the monetization & securitization of credit scores

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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 . Borrower. 650 FICO SCORE - PowerPoint PPT Presentation

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The Monetization & Securitization of Credit Scores

The Monetization & Securitization of Credit ScoresSchyller Hall

BORROWERSMALL BUSINESS OWNERPoor credit Wants lower rateGood credit Needs liquidityWants 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)BorrowerEntrepreneurWith Entrepreneur As Cosignatory:Borrower qualifies for: $100,000 Loan @ 7%

Borrower & EntrepreneurTogetherBorrower 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

BorrowerEntrepreneur@ 10%, 30-Year Loan, PMT= $877.57@ 8.5%, 30-Year Loan, PMT= $768.91Borrower saves $108.66 Per MonthWhat Borrower Would Have PaidWhat Borrower Actually PaysOver Life Of Loan:$39,117.60My CompanyMy Company nets $103.61 Per MonthLending @ 8.5%, receiving $768.91 Per MonthBorrowing @ 7.0%, paying $665.30 Per MonthPV of PMTs (discounted 5% for 30 years) :$8,630.29My CompanyMy Company gets a percentage of the spreadEntrepreneur gets a percentageOmitting the entrepreneur entirely, and offering the borrower a loan @ 7% with your own money.5Alternatively

EntrepreneurMy CompanyLending @ 8.5%, receiving $768.91 Per MonthNPV of PMTs$64.047.04 - $50,000 = $14.047.04 My CompanyMy Company gets a percentage of the spreadSell 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 spreadBorrowing @ 7.0%, paying

$665.30 Per MonthPV = $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 CompanyNPV of PMTs$64,047.04 - $50,000 = $14.047.04 $4,047.04 $10,000.00 EntrepreneurMy Companys monthly incoming cash flows of $768.91 are sold as an ABS for $64,047.04.My Companys monthly obligations of $665.30 are transferred another borrower who receives a sum of $50,000.Other OptionsThere 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 quicklyReceives fees from both parties in addition to the spreadEnters into CDS contract to hedge against defaultNet 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.

EntrepreneurMy CompanyReceives $10,000 My Companys 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 Conclusion

BorrowerHomeowner 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 ConsiderationsContingencies 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 dealsBorrowers who require/request more than one cosignatory (possible?)Many others that will doubtless merit further examinationAgain, this is a brief overview of the overall business process.

OR

EntrepreneurLending @ 8.5%, receiving $768.91 Per MonthNPV of PMTs$64.047.04 Entrepreneurs Cut X = $My Share My CompanySell 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.BorrowerBorrower receives better interest on his loan, I still make a profit, no need to sell any product to Entrepreneurbut returns are smaller, potentially less lucrative for investors.My CompanyOR