Texas Residential Lending Update

[cwelsh 1,497]

I've had a few requests for updates on one of our other investment opportunities, Texas Residential Lending and inquiries into whether or not it is accepting new investors (yes it is).

 

For those members that have been around for over three years, they may remember us launching Texas Residential Lending, with the goal of providing a high yield, very low risk, investment product for our clients.  

 

Over the last three years, Texas Residential Lending ("TRL") has grown from a few hundred thousand dollars being invested in two mortgages to a company that owns almost 200 mortgages totaling $25m in value, yielding 10.5% annually.  TRL makes its money by buying mortgages from mortgage originators and outside investment firms.  It then places the mortgages with a servicer (the firm that sends out the monthly statements and collects the bills) and collects the revenue from the loans.  

 

All mortgages are first in line mortgages, secured by a deed of trust, and are single family, owner-occupied.  Currently all mortgages are located in Texas, which has extremely favorable lender foreclosure laws, but we the ability to expand into other states with similarly lender favorable laws.

 

Currently the portfolio loan to value is under 65% (meaning the homeowners have 35% equity in their homes) and we have debt coverage ratios north of 2.5.  In other words, we can have 25% of the mortgages go into default and still make all investor payments (TRL pays investors a quarterly distribution).  In order for investors to lose money, TRL would have to see a default rate of 100% AND have home values decline by over 35% -- two things which TRL just does not see occurring.  And if such a situation did arise, the company would just covert the foreclosed homes to rental homes until the market stabilized, then sell them.

 

In the last three years, TRL has only had to foreclose on two homes, and both foreclosures resulted in profits above of what had been expected from the loan.  (If there is 35% equity in the home, at a foreclosure auction TRL is either outbid, in which case it recovers 100% of what is owed, or it wins the home, markets it, and sells it at fair market value, ideally recognizing a larger profit).  

 

I personally market TRL as a bond replacement investment.  It returns interest income, quarterly, at the portfolio rate, which has increased by over a full percentage point in the last three years as mortgage rates have gone up.  Investors receive quarterly payments of interest back to their accounts.  Investors can elect to re-invest their interest or receive it.

 

Really the only reason I don't push clients to put over 10% of their accounts into TRL is the lock up period.  Because the company buys 30 year mortgages and finances them on 5 year windows, TRL does have a four year lock up period it can exercise.  So far TRL has had no issues with investors who want early redemptions, as plenty of investors have been willing to take their place.  But if an investor wanted their money back six months in, TRL would try to return it, but if there is not an investor to replace them, won't be able to do so.  

 

That said, returning north of 10% for four plus years is still a good looking investment.

 

If anyone has any questions on TRL, wants the investment summary writeup, or the investment presentation, just email me at cwelsh@lorintinecapital.com and I will send over.  If you have questions about TRL, how it works, returns, or other topics, feel free to post them here, and I will answer them.

[cwelsh 1,497]

For anyone interested, Texas Residential Lending ("TRL") continues to grow and increase returns.  Quarterly returns are as follows:

 

Q4 2021   9.6%

Q1 2022 9.7%

Q2 2022 9.7%

Q3 2022 10.1%

Q4 2022 10.2%

Q1 2023 10.5%

Q2 2023 10.6%

 

All returns are annualized.   TRL has grown to having portfolios totaling over $25m, while also increasing the overall performance and metrics of its mortgage portfolio.

 

For international clients who may be interested in investing, TRL has launched TRL BVI, an international unlevered mortgage product.  The unlevered product returns 2.25% less than the levered, but obviously without the risk of leverage (though TRL believes such risk to be minimal).  All loans are still first in line mortgages with loan to value not exceeding 85%, with the portfolio average LTV being in the high 60s% range.  Default rates continue to be well below market average and not affecting the investment in the slightest.  

 

If anyone has any questions on TRL, how to invest, or how the portfolio is performing, please do not hesitate to contact me.

 

 

[cwelsh 1,497]

TRL continues its exceptional value and returns to investors.  In Q3 2023 we increased our returns from 10.6% to 11.0%, while both increasing the size of the portfolio and reducing risk overall.

 

TRL has broken the $30m mark in AUM and we would like to double that over the next year.  Right now we are purchasing mortgages in the 12.5% to 13.0% range, though we're starting to see some downward pressure on those rates.  

 

We would like to buy as many high rate mortgages as possible over the next year before rates start going down again.  

 

One of the unique qualities of TRL is that, unlike most of our competitors, we are not as sensitive to interest rate changes.  So many mortgage firms have gone under in the last year, as they were loaning at 5%, but their cost of capital increased to 8% or more -- which puts them out of business.  

 

TRL does not use short term financing and always insures there's a spread on our cost of capital between our costs and mortgage returns.,

 

So if that's true how/why do returns to investors change?  Simply, the company is completely safe, but rates can go up and down.  Here's a simple example:

 

We buy a $1,000,000 mortgage yielding 10%.  Investors make 10%

We buy another $9m of mortgages yielding 10%, investors still make 10%.

We buy another $10m of mortgages yielding 11%, investors now make 10.5% (weighted average of portfolio).

We buy another $10m of mortgages yielding 9%.  Investors now make 10% (weighted average of portfolio).

 

So over the last year, as rates have gone up, and we keep acquiring mortgages, our returns increase.  If rates come down, then yields will come down (though I don't see investor yield dropping below 9% anytime in the next several years).  

 

I personally believe that buying bonds is insane when a product like TRL exists.  They both pay out regularly (ordinary income though).  TRL is asset backed (first in line mortgages, owner occupied, principal residence), with great loan to debt values (portfolio is about 65%),  Which means in the event that a foreclosure is necessary TRL typically MAKES more money than they would just by the note itself.  In three years, TRL has only foreclosed on two homes -- and both were profit centers.  For investors to lose money, TRL would have to have a 100% default rate, foreclose on everything, and then have property values decline on average over 35%.  This has never happened in US history.  And lets be honest, if that many homeowners were defaulting and property values were down that much, the government would do something.  And if they didn't, TRL does not have to sell the foreclosed property -- it would just run them as a rental portfolio until the market turned.

 

That's a long way of saying this is a VERY safe investment, with a consistent yield, that should replace bonds in many people's portfolios (I now have almost 1/3 of my liquid capital invested in TRL personally).