Points of Interest Spring 2019 Page 35 ortgagefundsorpoolswereonce a top-tier vehicle for real estate investing reserved primarily for institutional investors and hedge funds, but recently, more private lenders are incorporating mortgage funds into their operational portfolio. Here’s some insight into mortgage funds. Why You Want to Open a Mortgage Fund Theprimaryreasonthatmortgagebrokers and lenders choose to build a mortgage fund is to increase revenue. Lenders make significantly more money with a mortgage fund. While mortgage brokersreceiveoriginationfeesandpoints, mortgage funds provide the opportunity to earn origination fees, plus arbitrage or income participation from the fund, and additional fees, such as management and servicing fees. Mortgage funds also significantly increase production,asfundmanagersareallowed to choose, approve, and fund the loans themselves, without individual investor approval. This process provides managers with the flexibility to quickly fund more dealsandincreaseproductionandrevenue, typically growing their income by 20-30%. Mortgage funds are also a benefit to lendersbecausetheyoffermoreprotection by Kevin S. Kim Geraci LLP What You Need to Know About Mortgage Funds against risk exposure. A mortgage fund requires detailed risk disclosures to prospective investors that protect lenders from the legal risks associated with these types of investments. Why Investors Prefer Mortgage Funds Investors prefer mortgage funds to direct investing because it provides a passive investmentintomultipletypesofrealestate assets, without the headaches typically associated with directly purchasing notes or funding deals. Mortgage funds provide investors the option to invest in various types of real estate that offer different returns, diversifying their portfolio as a hedge againstrisk. Investorscantypicallyreceive betterreturnsthroughdiversificationthan they would otherwise see with direct investment. With a diversified pool of properties, it means the investors’ money is working around the clock. It also provides more insulation from risk because the money is invested in a pool of loans rather than just one loan. This setup leads to better returns in the aggregate. A fund structure also protects investors fromtheriskoflossbydefaultedborrowers, borrower lawsuits, and other foreclosure- related risks. In a pool, a default usually doesn’taffectaninvestor’scapital,unlikea directinvestment,wheretheentireamount of capital invested and revenue stream is placed at risk during a default. How a Mortgage Fund Works A mortgage fund or mortgage pool is typically constructed as a Limited Liability Companywhichsellsmembershipinterests in the company. Investors into the fund receive revenue from the returns of the fund’s loan activities. The LLC is typically operated by a management company that brokers loans to the fund and oversees day-to- day operations and assets. In exchange for management services, the company is compensated with management fees, origination fees, servicing fees, while also participating in the interest income. The majority of mortgage funds rely on federal exemptions to avoid registration with the SEC. Although not typically considered a security, shares of an investment pool or fund can sometimes trigger SEC or state regulatory oversight. Specific federal rules allow exemptions to these business models, with the four most relied upon exemptions being: