Why Mortgage Pools are a Smart Choice for Private Lenders

August 30, 2017 by Kevin S. Kim, Esq.

Private money lenders perform an essential and beneficial service to both borrowers and investors. First, they provide alternative financing solutions for consumers and businesses that may not be able to get financed otherwise. For investors, they can offer an opportunity to participate and share in profits from the $400 billion alternative lending market.

Since the economic turmoil of 2008, the mortgage industry has seen some distinct changes take place, with banks restricting access to capital through ultra-conservative lending practices. Strict institutional lending guidelines have led to an explosion within the alternative lending industry, helping to fuel a growing real estate market. The amount of retail alternative capital has been increasing exponentially since 2013. The market continues to grow, with investment into liquid alternative lending expected to exceed $490 billion by 2018.

As the market grows, now is the right time to take the next logical step in the evolution of your private lending business – private money mortgage pools. Mortgage pools offer diversity, flexibility, and security, not only for your investors, but also for your business.

Why Create a Mortgage Pool

Mortgage-backed funds were previously an investment reserved for only the institutional investor. The diversification of the fund provides investors with the security they need, and returns the better than average profits they love to see. Today, mortgage pools have gone mainstream, with more private lenders deciding to use the mechanism to their advantage.

  • Mortgage pools provide investors with a safer alternative to financing individual private loans, and to many investors, this type of diversification is more attractive than placing all their eggs into one basket.
  • With a mortgage pool, risk can be shared with other investors, and if one or two mortgages in the pool do not perform, the effect on the pool as a whole is negligible. Investors will look much more kindly upon a broker when he or she learns any losses are shared equally, with little interruption to their monthly cash flow.
  • A mortgage pool also allows a broker to bring more investors into the pool and continually roll over their investment. This leads to more flexibility in the number of deals you can make to your clients.

Why Investors Love Mortgage Pools

As we discussed earlier, investors love diversification. More diversification equals less risk, and less risk means more participation. It is an equation that works well for everyone.

  • Mortgage pools are attractive to investors because they involve less paperwork. Investors would much rather receive one package for a pool of loans, rather than dozens of packages for separate loans.
  • Another advantage of a mortgage pool is that an investor’s money is always working. There is no downtime while the broker lines up a new borrower. When a loan in the pool is paid off, another can be added at anytime, without interruption to monthly payouts.
  • A mortgage pool is typically audited annually, therefore providing a level of capital security individual loans cannot.
  • Mortgage pools offer investors the ability to reinvest their capital continually. As long as the interest checks keep coming in, an investor is much more likely to roll over their funds.

While mortgage pools can provide tremendous benefits, they can present some challenges in crafting the perfect structure. During the Geraci University Online Workshop, Kevin Kim will explain why a mortgage fund is essential for a private lender to grow their business. He will also break down the key components on how a mortgage fund will allow your business to scale up your loan production.