The Monetization & Securitization of Credit Scores
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Transcript of The Monetization & Securitization of Credit Scores
The Monetization & Securitization of Credit Scores
Schyller Hall
BORROWER SMALL BUSINESS OWNER
• Poor credit • Wants lower rate
• Good credit • Needs liquidity• Wants some cash for startup• (monthly income or lump sum)
My Company provides both
650 FICO SCORE Qualifies for $100,000 Loan @ 10%
780 FICO SCORE Qualifies for $100,000 Loan @ 5%(If she so desired)
Borrower
Entrepreneur
With Entrepreneur As Cosignatory:
Borrower qualifies for: $100,000 Loan @ 7%
Borrower & Entrepreneur
TogetherBorrower Qualifies for $100,000 Loan @ 7%
BankBank Loans
My Company
$100,000 @ 7%My
Company
Borrower
My CompanyLends Borrower
$100,000 @ 8.5%
Savings And Payouts
Borrower
Entrepreneur
@ 10%, 30-Year Loan, PMT= $877.57
@ 8.5%, 30-Year Loan, PMT= $768.91
Borrower saves $108.66 Per Month
What Borrower Would Have Paid
What Borrower Actually Pays
Over Life Of Loan:
$39,117.60
My Company
My Company nets $103.61 Per Month
Lending @ 8.5%, receiving $768.91 Per Month
Borrowing @ 7.0%, paying $665.30 Per MonthPV of PMTs (discounted 5% for 30 years) :
$8,630.29
My Company
My Company gets a percentage of the spread
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Alternatively…
Entrepreneur
My Company
Lending @ 8.5%, receiving $768.91 Per Month
NPV of PMTs$64.047.04 - $50,000 = $14.047.04
My Company
My Company gets a percentage of the spread
Sell the PV of This Stream of Cash Flows as some kind of ABS:
FV = $276,807.60
PV (discounted 5% over 30 years) = $64,047.04
Entrepreneur gets a percentage of the spread
Borrowing @ 7.0%, paying $665.30 Per Month
PV = $55,416.74From here, I can transfer the obligation: Transferring the monthly payments of $665.30 to another in exchange for a lump sum, say, $45,000 to $50,000.
From Previous Page…
My Company
NPV of PMTs$64,047.04 - $50,000 = $14.047.04
$4,047.04
$10,000.00
Entrepreneur
My Company’s monthly incoming cash flows of $768.91 are sold as an ABS for $64,047.04.
My Company’s monthly obligations of $665.30 are transferred another borrower who receives a sum of $50,000.
Other Options
There are many other varieties in which the payments and cash flows could be structured, listed in the preceding slides are only a few of the possibilities.
• Brings together homebuyers and individuals who need or want cash quickly
• Receives fees from both parties in addition to the spread
• Enters into CDS contract to hedge against default
• Net Profit = $4,047.04 + fees from homebuyer and counterparty – (CDS) – Transactions Costs.
• Potentially in and out of the transaction in a matter of hours.
• Even 1 deal per day would generate significant cash flows.
Entrepreneur
My Company
• Receives $10,000 – My Company’s fee (TBD)
• Ideally, cosignatory will successfully petition to remove him/herself from Loan after 2-3 years of consistent payments from Borrower.
• Rather than taking out a business loan on their own, this solution is advantageous because its essentially free money.• Cosignatory receives financing
without the requisite monthly payments.
In ConclusionBorrower
• Homeowner receives a lower interest rate on his home mortgage.
• This is an easy sale, even if fees are assessed on a % loan value or a straight, fee, say $1,000.
• Paying $1000 now to save nearly $40,000 over the life of the loan
• Even for those who plan on moving within a few years, it the structure will pay for itself within a year. (in this example)
Additional Considerations
Contingencies for re-financing situations either for existing borrowers or first-
time borrowers.
The potential for “entrepreneur” customers to use the process to accrue
multiple lump sums of cash acting as cosignatory for multiple deals
Borrowers who require/request more than one cosignatory (possible?)
Many others that will doubtless merit further examination
Again, this is a brief overview of the overall business process.
OR…
Entrepreneur
Lending @ 8.5%, receiving $768.91 Per Month
NPV of PMTs$64.047.04 – Entrepreneur’s Cut “X” = $My Share
My Company
Sell the PV of This Stream of Cash Flows as some kind of ABS:
FV = $276,807.60
PV (discounted 5% over 30 years) = $64,047.04
Entrepreneur gets a percentage of the spread
650 FICO SCORE Qualifies for $100,000 Loan @ 10%
Lends From Its Own Pocket $100,000 @ 8.5%, brokering a mortgage for 7% and pocketingthe difference.
Borrower
Borrower receives better interest on his loan, I still make a profit, no need to
sell any product to Entrepreneur…but returns are smaller,
potentially less lucrative for investors.My
Company
OR…