What void does The Rama Fund (“Rama”) fill in the lending marketplace?
Rama caters to an undeserved marketplace by offering loans to customers who fall outside the parameters of conventional guidelines for traditional banks. We capitalize on a supply/demand imbalance that does not necessarily have anything to do with the quality of our loans, but rather the extensive “red tape” that banks must contend with.
How does Rama differ from a traditional bank in qualifying its borrowers?
Barriers to entry from traditional lending sources result from their desire to avoid business purpose loans that fall outside the scope of the Consumer Finance Protection Bureau and to adhere to narrow “Ability to Repay” qualifications involved in the origination of consumer purpose loans. Additionally, we typically close our loans in 2‐4 weeks where banks often take 2‐4 months.
What makes Rama’s Trust Deed investing strategy attractive?
If structured properly, trust deed investments can offer an attractive current yield with significant downside protection. As of January 31, 2017, the weighted average loan‐to‐value (“LTV”) of Rama’s portfolio was 56% and every loan was in first lien position. The monthly standard deviation of Rama’s net returns since its inception in September 2008 through January 2017 is 0.06%. Rama’s average annual net return since inception is 9.79%1 and it has generated positive net returns for 100 consecutive months. These returns compare very favorably to other investment options, many of which have higher risk profiles. The possibility of losing money in a trust deed investment is mitigated by Rama’s built in “margin of safety.”
What is the margin of safety in Rama’s Trust Deed investments?
The margin of safety is the difference between the loan amount and the value of the underlying property. The core concept of trust deed investing is that if a borrower does not perform, the lender can foreclose on the underlying collateral and force a sale of the property to recoup its investment. If the loan is sufficiently conservative, i.e. the property value is high relative to the loan amount, then the investment should not lose money even if the borrower defaults on the loan. As of January 31, 2017, the weighted average LTV of Rama’s portfolio is 56% and only 4 loans out of 339 exceeded 70%2 (but were still equal to or less than 75% LTV).
Are the loans made directly from Rama to the borrowers or are they purchased from third parties?
As of January 31, 2017, Rama has never purchased a loan from a third party.
How selective is Rama in choosing which loans to fund?
We have a very disciplined approach to choosing the right borrowers and fund less than 1 out of 5 loans that come to us:
Out of 10 loan submissions, we issue 7 preliminary conditional loan approvals (after 8 years in business our brokers and, more specifically, our loan officers know what types of deals to formally submit for consideration).
Out of 7 preliminary loan approvals, about 50% of them execute.
Out of 3.5 loans that go into processing, underwriting, etc. about 1.75 of them of them actually close.
In summary, we fund about 18% of our submissions.
What does Rama do to ensure that property valuations are accurate?
Making sure that our collateral is accurately valued is of paramount importance. To that end, it is imperative that we maintain strict control over the valuation process:
4 out of 5 loans we order our own appraisals. We use 3 primary AMC’s or Appraisal Management Companies. They subcontract with local appraisers, review the appraisal report at corporate, then send it over to us.
1 out of 5 loans we will use an appraisal submitted to us by a broker or borrower. We review it first and if we like it then we order an interior Broker Price Opinion (“BPO”). A BPO is a skinnier version of an appraisal where a local realtor goes inside the property and takes pictures so we can see if there is any deferred maintenance and then they put together their valuation opinion, supported by comps, similar to an appraisal. We will use the lower of the two values.
In all cases, we review the appraisals and/or BPOs and supplement with our research as we best see fit using various online websites or other data sources. If we don’t agree with a third‐party opinion of value, we will cut value based on our internal conclusion and set our loan LTVs parameters off our internal figure.
How is Rama more scrupulous in regards to underwriting title compared to its peers or industry standard practices?
It is Rama’s nature to view title policies primarily as a disclosure in specific regards to the historical chain of title and encumbrances of record. The insurance component to Rama is meaningless from the stand point that if we had to pursue a title claim, we would find ourselves in a battle that we would rather avoid - like most insurance companies we anticipate that title companies would try to do everything in their power to avoid actually providing insurance and satisfying outstanding claims. We view title companies as companies with human beings that are “insuring” at an employee level and as such do not give any weight to their position. Considering this, we believe that we underwrite title more so than an actual title officer does. Quite frequently, we hear a title officer inquire as to why we are requesting specific items and informing us that no other lender has ever asked for the things which we are demanding. We question recent transfers of the property, validity of such transfers, and whether prior transfers of ownership were insured transactions. Often times, we are questioning the title company as to why they are not concerned with recent transfers and the insurability of the ownership chain, spurring them to action. Was there theft of the property? Did someone take advantage of the grantor? Was the grantor elderly? Title companies will often rely on affidavits. We may rely on those same affidavits but may go a step farther in certain instances and require that the prior property owner that conveyed vesting to our borrower be a part of our closing to execute a grant deed to the property, witnessed by our closing agent. This provides assurance related to the proper transfer of title, verification that the grantor is competent, and helps to obviate the need for future potential title claims.
If a property is vested in an entity or trust, we actually underwrite the entity/trust and do not simply rely on the title company to opine on authority. Often times, a title company will conclude that X borrower can sign in X capacity; however, pursuant to our review we find that X borrower actually does not have the authority to bind the asset in their capacity or that an additional borrower must execute the transaction documents concurrently. As it relates to trusts, we review the trust documents to validate who has legal signing authority. In contrast, title companies may be comfortable with a trust certificate, which is a simple one‐page attestation from a person who purports they are the trustee or that they have the power to act on behalf of the trust.
If, subsequent to the issuance of a preliminary title commitment, a lien, judgement, lis pendens or other encumbrance on the property is removed via a title supplement, update or by attestation that such encumbrance will not appear on the final title policy, we do not rely solely on their comfort but ask for the supporting documents to substantiate the removal of any such exception to the final title commitment.
We do not allow for anyone involved in the transaction to source demands for payoff related to any outstanding liens on our collateral. We mandate that only the title/escrow company handle this to ensure that the information received is directly from the appropriate creditor and that the monetary components to satisfy any prior liens are validated by the title company.
How is Rama’s underwriting process unique?
We do not rely on single stage Quality Control (“QC”) audits as is typical for most lenders. Rather, we have a redundant QC system in place at nearly every stage of the life of a loan. We initiate QC measures at the following checkpoints (refer to departmental QC Checklists for exact QC measures):
Initial Underwriting/Disclosure Desk (consumer loans).
Two touch method on QC for proper sorting and values of fees for TRID. (Disclosure Specialist and Funder are responsible for reviewing the disclosures prior to sending).
Compliance call with the borrower to verify borrower competency and awareness of the loan and terms
Reviewing conditions and monitoring for red flags, i.e. altered documents, fraudulent documents, mismatched stories, etc.
Assuring title and escrow have no affiliation with any parties to the transaction, e.g. builder, broker, seller, real estate agents, etc.
Independent verifications, e.g. employment, earnest money, HOA dues, etc.
Extensive and granular review of all conditions, income, assets, verifications, title, appraisal/valuation reports, and all other documents that are sourced in our loan processing.
Pre‐Loan Document Production
Final QC review of title, payoff demands, initial disclosures, changed circumstances, re‐ disclosures, Closing Disclosures, cool down period windows, vesting, spelling within transaction documents, address validation, APN validation, legal description validation, insurance requirements, etc.
Post‐Loan Document Execution/Pre‐Funding
Review of documents to ensure: no missing pages, alterations, proper signatures, proper dates, proper notary, proper vesting on Grant Deed, audit of disbursement details and fees.
Confirm date‐down on title.
Review of lender’s instructions and compliance thereof by the title company in regards to approved title exceptions, vesting, etc.
Review Closing Protection Letter for accuracy and relevance.
Review of final title policy to ensure it conforms to lender’s Instructions, final vesting, removal and satisfaction of unapproved title exceptions, etc.
Additional review of the executed loan documents docs (two touch) to verify: no missing pages, alterations, proper signatures, proper dates, proper notary, proper vesting on Grant Deed, audit of disbursement details and fees.
Second review of the final Closing Disclosures to evaluate acceptable tolerances or needed cures.
What is the breakdown of loan purpose for Rama’s borrowers?
For 2016 originations, Rama’s loan purpose split was approximately 61% refinance, 39% purchase.
What is the breakdown of interest only versus amortizing loans? Of the amortizing loans, what is the split between regular amortization and deferred amortization?
As of January 31, 2017, approximately 42% of our loans were interest only and 58% were amortizing. We do not write any deferred amortization loans.
Why does Rama have a geographical bias towards California?
Our California bias is a strategic one, rather than one out of convenience:
California is the largest State in the Country and the 6th largest economy in the world.
Alim Kassam and Brian O’Shaughnessy, Co‐CEOs, both grew up in the State and are familiar with the different sub‐markets
California is a lender friendly State from a foreclosure standpoint.
Like most of the Western United States, California employs a non‐judicial foreclosure process. The timeline from the recording of a Notice of Default until the property auction is around 4 months, compared to 1‐3 years in the Eastern Unites States where foreclosures must be done judicially.
Property prices in CA are higher than in other states:
A 66% LTV loan in Arizona might be a $100K loan secured by a $150K property.
A 66% LTV loan in CA might be a $300K loan secured by a $500K property.
So while the LTV % is the same, there are more absolute dollars of equity protecting our investment and more skin in the game from our borrowers.
What is Rama’s average loan size?
As of January 31, 2017, our average loan size was $342K.
What are the average default/foreclosure rates on the portfolio?
Typically, 5‐10% of our portfolio is delinquent, in default or in foreclosure. However, it is important to note that this does not necessarily correlate with our loss ratios given our conservative underwriting parameters. As of January 31, 2017, Rama has only incurred three losses since its inception out of approximately 2,400 loans funded.5
How does Rama dispose of Real Estate Owned (“REO”) acquired via foreclosure?
We will either liquidate them immediately or stabilize and then sell them.
What is the average term of Rama’s loans and what is the implied duration of Rama’s loan portfolio?
Typical loan terms range from 6 months to 30 years. As of January 31, 2017, our weighted average remaining term to stated maturity is 146 months or about 12.2 years. However, our average annual runoff rate (the rate at which borrowers repay us) since inception has been approximately 40%. Based on our historical runoff rate, our loan portfolio has a 2.5 year implied duration.
How do Rama’s fund managers feel about the runoff rate of the loan portfolio?
We view our runoff rate as a sign of healthy underwriting. It is not our investment philosophy to be a lender of last resort, we are not a “loan‐to‐own” shop. We want our borrowers to have a number of “outs” and that is why the weighted average FICO score of our borrowers is healthy and our weighted average LTV is so low. We want to have comfort when we originate a loan that our borrower will be able repay us in full, whether they refinance our loan with another lender, sell their property and repay us, or use other means to satisfy their obligations to us.
Does Rama use leverage?
Yes, Rama has historically employed a modest amount of leverage. As January 31, 2017, we had $14 million drawn on our line of credit (out of $35 million available) compared to $ 101 million of equity. We typically use leverage to manage our working capital rather than for pure yield augmentation.
What is the range of interest rates in Rama’s portfolio?
Typically, 7‐10%. As of January 31, 2017, the weighted average coupon of Rama’s loan portfolio is 8.8%.
If the weighted average coupon Rama charges its borrowers is 8.8%, how could Rama’s investors earn somewhere around 8.5% net of fees?
Beyond the coupon charged to its borrowers, Rama has five sources of ancillary revenue that generate approximately 2% of incremental yield: 1) prepayment fees, 2) late fees, 3) default interest, 4) yield augmentation through the use of a modest amount leverage, and 5) loan sale premiums. An attribution analysis of Rama’s net yield calculation is below.
