Chase: u201cIt's unique in that we're direct creditors to the collateral in the home; it's a highly collateralized investment.u201d

IRVINE, CA-Whole mortgage notes is an alternative real estate investment opportunity that is plentifully available when the market is strong and wanes when the market is suffering. As we move further away from the Great Recession, there are still opportunities for whole-mortgage-note investment, but these opportunities are waning, Vertical Fund Group principals Christopher Chase and Gus Altuzarra tell

Although they have some sensitivity to interest rates, residential whole mortgage notes are non-correlated with stocks or bonds and are therefore not affected by the performance of those two asset classes, says Altuzarra. Whole mortgage notes produce income from the underlying mortgages, and the investor also benefits from the “collateral gap” between the amount paid to purchase the note and its value when the note is paid off or refinanced, or if the home is sold. The mortgages are typically purchased from lenders at a deep discount.

Chase and Altuzarra say that non-correlated investments such as whole mortgage notes are necessary in order to diversify a real estate portfolio. They are also collateralized with real property, and investors are creditors, just as if they were a bank. If a foreclosure was necessary and the property sold, the investor may benefit and could still profit because the amount the property is sold for may still exceed the discounted purchase price of the note.

Chase and Altuzarra make a case for investing in whole mortgage loans in their white paper, available here. Moreover, with a 30% equity cushion, they say these loans are a safe and highly collateralized investment.

So what are the drawbacks? “The only drawback, or one of the biggest, would be that you have to invest prior to acquisition, and you may end up paying too much if the collateral is not sufficient for investment,” Altuzarra tells “Many loans are performing today, but someone could lose their job tomorrow, and an investor could find out that the amount invested is close to or less than the value of the collateral, so they could take a loss.”

To avoid this, make sure you’re in a good position by taking the advice of those you trust who have the knowledge and expertise in whole-mortgage-note investment, the principals advise. “The percentages imply that somebody got a good buy, but the truth is you really have to do the analysis. What did you get in terms of security for it? It’s not like overpaying for an asset—the acquisition price is crucial, along with what led us to that price.”

Over time, the opportunity for whole mortgage notes will go away, says Chase. “As we started buying whole-mortgage note assets in 2007, we thought the opportunities would be around for 18 months, but here we are more than six year later, still going. As credit becomes more available to borrowers to buy and refinance homes, there will be an increase in home prices that will eliminate a lot of the negative equity out there. Sellers will continue to sell and demand higher prices and reach a point where the price-to-security ratio is not going to be there anymore. At that point, the acquisition part of our investment will come to an end.”

Altuzarra says he thinks there’s probably as much as three years to go on whole-mortgage-note acquisitions. “As additional government regulations have been going into lending, the window has been prolonged, but there’s no question that over time, it will shut. But we’re on the front lines and are going to see it.”

As reported last month, Vertical Capital Income Fund easily outperformed its benchmark in its first year of operation, with a return of 12.95%, compared with a 2.59% return for the Barclays U.S. Mortgage-Backed Securities Index.

“VCAPX is potentially benefiting from a Goldilocks effect,” says Vertical president Bayard Closser.  “The housing market is recovering, but at a pace where lenders are still willing to sell whole mortgage notes at a deep discount.  This creates what we believe is a ‘just right’ environment that we believe will continue for at least three more years.”