4 Risk Management Strategies Used By Mortgage Pools

4 Risk Management Strategies Used By Mortgage Pools

A mortgage pool fund may provide more security than typical real estate alternatives such as development, acquisitions, or REITs for investors looking for low-risk mortgage investments in Abbotsford. Mortgage pool funds provide a consistent stream of interest payments that outperforms in today’s low interest rate environment. Investors in a mortgage pool fund may receive higher risk-adjusted returns on their investment.

When choosing a mortgage pool investment, investors should search for a properly managed fund led by experts with proven experience in real estate, financing, construction, fund accounting and reporting, and real estate legislation.

The primary risks that fund managers wish to manage are:

1) a fall in property value;

2) an interruption in the fund’s cash flow, which could occur if a borrower fails to make payments;

3) legal action; and

4) losses connected with a foreclosure sale.

The way these risks are addressed impacts the fund’s overall safety. Here are specific ways that fund managers use to reduce risk:

Maintain a loan-to-value ratio

The most important tool for controlling risk is maintaining a low loan-to-value (LTV) ratio. This ratio is calculated by dividing the loan amount by the fair market value of the property.

Lower LTV ratios are considered safer than higher ratios since in the event of a foreclosure sale the lender has a greater likelihood of recouping his investment if the property is worth more than what’s owed on the loan.

Evaluate property value and creditworthiness

In traditional lending, banks rely significantly on the borrower’s credit history to decide whether or not to make a loan. Hard money lenders, such as mortgage pool funds, are unique. These lenders prioritize the value of the property over the borrower’s credit history.

Banks lend mostly to owner-occupants, whereas mortgage pool funds target real estate professionals who buy, upgrade, and sell properties on a regular basis. These borrowers want financing arrangements closed swiftly and are willing to pay above-market interest rates to do it.

Diversify the lending portfolio

One of the basic tenets of investing is that portfolio diversification reduces risk. The same reasoning applies to real estate portfolios. A portfolio that contains multiple property types and is varied by geographic location is generally safer than one that holds only a few properties.

By building a diversified portfolio, mortgage pools minimize the impact if any one loan ceases to perform. The largest loan in the portfolio represents only about 3% of total loan volume. Diversification results in a steadier stream of income, delivered within a predictable time frame.

Focus on loans with shorter durations

Loans having extended maturities may pose liquidity and interest rate risk. Liquidity is low since the investor’s funds may be locked up for years. If interest rates or inflation rise, the investor is caught in a low-return investment with no option to reinvest and take advantage of new higher rates. Socotra Fund invests mostly in short-term loans that are essentially unaffected by interest rate changes. The majority of the loans in the portfolio have periods ranging from one to three years.

If you are looking for a reliable mortgage investment corporation in Abbotsford, Versa Platinum is the name to trust. We help you grow your wealth and become a real estate shareholder at the same time. Contact us to get started with your mortgage investment.

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