I am often asked by investors “why should I invest through a mortgage fund like TierONE Capital when I can facilitate a private loan myself?”. My response most often is, “it’s easy to hand over a cheque, but much harder to get it back”.
Successfully managing a portfolio of loans begins with ensuring you have the right people in the business and supporting the business. We at TierONE Capital are fortunate to have seasoned ex-bankers all with grey hair (and in my case no hair!) that bear the scars and cynicism from years of mortgage lending. Credit and risk is not something that can be learned from a text book. It comes from experience and being able to work through issues and challenges thrown up from changes in the market including, interest rate cycles, regulatory changes, supply chain issues, property supply and demand, and demographics, to name just a few.
The next step is to ensure you originate the right type of loan. At TierONE Capital we concentrate on a small segment of the mortgage market with specific parameters around security type, location, gearing and borrower background. Regardless of how ‘good’ an application might be, we won’t assess a loan that falls outside our specific parameters. Specialising in a particular segment means we can build on and reuse our expertise which results in better risk decisions and mortgage investment opportunities for our investors.
No loan that comes to a mortgage fund is ever perfect. Our job is to understand a loan’s shortcomings and build a loan structure that addresses the issues and gives both parties the best chance of delivering on its respective obligations. Documenting a loan that sets up a borrower for failure and/or hardship is neither ethical nor constructive and is something we take very seriously when committing to a loan.
Notwithstanding the lender and borrowers’ best intentions when committing to the terms at the start of a loan, sometimes events can intervene which require the lender to take a more active role in exiting the loan. We have seen a myriad of private loans over the years with, at best, sketchy documentation that often skips over the major control elements a lender needs to ensure its rights are secured and enforceable. Over the years we have built a network of business associates with the requisite skills to ensure agreements correctly reflect the intentions of the parties and, most importantly, protect and secure the investors’ interests.
Loans can go over their expiry for many reasons, but predominantly, it’s because the borrower is waiting on funds from an incoming financier, or settlement from the sale of the property. We maintain a flexible approach to these situations and will typically apply our default rate (which is passed on to our investors in full) and work with our borrowers to finalise the loan repayment. Every loan is different and at TierONE Capital we have the experience to work through these situations to ensure everyone’s interests are properly secured and the loan risk profile is not materially impacted through delays. Our ability to act quickly, remain flexible and have confidence in our documentation often means the investor can get an increase in their return, whilst the overall risk profile of their investment remains largely unchanged.
In the event a borrower reneges on their duties under the loan facility and the loan enters the next stage of default, we have the expertise to manage the loan through to completion. These situations are not common, however they do occur despite everyone’s best intentions when entering a loan. The TierONE Capital team have managed many mortgage-in-possession loans in their ‘past lives’ and bring a wealth of experience to ensure the investor’s interests are, at all times, secured and protected.
In a small number of instances, all our negotiation and facilitating skills built up over years of lending will still be insufficient to resolve a dispute and we will need to appoint a Receiver and Liquidator. This is not a process we seek out, however it is a robust process used when a borrower chooses to deviate from their agreements. We will always act with a singular purpose to protect our investors’ interests, first and foremost.
Lending money secured against real property, properly documented, and professionally managed, still offers an attractive risk adjusted return for a sophisticated investor. It’s a complex process with many variables from start to finish and, in the event you want to try it yourself, just remember “it’s easy to hand over a cheque, but much harder to get it back”.
P.S. The same principle applies to ‘lending’ money to your kids!
Article written by Kevin Said, Director and Chief Investment Officer of TierONE Capital.
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