Hard Money Lending Best Practices

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Table of Contents

Here Come the 2nd’s ........................................................................................................................1

Every Loan Has Wrinkles ................................................................................................................2

Why All Trust Deed Investment Opportunities are not Created Equal ...........................................3

How 200 Loans and $38 + Million in Funding Makes a Better Trust Deed ...................................4

Real Estate Debt Crowdfunding – Promise or Peril for Hard Money Lenders? .............................5

Which Real Estate Investment Strategy is Best for You .................................................................6

What Do Trust Deed Investors Really Want ...................................................................................7

What Have You Learned .................................................................................................................9

Interest Never Sleeps .....................................................................................................................10

The Double Nickel: 5 Lessons Learned 5 Years after the 2008 Meltdown ...................................11

4 Buckets for Better Diversification ..............................................................................................13

If You’re Retired Like Me ............................................................................................................14

What to Look for When Visiting a Non Owner Occupied Property .............................................15

10 Best Practices for You Hard Money Loan Servicers ...............................................................16

Don’t Fight the Fed .......................................................................................................................17

Go With the Flow ..........................................................................................................................18

7 Reason to Guard a Trust Deed’s Property Equity ......................................................................19

5 Advantages of the Managed Trust Deed Portfolio vs. a Mortgage Fund .................................20

Using a Self Directed IRA to Invest is a Fix & Flip or Fix & Rent ..............................................21

Yield Olympics: Trust Deed Investments Win the Gold Medal ...................................................22

1

Here Come the 2nd’s

Here come the 2nd’s! Rising California home prices are increasing equity in many primary residences and homeowners are wisely utilizing this capital through Home Equity Line of Credit’s (HELOC) or Business Purpose 2nd Trust Deeds. This Blog explains parameters and best practices for obtaining and or funding a business purpose 2nd Trust Deed and some of the differences between a Bank HELOC and a Business Purpose 2nd Trust Deed.

Zillow predicts that U.S. home prices will rise by 4.3 percent on average in 2014. In home equity lending, homeowners may borrow based on how much equity they have in their property. The variable HELOC or Line of Credit typically comes from a bank for a consumer purpose and the fixed Business Purpose 2nd Trust Deed comes through a Hard Money Lender. Here are some of the basic differences between a HELOC and Business Purpose 2nd Trust Deed:

Lending Criteria Bank HELOC Hard Money Business Purpose

2nd FICO >700 >600

Combined Loan to Value (CLTV) <85% <55%

Ability to Pay Yes Yes

Valuation Current Value Current or As Repaired Value

Term 10 year fixed 3-5 years

Access Line of Credit that can fluctuate

Loan amount fixed and disbursed at Origination

Rates 5-7% 11-14%

Loan Purpose Home Improvement or other consumer purpose

Business or Investment purpose

Status of 1st Trust Deed Current Current or Delinquent

Status of Taxes and Insurance Current Current or Delinquent

Prepaid Interest No Typically, yes

Here are a few examples of recent Business Purpose 2nd Trust Deeds: 1. Retiring Police Officer expanding a Notary business and needs money for marketing and

office equipment. 2. Rehabber needing additional funds to complete construction.

Property owners should learn from the 2008 Crisis, where about 30 percent of the equity in U.S. homes was obliterated, and not treat their homes like automated teller machines, but pull money out wisely without incurring too much leverage. Hard Money Lenders on these loans should pay attention to the above lending criteria to ensure a successful loan.

Whether a HELOC or Business Purpose 2nd, borrowers can take advantage of the equity in their homes.

2

Every Loan Has Wrinkles

Like a Pug, every loan has wrinkles. Each wrinkle defines a loan and should be evaluated during underwriting. The key to successful underwriting and Trust Deed investing is to know which wrinkles are harmful or not. This Blog addressed to Hard Money Lenders will discuss some of the common wrinkles in Hard Money Loans, some of the remedies for these wrinkles and the single most important wrinkle that dictates many loan approval decisions.

Wrinkle #1 - Low FICO Score: - All FICO’s scores are

not the same. Short Sales, Foreclosures, Medical Conditions, loss of a job can all contribute to a damaged

FICO. Treat FICO’s differently if the score is low because of irresponsibility vs. an event. Current

income, assets and a letter of credit explanation can smooth this wrinkle.

Wrinkle #2 – Lack of Verifiable Income: Many Hard Money borrowers are self-employed. These

borrowers work in the cash economy and don’t report qualifying W2 income. Bank Statements, other

income proof and verification of employment can help justify income and the ability to pay for these self-

employed borrowers.

Wrinkle #3 - Property location, Condition, Age or Specialty Use: Many Lenders state that they will

make a loan only if they would live in the property if they received the property back in a Foreclosure

action or Trustee Sale. For me, living in the property is the wrong metric. I measure Loan to Value,

rehab costs and property liquidity. All types of properties, whether distressed or not, will trade at the

right price. Lenders should make sure that the property is repairable at a suitable cost, and has enough

equity protection to cover the investment, foreclosure, sales expenses and has a market for future buyers.

Initial property valuation can be solidified through Appraisals, property visits, realtor comps, Broker Price

Opinions and Automated Valuations.

Wrinkle #4 - Borrower Character: I can attest from personal experience that character matters. If the

Borrower has a criminal record or history of litigation or the loan scenario/story does not add up, be

careful. Make sure that the seller, buyer, agents and all stakeholders are singing the same tune on the

loan. I try to understand and validated the motivations of each party to make sure that the loan story

makes sense. Even if the borrower has a checkered credit history, if they have significant equity at stake,

they will be incented to make the payments unless they have a lawsuit or fraud up their sleeve.

Wrinkle #5 – Loan to Value (LTV): This wrinkle can’t be smoothed out. Loan to Value makes or

breaks a Hard Money Loan. Equity incents the borrower and leaves room for protection against

foreclosure, rehab and sale costs. No matter what the property is or where it is, if the property carries

substantial equity protection, the Trust Deed Investment will be safer.

