Default is another major risk involved in private mortgage funds. Even the best fund management teams will face a mortgage default at some point. That is why it is very important to invest with a fund whose management has solid contingency plans in place to resolve this challenge, should it arise.




Investors should consider investing in managers and funds that have a thorough understanding of the foreclosure process. Fund managers should be able to demonstrate clearly that they have the resources available to reclaim a property, and a great legal counsel that is truly involved in this industry if a litigation process become necessary to complete the foreclosure.




Fund managers will do all they can to avoid a default within their funds, by underwriting Capacity, Collateral, Character, Credit, the liquidity of each borrower’s position and the ability to make sustained payments on the loan. This includes estimating longer holding times before the borrower sells or refinances the private loan. A great fund manager also will ensure the ability of a borrower to make interest payments, regardless of how much equity is in the property that serves as collateral. Furthermore, a fund’s risk of systemic default can be reduced significantly by diversifying loans among a wide variety of borrowers, diverse geographic areas, loan terms, property types and purpose of each loan. The equity contained within the property is a primary factor that makes investing in private mortgages appealing because it acts as a buffer to limit downside risk.




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