Trust Deed Investments and Economic Influences
 By Richard C. Temme

October, 2006

 Interest rates on trust deed investments (TDs) offer the best risk benefit ratio of any dollar denominated investment of which I am aware.  Thousands of TD investors agree.

Those (TD) investors who are most aggressive in pursuit of the highest interest rates are the ones most affected by possible changes in the real estate market. That, of course, is because the more aggressive TD investors have chosen a trade off, accepting less equity protection in exchange for higher rates of interest.  The more moderate and in particular, more conservative TD investors have settled for a very good, but relatively lower rate of interest earnings on their TD investments.

To lend perspective to the difference between aggressive, moderate and conservative TD investing, RC Temme Corporation (RCTC) with 30 years in business, is in our 7,400 loan series.  Counting only first TDs arranged by RCTC on improved property, we've only had two loans on which investors, following completion of a foreclosure, have not been returned 100% of their principal investment; the first loan retrieved 90% of invested principal for the investor; the second loan repaid the investors 95% of their principal investment.  In that same time period and with those same qualifications, between twelve and fifteen investors in second or third TDs lost at least a portion of their investments with RCTC.  Many of the losses on seconds and thirds were the result of the 1994 Northridge earthquake, with an epicenter a few miles from our office, occurring at the bottom of the disastrous 1990-94 decline in real estate values.  Clearly, investments in TDs secured in first loan position are, on average, more secure than second and third TD loans.

Assuming they have at some time owned real estate, TD investors who may be unfamiliar with TD investments can be comforted by understanding that owning the underlying real estate is the worst case scenario that most first TD investors might expect. Where that can be inconvenient, it does not have to result in a loss and in fact, can result in a profit if the TD investment is chosen with a low enough loan to value ratio.  To most TD investors, owning the underlying real estate is not usually something to fear.

Interest rates have dropped. On October 6, 2006 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the "worst may well be over" for the U.S. housing industry that's suffering its worst downturn in more than a decade.

The point in this is to illustrate that, to date, the highly predicted 2005-06, "housing bubble" has turned out to be anything but a bubble. Yes, real estate values in most areas of California have been declining, but with more of a whimper than a popping bubble.

Fortunately, interest rates have declined and that interest rate decline has kept a number of potential home buyers in the market. The decline in real estate values has also created a chicken or egg question; did the decline chase many real estate speculators out of the market place or did the exit of so many real estate speculators from the market contribute to the recent decline in real estate values? In the long run, it's healthy for TD investors to experience greater stability in real estate values, partially resulting from an exit by speculators from the real estate market.

TD investors must still exercise caution.  The real estate market, in general, appears to have softened its decent; however, it appears to still be sliding somewhat. Will it continue to slide? How far might it slide?  Those questions are difficult to predict and economist's predictions fall across the board.  There is no question in my mind that any significant rise in prevailing interest rates will, in the near term, eliminate any possible rise in real estate values and will probably cause a steeper or continued decline in values.

TD investors are, generally, not driven away by the prospect of a decline in real property values.  TD investors know that TD investments offer them one of very few methods available to obtain a retail rate of interest on their invested capital, as opposed to obtaining a wholesale rate of interest through their bank, money market fund, insurance annuity, corporate bond or corporate bond fund.

What precautions should TD investors take to protect themselves against possible continuing declines in real estate values?  The most obvious answer is to focus on first TD investments and leave second and third TD investments to only the most experienced and sophisticated TD investors.  The next most obvious answer is to select your TD investments based on safety factors, before yield, term or other factors; safety first.  That usually means lean towards those TDs with a lower loan to value ratio.

TD investors are well advised, to diversify their TD investments, if possible, by investing in small portions of many different TDs.  Such diversification not only keeps TD investors from concentrating on the same earthquake fault line, but it allows TD investors to capitalize on the early payoff statistics occurring with most TD loans.  Most TD investors don't want to invest their funds for long periods but many TD investors are quite willing to do so in small portions, knowing they are likely to take advantage of the payoff statistics showing that a very high percentage of longer term loans payoff quite early.

Anyone contemplating becoming a TD investor is encouraged to experience a very small investment early, prior to committing larger amounts of capital to TD investments.  The thinking is that obtaining a retail rate of interest on one's investments is a strong incentive that is self motivating for investors.  However, new TD investors should have the opportunity to see the documentation, ask the normal questions and experience the process of collecting their monthly checks to determine if retailing their available funds suits their temperament.  Investors are reminded that retailing their money can sometimes entail inconvenience. However, RCTC does absorb much of that inconvenience for their TD investor clients.

Comments or questions regarding this article or about TD investments are always welcome by RC Temme Corporation.