3

Why All Trust Deed Investment Opportunities Are Not Created Equal

During a recent loan underwriting we received a Broker Price Opinion (BPO) stating that the value of the residential property was $300k. The BPO Agent saw two units on the subject property and then gathered two unit sale comparables in the surrounding area. We received the BPO and offered 65% Loan to Value (LTV) or a $195k loan amount. However, upon further due diligence including a site visit, the R1 Zoning of the property became evident. The 2nd unit on the property was not permitted but had been used in the BPO valuation. We called the BPO Agent and asked what the value of the property would be as a single unit and the answer was $225k. We lowered our loan amount to 65% of the $225k or $146.25k and we lost out on the loan. So what is the big deal? What is the purpose of this story? Well, the problem is that another Hard Money Lender (HML) saw the $300k BPO and loaned the borrower the $195k. Maybe that HML did not realize and piece together that the higher BPO was for 2 units and the property was only zoned for a single unit. The investor working with that HML is now into the loan at an unacceptably high 86.67% LTV. The loan might work out as the borrower was well qualified, however that R1 vs. R2 Zoning experience reinforced our belief that All Trust Deeds are not created equally. Underwriting guidelines, experience, funds availability, expertise and a variety of other factors mentioned below make Trust Deeds unique investments. Trust Deed Investors should pay close attention to the following 5 elements when underwriting a loan:

1. Loan to Value (LTV): LTV offers “equity protection” meaning that the lower the LTV, the more a Trust Deed Investor’s capital is protected from loss.

2. Valuations: We all know that every property is truly unique. Who provided the Valuation on the property? An Appraiser? Real Estate Agent? The HML? All are capable of delivering accurate Valuations, however on the particular loan that is being considered, did the person really value the property correctly? Was the Zoning vs. Actual use verified? Were the Comps really relevant Comps? Were “As Is” vs. After Repair Value (ARV) estimates complete and justified?

3. Ability to Pay and Exit Strategy: Was the borrower’s ability to pay the monthly loan payment researched and verified. Is the exit strategy for the loan viable?

4. Compliance: Was evidence for the correct loan purpose and occupancy status provided? Were oral disclosures documented? Were proper disclosures, loan terms and documentation given? While many lenders try to get compliance right, sometimes a costly error can be made out of ignorance and that ignorance can cause huge legal or loan enforcement issues later.

5. Property Visit and Borrower Meeting: Did the HML visit the property and meet the borrower to verify that the loan scenario being offered truly is the loan scenario?

6. Trust Deed Investors should realize that Trust Deeds are as unique as the property and the borrower. Prudent investors monitor the individual Trust Deed and qualify their Trust Deed provider to ensure that the investment will perform as indicated.

4

How 200 Loans and $38+ Million in Funding’s Makes a Better Trust Deed

Do you know what happens when, during a real estate transaction, a person with money meets a person with experience? The person with the experience ends up with the money and the person with the money ends up with the experience. Ha! Well, we all know experience matters. Whether the person is an NFL Quarterback, Ryder Cup Player or Real Estate Investor or Lender, experience helps. Since 2007 Mortgage Vintage, Inc. (MVI) focused on making fast and professional private money loans and Trust Deed Investments. Today’s Blog highlights the metrics achieved since the Companies inception and how that experience coupled with technology, personal service and compliance make the best Hard Money Loans and Trust Deed Investments in Southern California.

Experience Value Over $38 million loans funded. Experienced and real estate savvy Lenders line up

to fund well underwritten, high yielding private money loans from Mortgage Vintage, Inc.

Over 200 total loans originated from $40k to $1.5 Million through 8 different loan programs

While staying in the Hard Money niche, MVI funds many types of real estate investor and business purpose bridge loans.

Over $1.1 Million in Lender payments made in 2014

Lenders enjoy secured monthly smart passive income with outsized yields and returns.

Over $23 million in monthly mortgage payments received

Meeting borrowers and working with them to help them achieve their investment success is part of MVI’s core value proposition.

Total Real Estate Loans (REO) = 2 2 loans defaulted and the properties came back to MVI. Happy to report that all initial capital was returned along with 10.5% and 6.5% annual yields. We have applied new origination and underwriting criteria as a result of living through these REO experiences.

Total Delinquent Loans Today = 1 Current portfolio performing well, which means underwriting criteria is working.

Low rate 8.99% and high rate 16.50% Whether Single Family, Multi-Family, small commercial, fix and flip or fix and rent, MVI offers well priced and attainable business purpose loan programs.

Servicing more than 70 loans and $17 million in unpaid principal balances

Working with the largest servicer of Hard Money Loans in the country helps keep payments, distributions, payoffs and servicing compliance on track.

5

CrowdFunding: Promise or Peril for Hard Money Lenders?

When one of our lenders recently moved their investment funds to

Crowdfunding Trust Deed providers, I realized I better get up to

speed on Crowdfunding. How will this new capital raising

phenomenon impact the Hard Money Loan and Trust Deed

investment business? How can a Hard Money Lender effectively

Crowdfund? I will answer a few of these questions over my next

few Blogs but for today I will discuss whether Crowdfunding

offers Promise or Peril for Hard Money Lenders:

In October, 2013 Congress passed and the President signed the “Jobs Act” into law which authorized this

new era in fund raising. Crowdfunding is, according to Forbes, the practice of funding a project or

venture by raising many small amounts of money from a large number of people, typically via the

Internet. While Hard Money Lenders sell Trust Deed Investments over the Internet to multiple people,

there is a wide chasm between today’s traditional Hard Money Lender and the new breed of Real Estate

debt Crowdfunding companies.

To effectively evaluate the Promise of Real Estate Debt Crowdfunding, the perspectives and benefits from the Borrower and Lender stakeholders need to be understood:

Real Estate Debt

Crowdfunding Promise

Hard Money Loan Borrower Benefit Hard Money Lender

Benefit Lower Cost of Funds to Borrower

Lower cost of funds to borrower make more projects viable and increases potential profits

Lenders enjoy 9% - 12% returns today. These yields may scale back if borrowers get lower rates

Transaction Transparency Good for the borrower to divulge all of the aspects of the deal

Reduces fraud

Underwriting Transparency Helps borrowers screen potential projects Lenders love due diligence transparency and the ability to quickly determine their interest in funding a loan

Funds reliability Certainty of funding eliminates a big headache for borrowers

Everybody knows the percentage of the funds raised for the loan

Online experience Would like to know status of their loan real-time

Other lenders/friends involvement, social aspects of lending, loan/borrower/investor ratings

Lower investment entry cost to Lender

If more capital means lower rates, borrowers are all for it

More capital available to fund loans with lower entry costs to funding

Faster Funding Beneficial in distressed acquisition and cash-out situations

As long as the due diligence is complete and compliance is met, no problem

Diversification Loans for various property types Lenders desire a diversified Trust Deed Portfolio to spread their risk

6

Which Real Estate Investment Strategy Is Best for You?

