A Real Estate Note is a fixed income contract with a monthly payment based on a time horizon and a coupon rate. It is developed based on financial bonds that include a risk of recall and a risk of default.
IRESE offers an alternative to non-existing mortgage loan securitization. It allows investors to pick and choose a risk profile based on individual loan criteria and construct an optimal investment portfolio. Ongoing liquidity is provided by investor trading on the exchange. Investors will benefit from returns associated with investing in real estate and will be able to diversify their investment portfolios.
Real Estate Note is an interest-bearing note on a faction of an existing mortgage.
It has a face value of $100 and an interest rate which is set by property owners and bid down by investors at origination.
Rate is determined at the time of initial Real Estate Note offer and set by investors who bid on the offer based on their initial loan risk assessment.
The Real Estate Note structure is depicted in the figure below.
Each mortgage 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 loan 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 1-1000, 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%.
IRESE creates a new level of liquidity and increases the efficiency of the real estate capital finance market as follows.
For
Mortgage Bankers and Brokers, which seeks to securitize mortgage loans and to obtain competitive financing, IRESE provides a flexible securitization product with:
- Ability to securitize loans;
- Access to many real estate investors; and
- Competitive loan pricing based on investor bidding.
For
Investors, who are exposed to real estate financing risk and seek investments in asset-backed securities, IRESE provides opportunities to purchase “real estate notes“ in individual mortgages with:
- Better risk assessment and efficient pricing of returns;
- Diversification based on many loan attributes; and
- Ongoing liquidity provided by the exchange.
For
Investment Managers and Financial Advisers, who advise clients on financial portfolio allocation and risk management, IRESE provides access to a new option for investment consideration and diversification with:
- New fixed income investment product;
- Asset investment secured by real estate; and
- Liquid marketplace where Real Estate Notes can be traded.