Making Sense of Mortgage Pools - February 25, 2014

One of the investment vehicles offered by Sterling Pacific is a mortgage pool. With two separate funds, and not a lot of information regarding what a mortgage pool is, it can be understandably confusing. So what exactly is a mortgage pool, and what’re the differences between Sterling’s First Floor Fund and The Foundation Fund?

Mortgage Pool 101

Mortgage pools aren’t particularly complicated to understand, but they do suffer from a lack of widespread knowledge that inhibits potential investors from jumping on board. One of the best ways to explain it is to make the analogy to a much more familiar investment tool: the mutual fund. In principle, these two work in much the same way. Investors pool their money into a larger fund managed by a service provider. This fund is then used for large investments than wouldn’t be possible for a single investor, and can produce greater returns because of this fact. The setup allows for great diversification of assets, and more reliable returns than an individual investment. At its core, this is how a mortgage pool operates, and it makes for a very attractive option. Rather than the stocks of a mutual fund, the mortgage pool money is loaned out for various trust deed investments. This creates a situation where even if one of the loans is repaid late that month, investors are still seeing a return on their investment. The higher level of diversification provides these more reliable returns, as well as a greater level of stability. There are inevitably some downsides as well. Investors don’t approve the individual loans as they could if participating in a whole note or fractional note investment by choosing to not partake in the loan. Since the fund is being managed by Sterling Pacific, the decision to execute a loan is left to the management team. Most people find this an acceptable trade off for the stability and diversification provided by a mortgage pool.

The First Floor Fund vs. The Foundation Fund

Now that we’ve explained what a mortgage pool is, some of you may be wondering, “Why does Sterling manage two funds?” While both funds are managed by the same team, and follow similar investment strategies, the geographic focus of the two differs. The Foundation Fund loans almost exclusively within California, and is subject to residency requirements for investors. The First Floor Fund is open to any U.S. resident, and has a license to write loans throughout the US. Due to these different lending regions, the target returns and investor requirements also vary. For the Foundation Fund, the target return is 10-11% and investors must have a net worth of $500,000 or a net worth of $250,000 as well as an annual income of $65,000. The First Floor Fund requires a non-home net worth of $1,000,000 or an annual income of $200,000 (for individuals) or $300,000 (for couples) with a target return of 11-13%.

While this is a cursory overview of our mortgage pools, we also have a more in depth look into the specifics of each fund. To download the guide, click the button below. All you have to do is answer a few questions that will help us deliver better content.


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