I recently attended the Real Estate Investor Expo “REIEXPO” in Anaheim, CA and enjoyed meeting many Real Estate Investors while learning about new Investment strategies. What struck me about the meeting was the plethora of methods Real Estate Investors use to make money in Real Estate. Investors with different education, skill sets, risk tolerances, time, money and licensing have a choice of the type of real estate investment that fits their personal profile. The investors I met work to grow their cash flow and personal wealth while maintaining an entrepreneurial and non-corporate lifestyle. Which Real Estate Investment Strategy is best for you? While there are many more real estate investment vehicles than I mention below, I have broken down some of the major investment types and commented on the advantages and success factors for each real estate investment approach:

Investment Type Advantages to Investment Success Factors Purchasing Trust Deed Investments

-Smart passive 9-11% monthly income -Equity protection -Personal choice on Loan to Value, product type, term and location

-Reliable Trust Deed sources -Redeployment of paid off capital

Hard Money Lending -Knowledge of property and borrower -Finding qualified loan scenarios

Bulk Promissory Note Investing

-Note Pool Discount opportunities -Investment diversity -Multiple exit scenarios

-Larger capital requirements for loan pools -Manage foreclosure timelines

Buying Notes on an Exchange -Loan Origination not required -Geographic diversification -Discounts to par available

-Origination quality -Compliance checks -Minimize transaction fees

Fix and Flip Single Family Residences

-Multiple on Rehab dollars spent -Loans and equity sharing available -No licensing required

-Expeditious repairs -Expense control -Realistic After Repair Value

Investing into a Mortgage Fund

-Diversity across multiple Trust Deeds -Consistency of returns

-Management fees = lower yields -Loan type and quality monitoring

Fix and Rent Single Family Residences

-Longer term investments – 3+ years -Good tenants maintain the property

-Capital requirements -Expense and property management -Minimize vacancy, quality tenants

Buying and Holding Multi-Family

-Multiple tenants = less risk to income -Rental rate increases -Value add opportunities

-Low Cap Rates -Large capital requirements -Minimize vacancy, quality tenants -Property management

Buying office, industrial commercial properties

-Multi-tenant provides income security -Longer term tenancy available -Value add opportunities

-Product saturation limits rental increases -Cap rate compression

7

What Do Trust Deed Investors Really Want?

Smart Trust Deed Investors maintain a portfolio of Trust Deeds that provide smart passive income. These investors realize the significant benefits of a diversified high yielding current income basket of Trust Deeds. We hear from these investors about what they would like to see and experience as they build their portfolio. Today’s online loan origination, vendor management, document management, web-based social capabilities, automated underwriting and servicing technologies provide an opportunity for a better approach and process for Trust Deed Investing. Below are some highlights of what Trust Deed Investors really want and what they can expect to see in 2015:

Industry-wide challenges for

Trust Deed Investors

Current Industry Practices

Technology Based

Future

Stale Status -Investors call to invest in a Trust Deed and the Trust Deed is already sold or a portion of it is

Static, offline flyers or descriptions of Available Trust Deeds either sent out by email or posted to a Website

Real-time Status - Online Real-time pledging of whole or fractional interests in Trust Deeds

Multiple Statements Investors receive Servicing Statements from multiple Trust Deed Providers and don’t have a consolidated statement

Servicing Statements from multiple Trust Deed providers and servicers

Consolidated

Statements - Consolidated Servicing Statement for all the Trust Deeds an investor may hold

Limited Transparency and

Influence -Lack of transparency and influence on who else might be holding the other fractional interests in a Trust Deed

Fractional interest ownership dissemination provided offline by the syndicator/originator

Full Transparency

and Influence -Online Community approach to Trust Deed investing where investors know who else is involved in the investment and can syndicate friends

Re-Investment Challenges – Returns impacted by the inability to re-invest in a timely manner, resulting in a dis-continuity of interest income after a TD pay offs.

Call originators or look online for a new Trust Deed Investment across multiple sites, in multiple formats

Automated Re-

Investment - Online Marketplace that gathers Trust Deed investments from multiple providers, suggests appropriate investments based on investor criteria.

Lack of Liquidity – no easy way to sell existing trust deeds

Offline attempt to sell a Trust Deed to another investor or sell the Trust Deed at a discount on an exchange

Online Marketplace that allows investors to buy, sell and trade Trust Deeds

8

Industry-wide challenges for

Trust Deed Investors

Current Industry Practices

Technology Based

Future No Filtering - Personal investment criteria not matched with Trust Deed offerings, no easy way to filter offerings

Email and phone bombardment of Trust Deed Opportunities that don’t meet the investors specified criteria, time-consuming to sort through

Search Filters - Online search filters present only Trust Deed opportunities matching an investors criteria

Lack of Transparency in Pricing

Risk -Some Trust Deeds pay more than the risk profile warrants and some loans pay less, limited ability to compare and assess risk

Trust Deed pricing set by the originator and borrower and does not consistently reflect actual risks

Appropriate Risk Based

Pricing – Automation and transparency will drive more appropriate risk based pricing for Risk Adjusted returns

Significant Minimum Investment,

Limits Diversification and Investor

Participation - Fractional Trust Deed minimum Investment requirements range from $50K to $100k or more, making it challenging to diversify for everyone but the largest investors.

Investment amounts less than $50,000 are typically unavailable, making it challenging for investors with less the $500,000-$1M to diversify and participate.

Small Minimum Investment,

enables Diversification and

greater Participation –Crowdfunding with a Borrower Dependent Note structure enables minimums as low as $10,000 or lower, servicing costs and their impacts on returns limits how low minimums will go.

Inconsistent Due-Diligence - Lack of consistency and transparency into the underwriting and due diligence. For instance, some brokers are more conservative than others on LTV, different vendors provide differing results.

