Due to the low rate environment, I along with hordes of other investors have been pushed into alternative investments to swim back to sustainable portfolio returns. With respect to fixed income, I’ve invested in first lien loans real estate loans within Seattle, levered loans against $100m+ commercial real estate properties, secondary small balance purchases of unsecured personal loans, etc. To be sure, they are riskier than a liquid investment grade bond allocation. I utilize cash to balance the risk to arrive at a blended yield between cash and these investments to get to a more safe risk and yield profile.
I’ve come across a new fixed income alternative which is essentially a private REIT that originates / invests in home equity lines of credit to super-prime borrowers. Quick stats:
- Average total loan to value (first mortgage + HELOC) of ~72%
- Average FICO: 740
- Average coupon / gross interest rate: 7%
I think generally speaking, without knowing the geographic distribution and average home value, these are good people to lend to (FICO driven). The fund utilizes leverage that has no mark to market provisions with up to an 85% advance rate. This pushes estimated levered returns to the investor to roughly 10% after fees.
I write about it as I don’t feel like it’s a slam dunk. Things I don’t like about it include housing being the underlying asset (can home prices decline by ~20% or more from here?), the amount of leverage, and for now, information that I have requested regarding geo / home data.
That said, the opportunities for a clean vehicle that makes super-prime loans are few and far between. This may end up being something that is a “toe in the water” situation that I average into over time (perhaps a smaller amount each quarter or half year) as the minimum is low which would allow for more clarity in the economy and the sponsor.