Have you wondered what a mortgage fund could do for you? I bet you’re wondering why you would even want one. Simply put, a mortgage fund is a mutual fund that invests in mortgages, and it has many advantages over the traditional route of seeking investors for individual loans. Consider the benefits: (1) more profit for you as the mortgage broker and lender, (2) more profit for your investors with less risk, and (3) more deals as you become a direct lender. With a mortgage fund or pool, you can scale up your loan production and grow your business.

Advantages For You

As a mortgage broker, you’re working for your points. But what if you could earn a percentage of the assets under management of the mortgage fund? Our clients typically earn between 1 percent and 3 percent more on their mortgage fund. While that may not sound like much, you could have an extra $1-3 million in your pocket if you managed $100 million.

If you want more control, more money and more deals, you should look into forming a mortgage fund. You’ll wonder why you went so long without one.

Further, mortgage funds are less hassle for you. As a mortgage lender, you are constantly chasing investors, convincing them to invest in each loan, and getting their buy-in. As the manager of a mortgage fund, you no longer have to do that. You can set the general parameters of loans you will fund, and as long as you stay within those parameters, you can fund the loan.

In addition, you could fund loans faster as a result of  the shortened investor sale cycle. When you have control over the fund and investors’ automatic permission to fund loans, you are in a position to say yes to every deal.

A mortgage fund protects you as well. Brokering loans to investors is fraught with omissions and “the lender didn’t tell me X” when investing in the loan. If the loan goes bad, the investor could look to you to make them whole. In a mortgage fund, everything that could possibly go wrong is disclosed to the investor already. The SEC requires you to do so. But it isn’t a blind disclosure. You are required to disclose everything that may possibly go wrong in a mortgage fund to your investors.

Further, the SEC allows the fund to indemnify you except in cases of fraud or willful neglect. Assuming there isn’t fraud or willful neglect, the fund’s assets will indemnify you from an investor lawsuit. This can have a chilling effect on lawsuits from your investors, allowing you to have freedom from stress if you’re doing things the right way.

Advantages for Your Investor

Given the advantages of running a mortgage fund, your investors want to be in one as well. Your investor’s money will be working for them 24 hours a day, 365 days a year. In a mortgage fund, an investor will earn their percentage of the yield generatedby the mortgage fund, which will own several loans of varying maturity dates. When the investor owns one loan, the investor is no longer earning money once the loan is paid off. Rather, the investor will be hunting for his or her next deal to continue earning interest.

Another benefit is investors are automatically diversified in a mortgage fund. A mortgage fund typically owns several loans. If one loan stops performing — i.e., the borrower stops making payments on the loan — the other loans in a mortgage fund are still producing and the investors are earning a return on their investment. If an investor owns the loan and the borrower stops making payments, the investor is not earning anything.

If the loan stops performing, the investor is now faced with myriad issues revolving around the default of the borrower: Should the investor foreclose? Work out a loan modification? Sell the loan on a note platform at a discount and not worry about collecting? In a mortgage fund, the manager of the fund — i.e., you — makes those decisions for the investor, leaving the investor as a true owner and trusting their reliable CEO to make the necessary decisions to generate passive income for them.

If you want more control, more money, and more deals, you should look into forming a mortgage fund. You’ll wonder why you went so long without one.

For a free consultation about mortgage funds, contact Kevin Kim at (949) 379-2600.