Due Diligence material provided to the investor via an online portal, file sharing (Dropbox) or email, with each broker using their vendors of choice.

Standardized Due-Diligence -Standardized due diligence with full transparency. Complete documentation with online analysis, ratios, meaningful and verified metrics all accessible securely online.

No visibility into Payoff Timing - Lack of advance knowledge of payoff timing creates challenges for timely reinvestment, impacting returns

Loans mature across different servicing platforms with payoffs happening haphazardly, with little advance warning, if any.

Payoff Alerts and Visibility - Single platform where Trust Deed maturities can be mapped with payoff requests being communicated in advance to facilitate timely reinvestment.

Loans over $1M, unfundable – Most loans over $1M, many of which are very high quality, go unfunded, since pulling together more than 4 or 5 investors on a deal, each with $200K plus to invest is challenging at best.

Brokers solicit investors for deals manually and are limited to 10 investors per deal.

Loans over $1M, fundable – Crowdfunding enables more than 10 investors to invest in a deal and the ability for investors to “self-syndicate” via the platform makes it easier for groups to come together to fund larger amounts.

9

What Have You Learned?

I am more bullish on Trust Deed Investing than ever! I just

experienced how equity protection, capital preservation and

oversized risk adjusted returns are all very real and alive in the

world of Trust Deed Investments.

After almost 3 years, one of Mortgage Vintage, Inc.’s 1st Trust

Deeds, turned REO just sold. The original borrower committed

fraud, sued all parties involved, filed bankruptcy, extorted

funds from the lenders and generally was a bad guy. The

investors hung in there, contributed on capital calls for the litigation, foreclosure and rehab costs and

through all these trials ended up with a 10.50% annual yield!

I heard a quote recently that resonated: “The trials that you go through and the blessings that you receive are the exact same thing”. While I would not wish this “loan gone bad” experience on anyone, we learned through the entire process and will be a better Hard Money Lender as a result. Here are a few lessons learned from this Trust Deed Investment:

Origination:

• Verify the Zoning of a Property on the Property Profile. Make sure that an SFR is zoned an SFR, Duplex is zoned a Duplex and a Tri-Plex zoned as a Triplex. Make sure the Appraisal/BPO values the property as Zoned.

• Borrower needs a separate source of income besides rental income on a cash-out loan

• Avoid litigious people. If they have sued once, they will sue again.

• Make sure the loan documentation is in order. Occupancy, Loan Type, Disclosures, Business Purpose documentation

Servicing, Foreclosure, Bankruptcy and the Trustee Sale:

• Use a qualified and experienced Foreclosure specialist

• Bid less than what you are owed at the Trustee Sale

• Hire an Attorney that knows the intricacies of the hard money lending industry

Rehab and REO Sale:

• Rehab and repair the high impact items related to the resale value

• Pick a licensed General Contractor and check references

• Review the major Sub-Contractors and their qualifications and references

• More visits to the property the better to keep the project on track

• Visit the Comps and adjust sales price accordingly

• Be careful not to guarantee Section 1 Termite clearance to the prospective buyer

• Don’t stage the property until all the permits and construction is complete

10

“Interest Never Sleeps”

Gordon Gekko, Hollywood’s famous Investment Banker, coined the Term “Money Never Sleeps” in the 2010 Film, Wall Street-Money Never ning quote came from Jack Heidt, Former President of Union Bank of California during the 1980’s who said when I asked about perspectives on his illustrious banking career, “Interest Never Sleeps”. Let’s take a look at this quote and what it means to Lenders and Borrowers:

A Real Estate Lender’s Perspective:

1. Interest on invested capital earned every day, all day and night, adds up. The below table shows how a Trust Deed Investment for $240,500 that earned a 10.00% yield over the course of the 618 day loan provided the Lender with $20,362 of smart passive income.

Description Amount

Property Address: Los Angeles, CA

Original Loan Amount $240,500.00

Lender Loan Portion % 50.00%

Lender Loan Portion $120,250.00

Total Interest Paid for Term $20,271.80

Total Late Charges for Lender $91.03

Total Interest and Fees $20,362.83

Loan Commencement 2/6/2012

Loan Payoff 10/16/2013

Total Days of Loan 618

Net Interest Per Day $32.95

Annualized Interest $12,026.59

Annual Realized Yield 10.00%

2. Remember the Rule of 72: The Rule of 72 says to divide your yield into 72 to determine the amount of time for your money to double in value. So, if you earn 10% on your money, it will take 7.2 years to double your money. (72/10=7.2)

A Borrower’s Perspective:

1. Explore Positive Arbitrage: Lower interest rate loans can be invested in a project providing a higher return that provides a positive arbitrage on the capital. Example: A loan at 4% invested at 10% earns a 6% positive return.

2. Define and Execute the Exit: Higher interest rates can erode profits for real estate investors. A timely exit of the investment through a refinance to a lower interest rate or the property’s sale can capture the projected return.

Lenders and Borrowers can both make money by remembering that “Interest Never Sleeps”. Group.

11

The Double Nickel: 5 Lessons Learned 5 Years after the 2008 Meltdown

It's been five years since Wall Street crashed and the financial crisis

broke across the country. Many people lost their homes, their

savings or their jobs. Financial plans were shredded. College funds

and retirement accounts were drained.

The economy has been slowly recovering over the past few years. The stock market is at new highs and mom-and-pop investors are pouring in money.

But how much have we really learned? Are we any wiser or better prepared, than we were?

Here are 5 lessons that we should have learned and Action Plans to avoid a personal financial meltdown during the next crisis:

1. Bubbles Always Pop:

According to the conventional wisdom on Wall Street in 2006, house prices would just keep going up. The reason: They always had. "We looked at the data since 1945," said Treasury Secretary Hank Paulson later, "and we concluded house prices don't go down." Conventional wisdom also said then that stocks would produce average returns of about 9% a year and bonds about 5%. The reason: Those were the historical averages in Wall Street's spreadsheets according to the Wall Street Journal. The problem didn't lie with the data, but the reasoning. You cannot reliably extrapolate a guide to the future from a limited set of past experiences. Yet today too many households are still basing their financial planning and retirement hopes on the same flawed forecasts. Action Plan: Be prepared by keeping 6 months’ worth of living expenses in cash in case your investments do worse than expected.