Weighted Average Coupon 8.80%
Incremental Ancillary Revenue 2.00%
Gross Yield 10.80%
Management Fee (1.00%)
Servicing Fee (0.50%)
Provision for Loan Losses (0.25%)
Yield Before Performance Fee 9.05%
Investors Preferred Return (7.00%)
Excess Yield 2.05%
Performance Fee (1.03%)
Additional Return to Investors (1.03%)
Investors' Net Yield Calculation
Investors Preferred Return 7.00%
Additional Return to Investors 1.03%
Uncompounded Net Return 8.03%
Extra Yield Via Compounding 0.30%
Net Yield to Investors 8.33%
Can investors receive monthly cash distributions?
Yes. Rama offers its investors the option to receive monthly cash distributions or to reinvest monthly earnings automatically.
What is the tax treatment for U.S. investors in the Rama?
By and large the vast majority of Rama’s income is taxed as ordinary income that is generated from interest payments received from our borrowers. The exception would be if we ever hold an REO for over a year and sell it for either a profit or a loss, then that could produce a small portion of long term capital gain or loss.
What is Rama’s investor composition?
As of January 31, 2017, approximately 27% of our fund’s equity comes from 8 institutional investors: 3 RIAs, 2 fund‐of‐funds, 1 single family office, 1 multi‐family office, and 1 K‐12 private school. The remaining 73% of the fund’s equity comes from 287 retail investors.
Can Rama accept ERISA accounts?
Yes, up to 25% of the total equity invested in Rama can be ERISA money.
What is your capacity to meaningfully scale AUM without sacrificing credit quality?
We have a demonstrable ability to scale our portfolio without investment pressure or style drift. Historically, we have consistently originated more loans than our balance sheet could support. Excess loan production gets sold to third parties on the secondary market, mostly to FDIC insured banks and hedge funds. In 2016 alone, we sourced $215M of new loans and sold $175M to third parties.
We can deploy substantial amounts of new equity capital in a prudent manner, without the need to hire one new person, change our underwriting criteria, or alter our pricing. All that we would need to do is to flip a switch and shut off our secondary marketing activities. As we are positioned today, The Rama Fund could easily deploy $15 million of new equity per month.
What has been the growth in annual loan origination volume over the past five years?
We have grown our annual loan origination volume by over 500% over the past five years. 2012 = $40M, 2013 = $72M, 2014 = $114M, 2015 = $174M, and 2016 = $215M.
Does Rama “mark‐to‐market” its portfolio?
No, similar to our peers we do not “mark‐to‐market” our portfolio. All performing loans are carried at cost/par. For loans that are deeply delinquent or in foreclosure, we do re‐assess the value of the underlying real estate and if we believe a loan is impaired then we would write it down. REOs are also evaluated and if we believe our carrying value exceeds fair market value, then we would write down the asset.
What Impact Would Rising Interest Rates Have on The Rama Fund?
It is our opinion that a rising interest rate environment would be beneficial to The Rama Fund (“Rama”) and the consequences of such can be broken down into two components: the impact on Rama’s existing loan portfolio and the impact on future loan origination's.
We subscribe to the belief that our Country’s monetary branch is not as independent from our legislative branch as the casual observer might be led to think; therefore, our hypothesis is that interest rates will rise somewhat commensurate with inflation. If they don’t, then the U.S. Government’s interest payments as a percentage of GDP would increase, which would decrease the budget for discretionary spending. On the other hand, if interest rates rise along with inflation, then higher nominal wages would lead to increased tax revenue which would help to mitigate higher debt/interest payments.
