Texas Residential Lending

Company Finance Model

New Purchase Loan Financing

  • A home purchaser/borrower puts a 15%-25% down payment on a home

  • Texas Residential Lending (TRL) loans the client the remaining amount at the maximum legal interest rate allowed for Higher-Priced Mortgage Loans (HPMLs) under

  • Dodd-Frank’s Qualified Mortgage (QM) rules, currently 9.25%-9.75%

  • TRL borrows 75% of the amount it loaned to the purchaser from a bank at rates between 4.25% and 4.75%

  • TRL investors fund the remaining 25%

Portfolio Acquisitions

  • TRL buys bundles of existing mortgage loans which are similar to the above new purchase loans

  • TRL finances these with 75% bank debt and 25% investor capital as with the new purchase loans

Capital Raise Terms

  • Investors will hold a four-year note to TRL with a 12-month extension option

  • The note earns interest at the rate of the underlying loans which is currently 9.6% annually

  • Principal and interest on the note will be paid quarterly approximately pro-rata with the incoming principal and interest from the underlying loans which amortize over 30 years

  • No fees or expenses are charged to the investor

  • The note is cross collateralized by all loans in the portfolio

  • Investor money is committed for four years at which point it may be redeemed. TRL has 12 months from the redemption request to return the capital.

  • The note is pre-payable to the investor since the loans underlying it are pre-payable

Company Portfolio

  • $8.9 million loan portfolio secured by approximately 155 first in line deeds of trust

  • Entire portfolio is in Texas with 80% is in primary markets and 20% in secondary markets

  • Approximately 97.5% of loans in the portfolio are performing

  • Average FICO score of borrowers is 680

  • Average housing debt-to-income ratio of borrowers is 31%

  • The portfolio’s income covers payments to investors approximately 1.4 times

  • TRL canstill cover its investor payments if 20% of its borrowers become delinquent. The Texas fixed-rate 30-year subprime serious delinquency rate only reached about 15% in late 2009.

COMPANY SUMMARY

Background

  • Texas Residential Lending (“TRL’) is a private real estate investment firm founded in 2019 for the purpose of providing home financing to individuals that cannot accessthe traditional mortgage market. Alternative mortgage lenders now account for almost half (45%) of all home loans according to the Federal Reserve. This is the largest share of the market they’ve held for the past 20 years. This share is on the rise because traditional banks are backing away from certain borrowers and because of increased risk aversion in the current lending environment. TRL provides home mortgage products to home buyers that traditional banks now ignore. These borrowers may be business owners with variable income, self-employed borrowers with K-1 income instead of W-2 income, ITIN individuals (non-US citizens who are legally allowed to borrow money in the United States), clients who have a bankruptcy on their record from the past seven years, individuals that are recently divorced, or other borrowers who meet TRLs underwriting requirements.

  • Since the 2008 credit crisis and the passage of the Dodd-Frank Act, lending requirements have significantly changed in the United States making it more difficult for individuals who previously could qualify for mortgages to do so in the current regulatory environment. In particular, self-employed (non-W2) individuals, those with shorter work histories (2-3 years), ITIN borrowers, and those who have filed bankruptcy (personally or through business) largely saw the residential mortgage market become unavailable to them. Prior to Dodd-Frank, lending officers and banks could interview potential borrowers and consider their situations holistically, looking at assets, income and expenses in combination to determine loan security. The Dodd-Frank Act put in place rules that removed this ability, even for otherwise attractive borrowers seeking to purchase adequately secured homes.

What is an ITIN Borrower?

A portion of TRL’s borrowers are known as “ITIN Borrowers.’ The Individual Tax Identification Number (ITIN) is a tax processing number issued by the Internal

Revenue Service (IRS) to ensure that people who are not eligible for social security numbers have a means to pay taxes.

ITINs allow the holder to:

  • Open an interest-bearing bank account; individuals who have an ITIN can open interest-bearing accounts.

  • Obtain Loans; Individuals with an ITIN are allowed to obtain loans from US financing sources.

  • Secure a driver’s license; some states have allowed the ITIN to be used instead of a SSN to receive a driver’s license, driver’s permit or state identification card.

  • Pay taxes; An ITIN is in the same format as an SSN (XXX-XX-XXXX) and is used to file US tax returns if the holder is not a US citizen.

Having an ITIN number is not an indication of legal status. An ITIN holder may be in the US on a green card or work visa, student visa, may be a citizen of a foreign country purchasing property in the US, may be present in the US on deferred status, or may be in the US illegally.

TRL’s Lending

There is a growing investment community which seeks to assist individuals such as those described above in acquiring homes of their own. TRL is a part of this community and acts as a lender for these homes by issuing traditional mortgages, typically thirty-year loans at fixed rates. Our client contracts stipulate sizable down payments (at least 15% of the purchase price) and monthly payments that include taxes and insurance.

The target home buyer in this program must meet specific qualification guidelines. These qualifications are in addition to the due diligence performed on the purchase of the home. For instance, the borrower must have a debt to income (DTI) of 43, but ideally 40 or less. In addition, the individual must have a clean criminal background, pass credit checks, and have no egregious issues appear during underwriting.