2. The Experts can’t accurately predict the future and have different agendas:

Most of Wall Street, the Government and most economists were surprised by the crash in 2008. The Federal Reserve thought the subprime-mortgage blowup would be "contained." Few economists predicted the recession before it was nearly over. Even amid the biggest housing bubble in U.S. history, there was no consensus among economists that housing was even overvalued. In 2005, at the peak of the bubble, most Wall Street analysts were bullish on housing stocks.

The No. 1 job of the experts is to protect their own careers. That means they have every incentive to stick to the herd. Today, as the Fed plans eventually to "taper" down its bond-buying program, China slows alarmingly, and government debt burdens almost everywhere surge, Wall Street experts insist it will all be OK.

Action Plan: Listen to experts but take control of your own portfolio

12

3. Use Leverage Wisely:

The three decades leading up to 2008 saw the entire U.S. go on a debt binge. That included households, companies and the government. Households and financial companies doubled their debts in the previous eight years. By the summer of 2008 U.S. households owed 10 times as much as they had in 1980.

Do we know any better? Today household and financial companies' debts remain higher than they were in 2006, while federal and corporate debts have spiraled. Many consumers are borrowing freely again and are exposed if they lose their jobs, or the economy turns down again.

Action Plan: Don’t Over Leverage. Maintain equity protection on both Wall Street and Real Estate assets

4. Sleep better at night by reducing risk, earning income and diversifying your Portfolio:

When the stock market collapses, people sell. Seeing your net worth halved is very different in practice than in theory. From September 2008 through March 2009, as the Dow Jones Industrial Average plummeted from 11700 to 6500, mutual-fund investors withdrew more than $200 billion from stocks—at precisely the wrong time.

I remember waking up in the middle of the night in 2008 after my Wall St. portfolio had depreciated 35%. I vowed to take action to reduce that feeling of potentially losing 35% of my life savings. Now I have a Wall St. and Trust Deed Portfolio and sleep better at night.

Today, as the stock market hits new highs, investors are feeling complacent and wealthier. Could they cope with another selloff? They need to be prepared.

Action Plan: Make sure to diversify across Wall Street Equity and Debt and Real Estate Equity and Debt

5. KIS – Keep it Simple:

Credit Default swaps, Derivatives, Collateral Debt Obligations all collapsed. Hedge funds imploded. Banking stocks plunged or got wiped out. Complexity lost. It's an argument for investing in simple assets or simple strategies.

Trust Deed Investments are simple smart passive income investments. The Collateral for the loan is a piece of California Real Estate. Generally, a conservative loan to value of 65% or less will provide the investor with sufficient equity protection to weather depreciation, property or borrower calamities. Providing debt vs. equity enhances capital preservation, simplicity and current income.

Action Plan: Invest in assets, or strategies, that you understand.

13

4 Buckets for Better Diversification

With Stock Prices at all-time highs and bond yields still near record lows, establishing a truly diversified portfolio makes more sense than ever. Financial planners have long built portfolios based on historical correlations, or the extent to which various investments have moved up and down together in the past. The theory is that when stocks zig, bonds and other investments will zag; market declines in one asset will be buffered by rising values for others. "You'd like different assets to move together when markets are doing well and then to deviate from each other when markets do badly," says Mark Kritzman, chief executive of Windham Capital Management, an investment firm in Boston that oversees $1.3 billion. The past decade has shown that traditional diversification—parceling out your money across U.S. and international stocks and bonds can leave investors exposed to the risk of severe losses. Consider that since 2000, the U.S. stock market has fallen by more than 40% from top to bottom—twice. I remember how frightened I was in 2008 (I had most of my investments in Wall Street instruments) when I realized that my life savings and retirement nest egg had plummeted by 35%-40%. I realized at that critical life moment that I needed to put a better diversification plan in place so I could sleep better at nights. As Mr. Kritzman alluded to, the problem with Wall Street only based diversification is that most of the assets on Wall Street are correlated. Correlation indicates the degree that the investment tracks to the direction of the Stock Market. To truly diversify, a portfolio should have correlated and non-correlated assets including:

• Stocks and Mutual Funds:

• Bonds and Fixed Income

• Real Estate Equity

• Real Estate Debt (Trust Deed Investments) Similar to Stocks (equity) and Bonds (debt), a well-rounded portfolio should include both equity in Real Estate including your home and debt in real estate (Trust Deed Investments). We have found empirically that, borrowers with substantial equity will make their mortgage payments and not allow their property to lapse into distress or delinquency. Even when the Stock Market dives, equity rich borrowers continue to make their payments and Trust Deed Investors continue to earn their current income. This phenomenon creates the non-correlated aspect of Trust Deeds.

14

“If You’re Retired Like Me”

I get to work with retired people who have enjoyed very

successful business careers. They worked hard, made good

entrepreneurial or employment choices and now want to enjoy

the fruits of their labor. The question they all have is how do

they maximize their income in retirement? How can they

maintain their lifestyle without dipping into their principal? I

spoke to a former IBM Executive who is now a Trust Deed

Investor and he spoke about “replacement income.” His

thoughts are below and should be of interest for those of you

who want to enjoy your retirement.

“If you’re retired like me, 1st Trust Deeds offer 9-11% and

Capital Preservation!

After retiring from IBM in 2009 after 31 years, my main

objective was to find the best investment that offered predictable

"replacement income" and low risk enabling "capital preservation". A key here is having

predictable" cash flow which does not always mean the highest return i.e. you want a return that

is dependable based on the lowest risk parameters. Another key is capital preservation, at over

50 years of age; one does not have as much time to earn back a loss nor the necessity of having

to rejoin the workforce!

1st Trust Deeds in real estate are the best investment vehicle for predictable, replacement

income and capital preservation:

• returns of 9-11% over 1 to 3 year terms

• capital preservation ,collateralized by high equity properties

• greater returns in case of default, high equity value inhibits risk on original investment

I have done dozens of 1st Trust Deeds since 2009 and they are my go to choice over bank deposit

at 1%, 5 year CDs at 1.6% or tax free muni bonds or fixed income mutual funds/ETFs at 3%.

