Understanding Real Estate Notes

Real Estate Note

Real Estate Note is a fixed income contract with a monthly payment based on a time horizon and a coupon rate. Real Estate Notes are similar to financial bonds with a risk of recall and a risk of default. Real Estate Notes are an alternative to mortgage loan securitization.

IRESE provides mortgage bankers and brokers with financial tools that allow them to offer Mortgage Financing via Real Estate Notes. The product allows investors to invest in fraction of an individual mortgage by picking and choosing a risk profile based on individual loan criteria. Doing so, investors manage and diversify risk and develop an optimal investment portfolio.

Investors will benefit from returns associated with investing in fixed income secured by real estate and the ability to diversify their investment portfolios across many loans. Investor trading on the Exchange provides ongoing liquidity.

Real Estate Note is an interest-bearing note on a faction of an existing mortgage which is secured by a real estate property. It has a face value of $100 and an interest rate which is set at auction. Rate is determined at the time of initial Real Estate Note auction and set by investors who bid on the auction based on their initial loan risk assessment.

The Real Estate Note structure is depicted in the figure below.

Each Mortgage Financing represents a loan which is profiled based on hundreds of criteria. Each profile represented by risk profile with a specific score. The score helps investors to determine the interest rate they are willing to pay on that loan. The Major difference in a Real Estate Note structure is that individual loans are not pooled together to form a pool. Instead, a loan is broken into many interest-bearing notes which represent a fraction of the whole loan – called Real Estate Notes .

Each note has a face value of $100, which is a unit of investment by Investors. Based on investors’ criteria and risk allocation strategy, investors are able to create portfolio of Real Estate Notes to achieve desired diversification, risk tolerance, and reward position.

For example, a Mortgage Financing can be profiled by borrower’s credit score, loan-to-value and debt-to-income ratios. Based on investor defined weighted scores, a specific risk profile receives a score from 1 to 1000, such as given loan might score 900 points. An investor might consider this as a risk-free investment and will be willing to purchase $10,000 of notes at 6.5%.

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