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cwelsh

Residential Mortgage Investing

Interest Rates  

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About two years ago my firm joined with another few individuals and started a business that buys and sells residential mortgages, secured by first in line deeds of trust, on residential real estate.  This is a "fixed income" type investment, as there is no room for appreciation of capital.  If a 30 year mortgage yields 4%, then that's what you get (unless you are buying the notes at a discount).  This was originally largely self funded, with the assistance of a handful of outside investors.

 

The firm is doing quite well and we are looking to expand.  However, we do not know what the market for investment yield is right now.  Virtually every mutual fund/etf that invests in this space has switched to either entirely commercially backed mortgages or a blend, as mortgage rates keep falling.  

 

UMBS 30 year are currently yielding between 2%-3.5%.  GNMA's are yielding 2.5%

ETFs (such as MBB or SPMB) are yielding 1.08% and 0.80% respectively.

 

We do NOT buy government backed securities, but do have a stable underwriting process and are conservative in what we purchase.

 

So I'm launching a poll to start gathering data on what interest rates investors think are reasonable, or at what point they may have interest in investing.

 

This is NOT an offering, or anything of the sort, rather just general information gathering.

 

That said, if you have questions, feel free to post them.

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The risk and liquidity aspects are rather key - 30 y interest rates in Eurozone are around 0.25% for Germany or Netherlands so I can get that risk free. You state being conservative but and I take your word for it but some kind of metric like value to equity ratio is important to understand.

My presumption is also that your investment is not liquid, i.e. you either wait 30 years or you have to hope someone will buy you out if you need the money. All of that requires a considerable mark-up. From a European perspective (and just ignoring the currency aspect here) 4-5% would look very attractive.

To give you 2 possibly incomparable data points:

  1. For our family foundation (investment horizon infinite, capital conservation very important, moderate but consistent returns required) we started running out of options in regular investments. Through contacts we made an unsecured subordinated loan to a very solid German trading company with a strong balance sheet and consistent long term returns. They paid us 8% for the privilege of this 5 year loan - now 4 years in they believe they paid too much;
  2. Another associate of mine runs a business in elderly care homes - this is a complex package including the house and round the clock care. They provide the staff and management but need capital for the stones. They offer a 10% return mortgage at this time but it is illiquid and to me the exit strategy is unclear.

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8 hours ago, TrustyJules said:

The risk and liquidity aspects are rather key - 30 y interest rates in Eurozone are around 0.25% for Germany or Netherlands so I can get that risk free. You state being conservative but and I take your word for it but some kind of metric like value to equity ratio is important to understand.

My presumption is also that your investment is not liquid, i.e. you either wait 30 years or you have to hope someone will buy you out if you need the money. All of that requires a considerable mark-up. From a European perspective (and just ignoring the currency aspect here) 4-5% would look very attractive.

To give you 2 possibly incomparable data points:

  1. For our family foundation (investment horizon infinite, capital conservation very important, moderate but consistent returns required) we started running out of options in regular investments. Through contacts we made an unsecured subordinated loan to a very solid German trading company with a strong balance sheet and consistent long term returns. They paid us 8% for the privilege of this 5 year loan - now 4 years in they believe they paid too much;
  2. Another associate of mine runs a business in elderly care homes - this is a complex package including the house and round the clock care. They provide the staff and management but need capital for the stones. They offer a 10% return mortgage at this time but it is illiquid and to me the exit strategy is unclear.

I really appreciate that, and I'm actually writing up a more descriptive piece for the members here.  But to give you an example of the last book of about 100 mortgages we bought:

 

1.  All 30 year fixed notes;

2.  Average of a 22 year pay string (in other words, there's about 8 years left on the notes);

3.  Average yield is 9%;

4.  Non-government backed;

5.  Average loan to value of 40% (so homeowners equity is 60%);

6.  All homes in Texas (which have very favorable lender foreclosure laws, it's what I call a tier one state for lenders);

7.  Bad credit scores up and down the portfolio; and

8.  All are secured by first in line deed of trust.

 

We were able to get these because of the really bad credit scores of the home owners.  I personally could care less what the credit score is, if I have a 22 year current pay history, loan to value is 40% or more (based on appraised values from years ago, so in reality its probably even better), and I know I can get the asset with relative ease if there's a default (compared to other jurisdictions).

 

We don't expect books like this moving forward, as the average yield we're seeing is closer to 7% (of course that's gross to the company, not investors), but there is a LOT of product at that level.

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