Primer on Distressed Mortgage Debt Investing
OUR COMPETITIVE ADVANTAGE
Resolute.Fund invests in non-performing mortgage loans (commercial and residential); generally characterized as ‘distressed’ mortgage loans.
Our team has been investing in mortgages for more than 20 years.
We target a return on our distressed mortgage investments of approximately 25% (with no leverage).
All while holding the most senior loan on a property — giving us full control.
This is how it works, with an example we are currently investing in:
A bank holds a mortgage loan it made to a real estate owner.
That borrower fails to make regular payments for various reasons. At a certain point, generally, 90 days of non-payment, that loan is characterized by the bank as ‘non-performing’.
Banks prefer to move these loans off of their balance sheet by selling them.
Many of these banks are small and midsize banks across the U.S. We have seen $2 billion of non-performing mortgage loans in our area of focus in 2018.
There are certain reasons banks sell non-performing loans:
1) Banks are required to keep a loan loss reserve of 2.5x the unpaid mortgage balance as collateral for non-performing loans. This prevents the banks from otherwise lending that capital and making a spread on customer deposits and the rates they charge borrowers — most banks’ principal line of business and revenue generator.
2) Most small/midsize banks do not have qualified personnel to ‘work out’ a non-performing mortgage, meaning working closely with the borrower to help them get back to making regular payments.
3) Most small/midsize banks do not want to foreclose on their clients.
Therefore, banks sell these loans or pools of loans to investors like us.
The key is — they sell them at deep discount prices to the current loan balance. Anywhere from 0.30 to 0.70 cents on the dollar. In the current market, we have been acquiring loans on average at 0.70 cents on the dollar.
Once we acquire the loans, we approach the borrowers and propose ways they can begin to make regular payments again: we offer loan modifications, including interest-only payments, reduction in interest payments and loan extensions.
Once the borrowers begin paying regularly again, we ‘season’ the loan, holding it for approximately 12 months, then look to resell it as a ‘performing’ loan. Generally we target prices close to par. Alternatively, we can refinance our equity out of the investment.
If borrowers are unwilling or unable to work with us, we pursue foreclosure, take over the asset and sell it. All of this is done within an approximate 24–36 month timeframe.
EXAMPLE: Pool of 11 Non-Performing Mortgages on Single Family Residences — NYC area
These loans have an aggregate unpaid principal balance of $4 million.
We are targeting to buy this pool of loans for $2 million, at 0.50 cents/dollar.
The homes have recently been appraised for $4.2 million.
Once we acquire the loans, we effectively become the bank, but, without the restrictions and regulations, allowing us to provide more options to the borrower for making payments.
Our strategy for this pool is as discussed above. We expect that most of these borrowers will begin to make payments. Within 18–24 months, we plan to resell this pool of loans at or near par: $4MM.
We have minimal competition in our market for two main reasons: we focus on small sized loans or pools of loans of between $5–15 million. These loan sizes are too small for most institutional investors. We focus on first (senior) mortgages only. And, we focus in secondary and tertiary markets — primarily the Southeast and Southwest of the U.S.
Our experience, network and focus affords us high quality deal flow and minimal to no competition.
The focused strategy we adhere to, from the types of loans we buy, to the exit strategies we pursue to the strict discipline in our due diligence, are all designed to achieve the most attractive risk-adjusted returns for our clients.
Resolute.Fund: Distressed mortgage debt investing — upside returns, with the security of holding the senior position in the capital stack.
595 Madison Avenue
New York, NY 10022
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