In an inflationary environment, tangible assets appreciate while esoteric assets “correct.” The prices of gold, copper, aluminum, steel and other raw materials would be expected to increase in addition to nominal wages as alluded to above. To tie this back to Rama’s underlying collateral, there are only two inputs for the creation of real estate: raw materials and labor. Accordingly, in an inflationary environment the replacement cost of real estate increases. Beyond the replacement cost perspective, we would anticipate appreciation in our collateral since real estate is and of itself a tangible asset. The counter argument to our hypothesis is that affordability would be impacted as a result of higher interest rates and this would limit the demand of buyers which would translate into downward pressure on real estate prices. However, we maintain our conviction that the higher replacement costs of real estate against the backdrop of an ever growing population, appreciation resulting from real estate being a tangible asset, and the likelihood of higher nominal wages, all tilt the scale in favor of higher real estate values over the medium and long term during periods in which both higher interest rates and inflation persist.
That all being said, we believe the impact of higher interest rates on Rama’s existing loan portfolio would be that the weighted average loan‐to‐value (“LTV”) of our portfolio would be decreasing as the value of our underlying collateral appreciates, thereby increasing the margin of safety protecting our loan portfolio.
In regards to new origination's, we believe that rising interest rates would be a meaningful catalyst for volume growth within the non‐prime mortgage sub-sector. It is important to understand that a large portion of all mortgage loan origination's are sourced by mortgage brokers. Furthermore, we estimate that half of the mortgage industry’s volume is comprised of refinance activity versus purchase money transactions. For the past several years, interest rates have been historically low so there has been a refinancing boom within the A‐paper or conventional mortgage world. Accordingly, mortgage brokers have been so busy “feeding at the trough of A‐paper” that they don’t want to work on deals that don’t fit the conventional box, i.e. non‐prime loans. However, when interest rates rise then refinancing volume will significantly decrease as most borrowers will have locked in their mortgages at lower rates. Future refinance volume would primarily be driven from loans that are ballooning or from borrowers who want to pull cash out of their properties ‐ so total volume in the A‐paper world would shrink. Therefore, we believe that in order to preserve their income streams mortgage brokers would be motivated to work on deals that might require a little more effort, those being non‐prime loans.
What happens if there is a decline in real estate values?
The equity risk of the real estate investment is borne by our borrowers. If real estate values drop, our borrowers are in the first dollar loss position and they are still obligated to make their mortgage payments to us and ultimately pay off their loan.
We place a tremendous amount of emphasis on the downside protection of our portfolio. The higher the value of the property relative to our loan amount, the greater the margin of safety. The lower the LTV, the more property values would need to fall before we would take a loss. As of January 31, 2017, the weighted average LTV of our loan portfolio was 56%, only 4 loans out of 339 exceeded 70% (but were still equal to or less than 75% LTV)7, and every loan was in first lien position.
What are the meanings of the names “Rama” and “Athas?”
Alim Kassam, co‐founder, is Indian and named The Rama Fund and Rama Capital Partners. Rama is an Indian deity – he is the God of karma/doing the right thing. Brian O’Shaughnessy, co‐founder, is Irish and he named Athas Capital Group. Athas is a Gaelic (Irish language) word that means rebirth.
When we started our companies in 2008, the whole economy was imploding, particularly the mortgage industry. So we thought our collective names carried great meaning. The origination company “rebirth” and the investing company “do the right thing/karma.”
Who is Rama’s auditor?
We have been audited every year since our inception in 2008 by Armanino, LLP. Armanino is the largest California based accounting firm and the 20th largest in the Country. They have over 900 employees and work with over 60 different mortgage funds.
Who is Rama’s sub‐servicer and what do they do?
Rama Capital Partners is The Rama Fund’s Managing Member and the Master Servicer of its loan portfolio. Sub‐servicing is performed by FCI Lender Services. FCI has been in business since 1982 and services over $5 billion of mortgage loans. FCI sends Rama’s borrowers their monthly mortgage statements and borrowers remit their mortgage payments directly to FCI, whether it’s a regular monthly payment or the full payoff of a loan.
FCI also performs certain administrative functions for The Rama Fund, including formal bank reconciliations no less than twice a month. At the end of each month, FCI determines The Rama Fund’s NAV, sends Rama Capital Partners its management and performance fees, and sends to each of Rama’s investors their monthly distributions checks along with their account statements.