(Glenn Goldan, Brock Vandenburg, Mayumi Bowers (Moderator), Sandy MacDougall and Ken Thayer face off at the CMA Summer Conference Mortgage Fund vs. Fractional Trust Deed Debate)
The California Mortgage Association (CMA) held its first ever “Debate” at the 2022 Summer Conference in beautiful San Diego. On one side, Team Fund espoused the benefits and opportunities with Mortgage Funds. On the other side, Team Fractional lobbied the advantages of investing in a Fractional Trust Deed Interest. Today’s Blog highlights the main offensive discussion points from the fun event.
What is a Mortgage Fund: An entity (typically an LLC) owns the loans, and the Fund can buy or originate the loans. Investors own shares of the LLC and the LLC is managed by the Fund Manager. The Fund Manager makes all the decisions regarding the loan. The collateral for the loan is the corresponding LLC pro-rata interest which may include the underlying assets. Generally, Funds are exempt from SEC Registration through an SEC 506, B, C or D filing.
What is a Fractional Trust Deed? A fractional trust deed, also known as a multi-lender loan, is a Trust Deed (TD) owned by more than one Lender. The California Department of Real Estate (CA DRE) requires a Declaration of the Securities Exemption chosen when originating a loan. The first exemption is defined in the Business and Professions Code Section 10238 or the CA Multi-Lender Loan rule which allows up to 10 Lenders in a loan. The second exemption is defined in Corporations Code 25102(f) which allows up to 35 fractional loan lenders.
The lively debate observed by the large CMA crowd saw each side lobby for their chosen loan funding mechanism:
Mortgage Fund Advantages Thesis: Investing in shares of a Mortgage Fund is better than owning Fractional Trust Deeds
- Leverage: Adding debt or a loan to a Mortgage Fund can boost yields but adds an element of risk
- Compound Interest Returns: Lenders can elect to be continually invested vs. getting paid off on a fractional loan
- Servicing: A Mortgage Fund is better because the Fund Manager makes all the servicing and default decisions
- Diversification: A Mortgage Fund provides more diversification than a single Trust Deed investment
- Redemptions: A redemption request allows Lenders to request to get their principal returned quickly
Fractional Trust Deeds Advantages Thesis: Investing in a portfolio of Trust Deeds is better than being in a Mortgage Fund
- Collateral: Fractional is better as the Real Estate is the Loan Collateral. Lender is on the Deed of Trust
- Loan Parameter Choice: Lenders determine their own TD investment parameters to suit their personal preference
- Servicing: The Lender can provide input and guidance into Servicing and Default decisions
- Transparency and Surety of Funding: Fractional Trust Deeds provide greater selection, underwriting and funding transparency while also providing more surety of funding compared with rigid loan guidelines in a Mortgage Fund
- Higher Yields: Fractional Trust Deed structures have less overhead and administrative costs and provide substantially higher yields
Both sides mentioned that many Private Money Lenders in California provide both Fund and Fractional solutions. The educational and entertaining Debate ended with both sides agreeing that investing in Trust Deeds, whether through a Fund or a Fractional interest, provides Lenders with an excellent non-correlated and secured method to gain monthly high yielding cash Flow. To get started with Trust Deed Investing, please visit www.crowdtrustdeed.com or call (949) 632-6145.