How to Evaluate a Private Mortgage Fund

Private mortgage funds are easy to summarize. Investors put money into a fund, the fund makes loans secured by real estate, borrowers pay interest, and investors receive distributions.

Nothing about that description is wrong. It is just about as useful as describing a restaurant by saying food goes in and dinner comes out.

The important questions are what sits inside the portfolio, how the loans were made, how income becomes distributions, what happens when a borrower does not pay, how easily investors can get their capital back, and whether the numbers being presented actually describe the same thing.

That is where diligence starts.

Begin with what the fund actually owns

Before looking at the return, look at the assets producing it. How many loans are in the portfolio? What property types secure them? Where are those properties? How large is the average loan? Are the loans primarily first mortgages, or does the portfolio include meaningful junior-lien exposure?

A portfolio of 75 smaller loans secured by residential properties is a very different investment from a fund holding six large construction loans. Both can be called mortgage funds. The label does not tell you much about the risk underneath it.

Alliance Mortgage Fund's August 26, 2026 reporting showed 74 listed loans totaling $19.01 million, with residential real estate representing 76.2% of listed balances and geographic concentration primarily in Orange and Los Angeles counties.

Those numbers are not interesting because bigger or smaller is automatically better. They tell an investor what kind of portfolio they are actually buying.

Do not let the yield introduce itself without context

Yield is usually the first number on the page. Reasonable. Investors generally prefer investments that produce money.

But several numbers can all sound like "the return" while measuring different things. For the 12 months ended July 2026, Alliance Mortgage Fund reported an 8.06% average actual blended portfolio yield and a 7.49% average member distribution. Separately, its August 26 lender statement showed a 10.12% point-in-time portfolio yield.

All three can be accurate and still not be interchangeable. If a fund advertises a distribution rate, ask what the underlying loans are earning and what sits between portfolio income and investor distributions.

A distribution tells you what came out. Diligence asks how it got there.

Look at leverage before you admire the income

LTV is one of the quickest ways to understand how much debt sits against reported collateral value. Lower LTV generally means more property value beneath the loan, but the ratio needs context because valuations are estimates and recovery can be reduced by senior debt, taxes, insurance, legal expenses, repairs and selling costs.

Alliance Mortgage Fund reported a 53.3% weighted average LTV in August 2026. Its January through August schedules kept that figure within roughly 51.8% to 53.5%, which is more useful than seeing one favorable month in isolation.

Still, 53.3% LTV does not mean 46.7% of the property value is sitting in a vault waiting to absorb losses. Real estate is rarely that considerate.

Then ask where the fund sits in the capital stack

Lien position changes the recovery picture. A first mortgage generally gets paid before a second, and a third sits behind both.

Alliance Mortgage Fund's August 2026 listed balances were approximately 52.7% first position, 45.0% second position and 2.3% third position. Its diligence materials evaluate junior loans alongside total debt, senior financing, property value, borrower equity and expected recovery rather than treating lien position as a standalone answer.

"First lien" is information. It is not a gold star.

Credit quality deserves more than a current-loan percentage

A useful current-status report should tell you how much of the portfolio is performing and what is happening with the rest. Alliance Mortgage Fund reported 87.27% of assets current as of August 26, with 5.97% late or in default but still accruing interest and 6.76% classified as other, REO or new.

Then ask harder questions. How many loans have historically defaulted? What were actual recoveries? What realized losses have occurred? How long did workouts take?

And if the materials do not provide a statistic, that matters too. Do not turn "not reported" into "zero."

Find out what happens when a loan goes sideways

Every credit strategy looks attractive when every borrower pays on time. The more interesting test is what the manager does when one does not.

Does the manager service the loans directly? How quickly are late payments identified? When will the lender modify a loan rather than foreclose? Who manages the property if the lender takes control? How are taxes, insurance, senior liens, repairs and legal expenses funded?

"Real estate secured" sounds reassuring. Someone still has to manage the real estate when things stop being reassuring.

Ask whether the fund itself is borrowing money

A mortgage fund may invest using investor capital alone or borrow additional money against the portfolio. Fund-level leverage can amplify returns when things go well, but it can also add borrowing costs, lender covenants and refinancing risk.

Alliance Mortgage Fund states that it does not borrow against its portfolio to increase returns. Its 2024 audited balance sheet reported $17.56 million of total assets, $17.50 million of members' equity and $60,800 of liabilities, meaning 99.65% of audited assets were funded by member equity at that year-end.

That does not make the mortgage loans risk-free. It tells you that another major layer of borrowing is not being added above them.

Read the audit, not just the brochure

Marketing material tells you what the manager wants to explain. Audited financial statements tell you what an independent accounting process found in the financial records.

Alliance Mortgage Fund's December 31, 2024 audit reported $1.648 million of mortgage interest income, $786,800 of net income, a $699,000 allowance for expected loan losses, five loans more than 90 days past due but still accruing, two impaired loans and a $66,795 REO loss.

None of those numbers should be confused with the current August 2026 portfolio. A current portfolio report and an older audit can both be valuable because they answer different questions.

Understand liquidity before you need liquidity

Private mortgage funds invest in loans that do not trade like public stocks. That has consequences for investors who want capital back.

Alliance Mortgage Fund's current terms include a 12-month minimum membership period, at least 60 days' written notice and an annual Fund-level return-of-capital limit equal to 10% of beginning members' equity, subject to Fund liquidity and governing documents.

Those terms may fit an investor with a long horizon. They may be unsuitable for someone who thinks they might need the money next spring.

The terms did not change. The investor's circumstances did.

Look for what the manager tells you without being asked

Transparency is not just the volume of information. It is also the quality of the information.

Does reporting clearly distinguish current figures from historical ones? Does the manager explain when two yield measurements use different methodologies? Are defaults and realized losses disclosed? Are the limitations of LTV explained? Does the manager tell you when a statistic is not available? Knowing what is not reported is part of diligence too.

Ten questions worth asking

1. What exactly does the fund own?
2. How are the returns produced?
3. What is the portfolio LTV, and how is collateral valued?
4. Where do the loans sit in the capital stack?
5. How much of the portfolio is current, and what happens with the rest?
6. Does the fund use leverage?
7. Who originates and services the loans?
8. What do the audited financial statements show?
9. How do I get my money back?
10. What information is not being reported?

If a manager can answer those clearly, you know considerably more than the distribution rate told you.

The takeaway

Evaluating a private mortgage fund is not about finding one magic statistic. Yield, LTV, current-loan percentage, lien position, audit results, liquidity terms and manager experience all matter.

The useful picture emerges when those pieces agree with one another. That does not mean the investment will perform as expected. It means you understand more clearly what has to go right, what can go wrong and who is responsible when it does.

That is what diligence is for.