Our typical target properties are three bedroom, one and a half bath homes appraised at a price of under $300,000 and over $100,000. The properties must pass due diligence including being valued comparably to other similar nearby homes and having been independently appraised. Lastly, the homes must be move-in ready. The buyer must move into the property upon closing and be the primary resident of the home.

Typical Transaction Terms

Servicing of Loans

Source and Deal Flow

Texas Residential Lending’s transaction structure:

  • Individual Note Purchases

  • TRL purchases loans from a Residential Mortgage Loan Originator (“RMLO”), which acts as the licensed lender in the transaction

  • TRLhas a first lien Deed of Trust on the property at no more than 85% of appraised value

  • TRL then back-end finances approximately 75% of the loan amount in the form of a traditional commercial loan. The financing bank is collateralized by a recorded

Collateral Assignment Agreement. The remaining 25% is funded by TRLs internal funds or investor funds. Monthly payments of principal and interest are made to the bank from the incoming borrower payments. TRL retains the arbitrage between the interest collected from the borrower and the interest paid to the bank and investors. On liquidation of the property (whether due to the mortgage being paid off or the sale of the loan on the secondary market), the bank principal and investor note are paid down from the proceeds.

Example: An individual wants to purchase a $200,000 home with financing. At closing, the buyer pays $30,000 down and borrows the remaining $170,000 in the form of a mortgage originated by an RMLO. TRL immediately purchases the mortgage from the RMLO for $170,000 and obtains a deed of trust at closing. TRL then draws from a commercial line of credit from a financing entity for 75% of the loan value, or $127,500, and executes a Collateral Assignment Agreement with that entity. TRL and/or its investors provide the remaining $42,500. Both the bank and the investors receive principal and interest payments on their money on a quarterly basis. TRL keeps any remaining borrower payments as profit.

Portfolio Purchases

  • TRL identifies a portfolio of existing mortgages it wishes to purchase. Typical transaction sizes are between $1m and $5m

  • The portfolio must have first in line deed of trusts, loan to value at a maximum of 85% (with 60% being the average on portfolios purchased so far)

  • TRL purchases the portfolio and transfers servicing to one of its current preferred servicers

  • TRL finances the purchase with approximately 75% of the portfolio amount in the form of a commercial loan and the remainder using TRL’s funds and/or investor money as with the individual note purchases. The financing bank is collateralized by a recorded Collateral Assignment Agreement. Monthly payments of principal and interest are made to the bank from the incoming borrower payments. TRL retains the arbitrage between the interest collected from the borrower and the interest paid to the bank and investors. On liquidation of the property (whether due to the mortgage being paid off or the sale of the loan on the secondary market), the bank principal and then investor note are paid down from the proceeds.

Potential buyers come to Texas Residential Lending through numerous platforms:

Mortgage Originators – Mortgage Originators encounter many clients who traditional banks will ignore, for the reasons described above. We have relationships with several such originators.

  • Third Party Services – There are firms which provide assistance to home borrowers in the purchasing and financing of homes. TRL may be referred home buyers from such third parties.
    Real Estate Agents/Brokers –Many real estate agents do not have an alternative home financing partner for their clients. Through referrals, marketing and direct contact, the platform has attracted deal flow through these channels.

  • Real Estate Investors/Wholesalers/Builders – Many fix and flip investor/builders end up wholesaling their product instead of placing it in the retail market. By partnering with us, these investors can reach the retail market with an alternative offering to traditional financing readily available such that their pool of potential buyers is significantly expanded.

  • Loan Officers – Mortgage loan officers often send referrals to the platform once they have extinguished their options at traditional banks. The incentive for loan officers to refer their clients to our platform is its ease of use and as an alternative option that is more flexible than most banks.

  • Portfolio Purchases – We have found that there are funds and other entities that hold loan portfolios that largely fit our criteria and need to sell them to create liquidity or for other reasons. These performing loan portfolios are often well seasoned with attractive loan-to-value (LTV) ratios.

All servicing after the close of the loans we finance is completed by licensed third-party servicers. The servicer is responsible for managing accounting, payment handling, 1099 and 1098 reporting, insurance and property taxes, lien release after payoff, customer service, information management and late payment inquiries. In addition, the servicer is responsible for providing investor reporting material regarding loan payments.

Loan Default

Traditionally the individuals to whom TRL lends have relatively low default rates, but even so it is to be expected that some defaults will occur. TRL’s team has an in-house attorney with over a decade of experience dealing with lending documents, foreclosures, and foreclosure litigation. Since such matters will be handled in house, legal and foreclosure costs can be held under control.

Transaction Exit

TRL is an investment vehicle. As such, we intend to hold these notes and clip coupons for their entire terms. However, in the ordinary course of business borrowers may refinance us out or sell their home.

There also exists ample opportunity to securitize our loans and sell them to the secondary market. Several entities have already expressed interest in purchasing loans from us which have been seasoned for at least a year. Other funds and investors may also purchase notes directly from TRL under terms negotiated between TRL and such parties. To date, TRL has sold just over $800,000 of notes to outside funds while retaining a portion of the interest payment of those notes for their entire tenor.