For example, I invested $100k in a 1st Trust Deed paying 10% over 3 years with a good FICO

score / job earner, in a home with a loan to value (LTV) of 60% i.e. there was 40% of equity

coverage "insurance" in case property values decline. And I was protected in case of borrower

default, with higher premium points and fees added to my 10% and county trustee sale for

recovery in case of foreclosure.

The best part is that all of the necessary due diligence i.e. in finding the best properties,

underwriting quality borrowers, or default processing/recovery, is performed by the experts at

Mortgage Vintage, Inc. There has never been a better time to invest in 1st Trust Deeds, and I

endorse Mortgage Vintage, Inc. as your financial investment partner of choice.” C. Melillo (

Retired IBM Executive)

15

What to Look for When Visiting a Non Owner Occupied Property?

One of the many things I enjoy about the Real Estate business is that each property and loan scenario is unique. Real Estate is not a commodity as every property and borrower has different characteristics that impact value. A personal or trusted associate property visit before making a hard money loan always provides useful underwriting information and insights. This blog describes what to look for when visiting a property. Both positive and negative property characteristics can be determined by a drive by:

Positive Observations: Implication:

Toys on the lawn Verification that a Tenant is leasing the house

Garden hose on the side of the house The landlord/tenant/owner is watering the plants and taking care of the landscaping.

Welcome mat at front door Pride of ownership by Tenant and Owner

Real Estate signs on the street Many sale/lease signs signal a distressed neighborhood.

Paint and Roof in good condition Property maintenance and capital improvements taking place

Observations that should cause Concern: Implication:

High number of empty lots

Shows a neighborhood that may not be in demand

Vacant houses on the street Developer may have badly overestimated demand and could soon be choking on inventory. Also could signal pending foreclosures.

Bars on Windows Lack of security in the neighborhood

Real Estate signs on the street Many sale/lease signs signal a distressed neighborhood.

Trash in the Streets on lawns Neighborhood may be deteriorating

Pictures on a website or GoogleMaps can be deceiving. Make sure you get a real person making a real drive by of a property before you lend on your next hard money loan.

16

10 Best Practices for Your Hard Money Loan Servicer

Hard Money Loan Servicing can determine the success of your

Trust Deed Investment. Yes, the many factors involved with

servicing a loan correctly can highly influence the ultimate yield.

This Blog will describe 10 Best Practices for Hard Money Loan

and Trust Deed Investment Servicers. Whether a Lender is a

Master Servicer with an outsourced Sub-Servicer or the Lender

services loans in-house, these best practices below help to ensure

the security and high yield of your Trust Deed Investment:

1. Collect Payments and Distributions: Providing a variety of ways for the borrower to

pay the monthly mortgage and processing the payments quickly without a long holding

time before disbursement.

2. Personal Contact: The Servicer should provides a contact name and number for both

the borrower and investor. Someone that knows you and your loans. Not just an 800

number call center.

3. Monitor Tax Payments: Ensure that the borrower is staying current on property taxes.

4. Monitor Insurance Coverage: Track that the Homeowners or Renters Insurance Policy

has coverage limits that are equal to or greater than the property value, is up to date and

has the Lender listed as loss payee.

5. Late Payment Tracking: Apply late payment penalties correctly and send compliant

reminders to the borrower.

6. Prompt Demands and Payoffs: When Request for Payoff Demands arrive, a good

servicer will quickly process those requests and issue correct Demand Statements.

7. Notice of Default (NOD) Filing and Foreclosure Process: New Federal and State rules

and regulations make compliance, documentation and timeliness of the Foreclosure

process critical to a successful loan and property resolution.

8. REO Management: If a property reverts to the lender, a Hard Money Lender should

offer Asset Management services that include REO management and disposition

capabilities.

9. Reporting: A servicer should provide an investor portal with a login to review loan

details, portfolios, payments and payoffs

10. Fees: Servicing fees should typically run from 50 bps to 200 bps depending on the loan

type

17

Don’t Fight the Fed!

How does an investor get income from their hard earned savings? How does an investor get a high yield return in today’s low interest rate environment? Well, there is one thing for sure: Don’t Fight the Fed! This mantra means that investors should realize that high yield is not going to come from traditional savings vehicles correlated to interest rates that are influenced by the Fed (Fed Funds, Treasuries, Prime Rate, LIBOR et al). Interest Rates haven’t been this low in the U.S. in at least a century and the Fed plans to keep rates low. When the Fed’s rate setting committee announced the open ended commitment to quantitative easing, “QE Infinity” in Oct. 2012, they set forth their plans to keep interest rates low.

Investors are painfully aware of the following low interest rates on Wall Street investment vehicles that are typically used to provide current income:

• A 10 year Treasury note yields 1.7 percent a year and a one month Treasury Bill has an annualized return averaging just .05 percent over the past year. Inflation is running at 2% so you are actually losing money by putting money into Treasuries

• The average yield for stocks in the Standard & Poor’s 500 stock index was 2.2 percent as of Dec. 2012

• A Bloomberg REIT index had a 3.5 percent dividend yield as of Dec. 12th

• The FINRA – Bloomberg Active Investment Grade U.S. Corporate Bond Index yielded 3.4 % in Dec. 2012

• Municipal Bonds yields are at a 47 year low at 3.3% as of Dec. 2012, Source: Business Week, Dec. 2012

I could keep this list going with all of the investments that are providing abysmal returns including Money Market Accounts, Bank Savings Accounts, CD’s and others but I like to think of solutions not just problems.

Yield choices for Don’t Fight The Fed Investors:

1. Accept low yields on Wall Street investments, however, for most people, though, being ultra-cautious won’t produce the growth needed to pay for the children’s college or a golden retirement.

2. Try a Wall Street “Alternative Investment”. These “Alternatives” (REIT’s, Junk Bonds, Master Limited Partnerships and others) provide a marginally better return in the 4%-6% range, however these investments carry higher risk and are completely correlated to the Stock Market. If the Market swoons, so does the principal in these investments.

3. Invest in non-correlatedTrust Deeds that provide a high yield with real estate as collateral securing the investment. Most investors feel they have to seek safety at the expense of yield. Well, not with Trust Deed Investments!

18

Go With the Flow!

