The 6th and final part of this series on the economy in 2021 takes a look at Aspen Funds. This part covers the fund strategies, performance throughout 2020 and the COVID crisis, and positioning moving into next year.
See below for parts 1-5 of this economic series.
Hi, Bob Fraser, I’m the founder of Aspen Funds, and this is our 2021 economic forecast. In my final section here, I’m going to look at Aspen Funds. We have two strategies in the mortgage notes industry, and I’m going to look at those strategies and how they’re likely to fare in the 2021 economic scenario. So let’s jump into a couple charts.
This will be very short. Let’s take a look at Aspen Funds. Aspen Strategies. So I’m going to look at our two strategies. Our first is our RPN Strategy, it’s our income strategy. And in this strategy, we buy discounted first and second liens and hold for income and cap gains. So we buy notes on single family residences and we hold them, get paid the mortgage payments and cap gains. Because they’re discounted, when a note is refinanced or a home is sold, we recover that discount and make money.
So this is our strategy. We have eight years operating in this strategy today. Our fund has an eight year track record and about 500 loans in the portfolio across the United States. We buy discounted first and second liens. Basically 65% of our portfolio is discounted second liens.
In many cases we would prefer to buy a second lien than a first lien. And the reason is this. You know, let’s say there’s a $300,000 house, a $100,000 first lien, and a $100,000 second lien, but a $300,000 value. And let’s say you could buy that first lien and you would not get a discount on it, and it would be at a 4% interest rate. Well, you’d earn 4% on that loan. But let’s say I could buy a $100,000 second lien, which gets paid after the first, but it has a 8% interest rate, and I can buy it at 50 cents on the dollar. So I’m actually earning 16% on that loan. And so if I buy it at 50 cents on the dollar, I only paid $50,000 for that $100,000 note. And so when it pays off, I actually have a capital gain. So I would much rather buy in that scenario. I would much rather own the second than the first. They’re actually far superior.
So 65% of our portfolio is this strategy, 342 loans. We own them at 55 cents on the dollar on average. So that means a $100,000 loan we have paid $55,000 for it. They end up being fairly safe. 65% ITV, meaning the liens on this home at our cost are only two-thirds of the value of that home. So there’s 33% in equity in the value of the home above us. And our scheduled yield is 13.8%, assuming that all mortgage payments are made on time. That’s the contractual yield on that after the discount. So that’s two-thirds of our portfolio.
We have a first lien portfolio that’s 27% of the portfolio. That’s 149 loans. We bought them at 73 cents on the dollar, so about a 27% discount from the face value. Even safer, 57% investment to value. So very, very deep equity loans, very little risk, and a 12% gross scheduled yield on those loans.
And then the third part of our portfolio, which is very small, just 7% of our portfolio, is hard money loans. And we have just 13 of those loans. So this is our income strategy, or re-performing notes strategy. So these are notes that at one point the borrower was not making the payments and then they began making the payments. So it’s called re-performing notes. It could be a beautiful house. Doesn’t mean there’s anything wrong with the home. It just means the borrower had trouble. But typically borrowers recover. So that’s what we buy, that’s why we buy them at a discount.
Strategy is very well positioned in our estimation for 2021 and what’s happening. As we’ve looked at the market, increasing home values flow through to our equity. So as we see home prices gaining over the last eight years and continuing into ’21, it actually flows back to us. And in addition, low mortgage rates encouraging refinancing. And we love when we get refinanced out of a loan, because we get paid off, and any discount in that loan we recover. So if we bought a $100,000 loan for $50,000, when that home is sold or refinanced we get paid off $100,000. So we recover the discounts that we receive. So basically it’s a very good market and a very good time for us to be in this space. And of 2021 it looks to be a very good year for this strategy.
We’ve proven to be COVID-19 resilient. We didn’t know how things were going to work, but this is actually our performance on scheduled income. So the performance against scheduled income here as the contractual payments that we expected to receive if everyone paid on time. And so far in 2020 through Q3, we’ve received 102% of contractual payments. Now, how can it be more than what was expected? Well, it’s because primarily due to 2019 late payers catching up. In 2019 December, a fraction of people were late. That rolls into this the next year. So bottom line is we’ve proven to be fairly COVID-19 resilient, and with the economy turning early in the first half of ’21, we’re very optimistic about the performance of this fund.
Here’s our basic financials for the Income Fund over the last seven years of operating the strategy. So here’s our assets today. It’s been steadily increasing, and our income as well. So we’re on great trends, very strong funds with a strong operating history and a strong outlook for 2021 in our opinion.
Our second strategy is our Non-Performing Note Strategy. And this strategy we buy discounted residential non-performing second liens, where the senior is performing. That’s a mouthful. But these are residences. These are homes, typically owner occupied. They’re second liens.
We love the second liens that are not being paid, but where the senior loan is being paid. Our strategy here is to buy these loans at a discount and to execute one of seven exit strategies. Our current portfolio is across four funds, 1,269 loans in 46 states all over the United States. And our average payoff is $91,000. Our average acquisition price is $21,000. So we basically pay on average 31 cents on the dollar. Our median home value is $300,000. So we’re buying a second lien that’s not being paid where the first lien is being paid, and we fix this loan.
This strategy is very well positioned to benefit from 2021 economic trends, primarily due to increasing home values. These home values flow through to our equity and our note, and borrowers are more willing to work with us to position themselves to capture home equity growth. So if a homeowner knows that their prices have been going up 5% per year, with likely more to come, they’re more likely to want to capture that equity and build their own wealth, rather than let it all go away to a non-performing debt. So they’re willing to work with us.
Borrowers’ capacity is increasing due to personal income and savings rate increasing, and the COVID-19 crisis will undoubtedly generate a new wave of product coming to market, perhaps in the beginning of 2021. So very, very strong strategies and both poised to benefit from the current economic situation.
In this NPN Strategy, here’s our seven exit strategies. This is based on 795 exits over the last eight years across four operating funds. And you can see basically here’s our seven strategies. I’m not going to go into all of them, but this is where we basically modify the loan. We talk with a borrower, come up with a payment plan that is equitable for them that they can afford, and we re-perform that loan. We modify the loan, we get them performing again on a payment plan, and then we sell that note. We’ve done that 277 times. It ends up being about 35% of our loans and 48% of our revenues. And with a revenue multiple about 3.24X.
Our second largest exit is a fast settlement, short payoff. So this is where maybe there’s a $25,000 note, we’ll settle for $15,000 with this borrower, and just wipe the whole thing out. And we fix their credit. We’ve done this 170 times. It’s 21% of our loans, 28% of our revenues, and typically a 3.2X revenue multiple.
Overall we end up making about a 2.69X on this over the last eight years. So it’s a very solid strategy. We have a lot of experience in this space working this strategy.
And so there’s our forecast for 2021 for Aspen Funds. Thank you for listening, and here’s to a prosperous 2021 for you and your family.
About the Author
Mr. Fraser has 20+ years’ experience as a finance and technology executive and is a former E&Y Entrepreneur of the Year Award winner. In 2012 Fraser co-founded Aspen Funds, a fund management company focused on mortgage investments. Fraser is responsible for financial management, portfolio modeling, as well as systems and processes, designing and deploying Aspen’s scalable state-of-the-art back-end platform.