotiating mortgages on the behalf of the mortgage pool. This also means that you do not have to gain every single investor’s approval on every deal.
You will often find that the significant majority of investors you are dealing with are retirees that are living on fixed incomes, which means they may not have the requisite liquidity or financial cushion to weather an investment asset that pays one month but not the next. With a mortgage pool, because it is comprised of a diverse collection of aggregated mortgages, you will be able to provide your investors with a stable, highly predictable yield on a monthly basis. Mortgage pools are also scalable—almost infinitely so. They start with a zero balance and can be slowly added to as your business grows and takes on more business.
Mortgage pools demand a lesser amount of regulatory government oversight, which makes it easier for you as a lender to garner capital. There are far less applicable regulatory guidelines you must follow when setting up and managing the mortgage pool. Generally speaking, as long as you adhere to the documentation created when establishing the pool, the creation of mortgage pools is not explicitly dictated by government regulations and there is no ongoing monitoring by the government as to how you run and manage them. Obviously, this provides you with an enviable degree of flexibility and autonomy when it comes to the investment strategies you choose to implement.