Projected Yield is nice but Current Income Yield is better. Assuming invested Capital is equally safe in both types of investments; this blog describes the nuances of receiving yield through a back-end loaded projected yield where interest is earned at the end of an investment term vs. interest earned through a current income monthly deposit.

An example of a projected yield would be an investment to build a property where the gain on sale (Sale Price minus Acquisition Price + Expenses and Carry) provides the interest earned. An example of a current income yield investment would be a Trust Deed where the borrower’s monthly loan payments are used to pay the Lender. Projected Yield Characteristics:

1. Uncertainty – Any investment that pays the yield at the end of the term is subject to positive or negative fluctuations. Economic, interest rate, political and execution risks all come into play when an investor is waiting for a return on their money.

2. Expense Exposure – Expenses for administration of the investment and or expenses in the investment itself like higher construction costs can chew into profits and yield.

3. Projection vs. Reality – Real Estate Investors are subject to “Pro-Forma” risk. Did the investment organizer plug in the correct inflation and rental income growth into the fancy spreadsheet? Only time will tell.

4. Yield on Sale - Yield achieved by selling an investment at the end of the term is subject to the financing market, economy and desirability of that property type at the time of exit. Accuracy in forecasting a sales price 5, 7, 10 years down the line is very difficult.

Go with the Flow! Monthly cash flow yield provides a margin of safety and enables a person to borrow less, invest more, increase personal satisfaction and meet expense growth demands.

Current Monthly Cash Flow Yield Characteristics:

1. Safety – Similar to why dividend stocks are sometimes preferred to Non-Dividend stocks, Cash Flow yields are delivered through monthly payments, not a hope and a prayer that the yield and investment projections will come true.

2. Reinvestment – Income earned from cash flow can be immediately reinvested resulting in a potentially higher yield on the original cash invested

3. Personal Satisfaction – Cash Flow allows a person to satisfy current needs and desires while improving their lifestyle.

4. Positive Feedback – Seeing deposits into a checking or savings account feels good. A cash deposit encourages and bolsters the soul of any investor. I know a Trust Deed Investor that elects paper checks vs. ACH transfers because they enjoy receiving the checks in the mail and the personal satisfaction of going to the bank to make the deposit.

19

7 Reasons to Guard a Trust Deed’s Protective Equity

Hard Money Loans are loans underwritten primarily on the

underlying real estate collateral of the loan. Hard Money Lenders

have varying guidelines on Loan to Value (LTV) Ratios which is

defined as the Loan Amount/Property Value. A general rule

however is that the loan amount should be around 60% of the

value of the property or 60% LTV. The resulting 40% is called

“Equity Protection” and should be highly regarded as a way to

ensure capital preservation.

The subsequent Trust Deed Investments from these hard money loans offer secured high yield returns.

Most Trust Deeds pay monthly and don’t have monthly or balloon payment issues. However,

occasionally a borrower may have difficulty making the loan payments and the lender will need to

foreclose on the property to obtain their returns. When problems do occur with loan payments or a loan

payoff it is important to have plenty of cushion or Protective Equity to secure the investment. This Blog

briefly describes 7 Reasons to ensure your investments have sufficient Protective Equity.

1. Market Fluctuations: We all know that real estate goes up and down in value. If the property value

declines, this value erodes the Protective Equity and leaves a lender more exposed.

2. Property Defects: If the property is found to have a property defect like a foundation issue or if the

property is damaged during foreclosure these fixes cost money and time. Protective Equity reduces

when money and or time are invested by a lender after the original loan origination.

3. Litigation: Borrowers will sometimes make claims against their lender. The costs to the lender to

defend their position in court come straight out of Protective Equity.

4. Timeline to Foreclose: Foreclosure timelines can take months. On one loan, the borrower died

intestate, and we had to wait for court to give the authorization to sell.

5. Foreclosure Costs: Costs to Foreclose can include additional legal, servicing, and eviction fees

6. Rehab to Sell: When a lender gets the property back after foreclosure, many times it will make sense

to rehab and sell vs. selling as is. Additional capital will be required for the rehab.

7. Closing Costs: Typical sales costs are approximately 7% of the purchase price. These closing costs

need to be considered and factored into the protective equity equation.

Most Trust Deeds will not have any of these foreclosure issues, but as a Trust Deed Investor, it is

important to realize that getting to and selling or renting the underlying security is the ultimate protection

for the invested capital and expected yield. Make sure the lender has access to this equity protection by

maintaining a healthy LTV ratio and the yields and overall returns on Trust Deed Investments will be

enhanced. Have you had any Protective Equity stories you would like to share?

20

5 Advantages of a Managed Trust Deed Portfolio vs. a Mortgage Fund Which is the better investment: A Trust Deed Portfolio or a Mortgage Fund that invests in Trust Deeds? You have probably already figured out that you should add non-correlated Alternative Investment, current income producing Trust Deeds to your investment portfolio to be truly diversified and protected from the volatile world of Stocks and Bonds. This article explains the difference and benefits to an investor building his own Trust Deed Portfolio through a Hard Money Brokerage Company or investing in a Mortgage Fund managed by a “Fund Manager”.

Yield: The first reason for building a Trust Deed Portfolio vs. a Mortgage Fund is simple. It’s a about the Yield! Most Mortgage Funds pay in the 8%-9% range while Trust Deeds pay in the 10% - 11% range. Why are the returns different when the underlying asset is the same? Simple: More hands in the cookie jar and more fees with a Mortgage Fund. Read any Mortgage Fund Prospectus and find out the many ways Fund Managers and Associates of the Fund squeeze fees out of a Fund. Here are just a few examples of Mortgage Fund Fees that you won’t see in a Trust Deed Investment Portfolio:

• Asset Management Fees

• Acquisition Fees

• Disposition Fees Not only to Funds add these fees in a Fund, an investor typically does not get to participate in yield enhancing late payment fees and default interest that significantly boost the yield in a Trust Deed Investment.

Individual Property and Borrower Selection: Personal due diligence, transparent Loan to Values (LTV) and individual property identification are inherent to Trust Deeds Investments. Investors can select the type of Asset, term, LTV, borrower profile, FICO, exit strategy and other investment parameters on each loan. In a Mortgage Fund investment, once a fund secures the cash from an investor, a “fund manager” will make the acquisition and disposition selections without review or input from the investor.

