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Loans. Loans. G&K, Chps. 9 & 10 Economic Environment Commercial and Industrial Lending Real Estate and Consumer Lending. Economic Environment. Pattern of Interest Rates with unfolding Business Cycle.

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Presentation Transcript
loans2
Loans
  • G&K, Chps. 9 & 10
  • Economic Environment
  • Commercial and Industrial Lending
  • Real Estate and Consumer Lending
economic environment
Economic Environment
  • Pattern of Interest Rates with unfolding Business Cycle.
  • Predict Business Cycle (Trough, Growth, Boom, Peak, Slowdown, Recession, Trough……)  Pattern of Interest Rates
  • 1-period ahead relatively easy (Simulation)
  • Discussion here is expectation 2 + periods ahead…….
business cycle and interest rates
Business Cycle and Interest Rates
  • Trough: Low economic activity; low demand for funds, high demand for safe, liquid investments  Low relative rates, + curve
  • Growth to Peak: Increasing economic activity; high demand for funds, low demand for interest-rate investments  Higher relative rates, + to flattening curve
  • SlowdownTrough; Slowing economic activity, early high demand for funds gives rise to drop off  High rates drop, with inverted-curve returning to positive slope
commercial lending
Commercial Lending
  • Asymmetric Information (AI) gives:
    • Adverse Selection: The reason bad borrowers are coming to banks is they can’t get capital elsewhere, but AI makes it hard to separate from good borrowers
    • Moral Hazard: Given loan granted, higher-risk activities may be substituted to gain extra return that goes to owners, not loan….MONITOR!
the business dynamics of loans
The Business Dynamics of Loans
  • Trade-off between:
    • Interest and fees gained, and
    • Credit Risk of default and costs
  • Types:
    • Lines of Credit, Term Loans, Bridge Loans
  • Technology has buffered:
    • Securitization of loans: Mtgs, Cars, CCs
    • Credit Scoring and Credit Risk transfer
definition of collateral
Definition of Collateral
  • Reduces Risk, but Increases Monitoring
  • Characteristics of good collateral:
    • Durability is the ability of the asset to withstand wear. Durable versus nondurable collateral.
    • Identification due to physical uniqueness or serial numbers.
    • Marketability of the property if resold.
    • Stability of value over the period of the loan.
    • Standardization by government or industry guidelines in grading quality of assets.
types of collateral
Types of Collateral
  • A/R – Pledging or Factoring
  • Inventory
  • Securities
  • Property or Equipment
  • Loan Guarantees – US Gov’t, State
lending evaluation
Lending Evaluation
  • Six C’s:
    • Character (personal traits)
    • Capacity (cash flows)
    • Capital (net worth)
    • Collateral (pledged assets)
    • Conditions (economic conditions)
    • Compliance (Legal standing)
methods of pricing
Methods of Pricing
  • Markup – BPs over index (prime)
  • Cost of Funds – WACC + Profit Goal
  • Relationship – Not just loan, but fees made elsewhere as an offset
  • Match funding – BPs over match funds cost of money
  • Adjustable rate – not just market yields, but also risk changes
    • Requires extra monitoring and compliance review……
real estate
Real Estate
  • Residential, Commercial, Farm, Multi-family
  • Origination, Securitization and Servicing
  • Brokering, Securitization Resale and Real Estate Industry assistance
real estate loan characteristics
Real Estate Loan Characteristics
  • Downpayment: 5 , 10 , 20%
    • <20% usually requires Private Mortgage Insurance (PMI)
  • Loan then for (RE value-DownPymt)
  • Prepay makes std 30 year mortgage into an average 7-12 year loan.
  • Falling interest rates can make this average even shorter.
  • RE good loan as well collateralized
residential re loan terms
Residential RE Loan Terms
  • Guarantor:
    • FHA, VA (as little as 3% down!)
  • Rates:
    • Fixed, 30 vs. 15, ARMs
    • ARMs:
      • 3 and 1, 5 and 1, X and Y……
      • Index, Caps, Resets
  • Other Terms:
    • Buydowns, Assumables, Balloons, Points, Graduated Payments (GPMs), Growing Equity (GEMs), Shared Apprec
commercial real estate
Commercial Real Estate
  • Land, construction and real estate development, and commercial properties
  • Construction loans:
    • Disbursements over time as project completed
    • Usually of “Bridge” variety
    • Land serves as collateral for loans.
    • Pricing Prime Plus
    • Origination as high as 3 Points
consumer lending
Consumer Lending
  • Personal Loans
  • Small Dollar, usually no collateral
  • Open Lines (CC) or Closed (Auto/Boat)
  • Higher Risk  Higher Rate
  • Attempt to diversify geographically
consumer loan types
Consumer Loan Types
  • Auto/Boat/Other Asset – High Competition, Med Risk
    • Can be securitized with high volume
  • Credit Cards – High Competition, Hi Risk
    • 25-30 day int grace on purch, immed int on cash advance……FEES!
  • Lines of Credit – Low Competition, Med Risk
    • Revolving Lines with Check Writing
other consumer lending
Other Consumer Lending
  • Mobile Homes
  • Balloon Loans
  • Leasing – High Competition, Low Risk
    • Bank buys and “rents” to customer
    • Open-end: Customer must buy (sell) at end of lease, Pay diff to residual value
    • Closed-end: Bank takes asset back.
consumer loan characteristics
Consumer Loan Characteristics
  • Amortized Loan
    • Pymt = $Loan / PVA (rate, term)
  • Balloon/Disc’d Loan
    • Pymt = $Loan * FVF (rate, term)
    • Pymt due only at term
    • Disc’d Money Recv’d = Pymt * PVF
  • Annual Percentage Rate vs. Effective Annual Rate
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