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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 . Borrower. 650 FICO SCORE

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The Monetization & Securitization of Credit Scores

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  1. The Monetization & Securitization of Credit Scores Schyller Hall

  2. 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

  3. Borrower 650 FICO SCORE Qualifies for $100,000 Loan @ 10% With Entrepreneur As Cosignatory: Borrower qualifies for: $100,000 Loan @ 7% Entrepreneur 780 FICO SCORE Qualifies for $100,000 Loan @ 5% (If she so desired)

  4. Borrower & Entrepreneur Borrower Together Borrower Qualifies for $100,000 Loan @ 7% • Bank My Company Lends Borrower $100,000 @ 8.5% Bank Loans My Company $100,000 @ 7% My Company

  5. Savings And Payouts What Borrower Would Have Paid Borrower What Borrower Actually Pays @ 10%, 30-Year Loan, PMT= $877.57 @ 8.5%, 30-Year Loan, PMT= $768.91 Over Life Of Loan: Borrower saves$108.66Per Month $39,117.60 Lending @ 8.5%, receiving $768.91 Per Month My Company Borrowing @ 7.0%, paying $665.30 Per Month PV of PMTs (discounted 5% for 30 years) : $8,630.29 My Company nets $103.61 Per Month My Company gets a percentage of the spread Entrepreneur gets a percentage Entrepreneur My Company

  6. Alternatively… Sell the PV of This Stream of Cash Flows as some kind of ABS: My Company Lending @ 8.5%, receiving $768.91 Per Month FV = $276,807.60 PV (discounted 5% over 30 years) = $64,047.04 Borrowing @ 7.0%, paying $665.30 Per Month PV = $55,416.74 From 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. NPV of PMTs $64.047.04 - $50,000 = $14.047.04 My Company gets a percentage of the spread Entrepreneur gets a percentage of the spread Entrepreneur My Company

  7. From Previous Page… My Company $4,047.04 NPV of PMTs $64,047.04 - $50,000 = $14.047.04 Entrepreneur $10,000.00 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.

  8. 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.

  9. In Conclusion Borrower Entrepreneur My Company • 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. • 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. • 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)

  10. Additional Considerations Again, this is a brief overview of the overall business process. • 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

  11. OR… Sell the PV of This Stream of Cash Flows as some kind of ABS: Lending @ 8.5%, receiving $768.91 Per Month FV = $276,807.60 PV (discounted 5% over 30 years) = $64,047.04 NPV of PMTs $64.047.04 – Entrepreneur’s Cut “X” = $My Share Entrepreneur gets a percentage of the spread Entrepreneur My Company

  12. OR… Borrower 650 FICO SCORE Qualifies for $100,000 Loan @ 10% 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 Lends From Its Own Pocket $100,000 @ 8.5%, brokering a mortgage for 7% and pocketingthe difference.

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