Ability to Vary Maturities Ensuring Continuing Cash Flow: Trust Deeds allow for selection of prepayment penalty terms and maturities. A diversified Trust Deed Portfolio has maturities spread over Years 1 to 5. This ability to monitor payments and payoffs provides an investor with a unique cash flow management dial.

Exit Strategy Certainty: With a Trust Deed, each loan has a defined Exit Strategy. Whether the

payoff derives from a conventional refinance or payoff from sale of the asset, the exit is defined and the timing is defined. When a payoff is requested of a Mortgage Fund, the manager has to somehow find the cash to reimburse the investor. These cash reimbursement requests are fulfilled as the cash becomes available to the Fund. If there are more withdrawal requests than new investments flowing into the fund, these requests remain unfulfilled.

Initial Investment Value: Mortgage Funds use Net Asset Values (NAV) to determine unit pricing.

Since the Fund typically invests in blind pools, an Investor is not necessarily aware of the underlying credit risk in the basket of loans, and the NAV may or may not accurately reflect all the aspects of the underlying credit risk.

21

Using a Self Directed IRA to Invest in a Fix and Flip or Fix and Rent Single

Family Residence

California Real Estate Investors with a Self Directed IRA can now invest in Fix and Flip and Fix and Rent properties and earn tax deferred income:

1. Purchase a distressed residential property and “Fix and Rent” 2. Purchase a distressed residential property and “Fix and Flip”

In both “Fix-It” cases an investor is taking advantage of a “distressed” property that offers a favorable acquisition price. Distressed properties can be purchased via a Financial Institution Short Sale, REO, at the Court House steps via a Trustee Sale or from an owner that is having trouble meeting his mortgage obligations. Purchasing at a below market rate in turn allows for an increased profit after the “Rehab”. The purpose of this Blog is to describe these two real estate investment scenarios for Self Directed IRA’s and their related Private Money Loan options:

Fix and Rent Strategy Strategy: The Fix and Rent investment opportunity in 2010 and 2011 existed in “fringe” areas that housed commuter communities. In those markets, rents did not decrease as much on a percentage basis as much as Purchase Prices. In 2012 properties in Metropolitan areas are now viable cash flowing Fix and Rent investments. In this Fix and Rent scenario a Real Estate Investor is buying a house, fixing it up and plans to rent it. Fix and Rent yields on Distressed SFR’s are typically in the 5.5% per year range.

Fix and Rent Private Money Loans: Loan programs for these Real Estate Investor Purchase loans have the following characteristics:

• <=65% Loan To Value

• >=35% Down Payment

• Interest Rates starting at 11.00%

• Non-Owner Occupied

• Loan amounts from $50k to $750k

• 12 months to 5 year balloon loans amortized over 30 or 40 years

• 3-6 month Prepayment penalties

These Real Estate Investor loans are based on the equity in the property, however the borrower’s ability to pay the monthly mortgage and viable exit strategy at loan maturity are critical underwriting factors.

Fix and Flip: Similar to Fix and Rent, profits for “Fix and Flip” properties in many cases are made on the acquisition. Some properties might require significant rehabs where the cost can range from $30k to $75k and some properties just require a simple $5k to $10k “paint and carpet” treatment to get ready for the flip. The key ingredient for most successful Fix and Flip investments is timing. “Get in and Get Out” is the successful mantra. When the fix is complete, the rehabber should list the property at a very competitive “priced to move” price and aggressively market. Remember, your first offer may be your best offer.

Fix and Flip Private Money Loans: Private Money Loan programs for these Fix and Flip loans have the following characteristics:

• <=60% - 70% Loan to Cost (Cost = Purchase + Rehab Cost)

• Rates starting at 11.00%

• Non-Owner Occupied

• Loan amounts from $50k to $750k

• 12 month terms

• 3 Months Guaranteed Interest

Advantages to Private Money Loans on Fix and Rent and Fix and Flip Investments:

• Increased Leverage: An investor using debt can buy more than one property with the same amount of capital

• Act Quickly: Private Money loans can be acquired in as little as 24 hours allowing an investor to take advantage of immediate opportunities

• Bridge to Profits: The shorter term nature of Private Money allows an investor to take advantage of an opportunity and then refinance or sell to lock in the profit.

22

Yield Olympics: Trust Deed Investments Win the Gold Medal

USA Today recently reported that "Money funds are yielding an average 0.03%. The highest-yielding one-year bank CD, from CIT bank, is yielding 1.1%, says Bankrate.com — $5,500 a year from a $500,000 deposit."

OUCH! If you're tired of seeing your money tied up in low-yielding accounts, we have good news! You can learn how to make 9-12% annualized returns (and sometimes more)! The Gold Medal of risk adjusted yields in today’s investment climate clearly goes to Trust Deed Investments. Consider the yield on what is believed to be one of the safest investments around: The 10-year U.S. Treasury note. Currently, investors who buy the 10-year Treasury earn a "whopping" yield of 1.5%. If inflation is 1.5% or more over the next 10 years, which isn't hard to imagine, that means investors are essentially getting no return on their money. Oh, how about those safe Certificates of Deposits (CD’s). Well, check out these recent rates/yields for CD’s:

• 1 Year = .30% • 3 Year = .90% • 5 Year = 1.49%

If a Real Estate Investor needs current income, how are they going to survive on these kinds of Money Fund, Treasury or CD Rates?

Maybe you are a stock market investor. You like to play the Wall Street game. Let’s see how those Dow Jones Industrial returns have stacked up over the last 5 – 10 years?

• 5 Year = 1.13% • 10 Year = 1.20%

Not only are you receiving paltry returns from Wall Street Equities and Bonds, but you are also subject to wild fluctuations and volatility that can really wake you up in the middle of the night! OUCH AGAIN! If you're tired of seeing your money tied up in low-yielding accounts, we can show you how to invest in First Trust Deeds and make, on average, 9-12% annualized returns. A far cry from the minuscule return at your bank or on Wall Street!

Trust Deed Investments from Mortgage Vintage, Inc. provide the following to Yield Seeking

Investors:

• 1 to 3 Years • 9.00% to 12.00% Paid Monthly • Secured investments with transparent and simple to understand lending criteria • Significant Equity Protection that covers market fluctuations