KAL_II Loan Servicing Valuation Manual


Chapter 4 Loan Portfolios

INTRODUCTION

1. Loan Portfolio Segmentation

2. Loan Statuses

3. Portfolio Segment Data

4. Consolidation of Portfolio Segments

CASHIERING PATTERNS

Premium Penetration

This table will appear after you enter the data in the extra income section. Use {Page Down} key if the tables do not appear.

This is the percentage of the portfolio that will generate insurance premium income. In the following example only 10% of the loans will pay premiums the first year (12 months). Due to an anticipated marketing program the penetration is expected to move to 20% the second Year and finally to 25% in the fourth through the 30th year.

Ancillary Income Growth Screen {S4162}

          
          GNMAEX     GNMA I Example
               Loan Portfolios
               Change Data

               Ancillary Income Growth
               Thru       Annual
               Month      Rate
                360       0.04000

Ancillary Income Growth Rate

This table will determine how the ancillary income premiums will grow over time. If you do not want the premiums to grow according to the general inflation rate then use this table to set up the expected growth rate of the premiums.

Premium Growth Table {S4163}

          
          GNMAEX     GNMA I Example
               Loan Portfolios
               Change Data

               Premium Growth
               Thru       Annual
               Month      Rate
                360       0.05000

Premium Growth Rate

This table describes how the dollar amount of the monthly premiums from the optional insurance program will grow over the life of the loan. It is possible to have this growth tied to the general inflation rate.

FORECLOSURE RECOVERY

The program uses several different methods to represent foreclosure costs. The first is to simply record all costs and losses as a single number; hard costs. If the hard cost is the amount of the actual foreclosure loss then no hard cost would be recovered.

Next, it is possible to estimate the P&I and T&I advance that is not recovered when the loan is foreclosed. This requires a greater understanding of the foreclosure costs. The interest payments lost and principal balance lost fields can be used together with, or instead of, the P&I and T&I advance fields. Define whichever scenario that has the most meaning to your particular situation.

The Model supplies different methods to analyze foreclosure costs because these costs are large and they often have a serious effect on the portfolio valuation. Use the Model to measure the effects of different foreclosure agreements you might use in the sale or purchase of loan servicing.

Foreclosure Recovery Screen S417

          
          GNMAEX     GNMA I Example
                    Loan Portfolios
                    Change Data

                    Foreclosure Factors

          Hard Out-of-Pocket Cost    :        350
     
          Hard Costs Recovered       :   0.650000
          Service Fees Recovered     :   0.000000
          P&I Advances Recovered     :   0.900000
          Tax & Ins Advances Recov   :   0.900000

          Interest Payments Lost     :          2
          Principal Balance Lost     :   0.010000

Hard Out-of-Pocket Cost

This is the real dollar amount paid to people and companies outside the firm to foreclose a loan. This would include legal fees, interest lost, REO costs incurred, property management not recovered, etc.

Hard Costs Recovered

This is the fraction of the hard dollar amount which you will get back after foreclosure. Enter it as a decimal (e.g. 10% as .10)

Service Fees Recovered

Enter the fraction of the service fees which were not received when the loan was delinquent which you will get at the end of foreclosure. Enter it as a decimal (e.g. 10% as .10)

P&I Advances Recovered

Enter the fraction of the P&I which was advanced while the loan was delinquent which you will recover at the end of foreclosure. Enter it as a decimal (e.g. 10% as .10)

Tax & Insurance Advances Recovered

Enter the percentage of Tax and Insurance payments which were advanced while the loan was delinquent and which you expect to get back when the loan completes foreclosure. Enter it as a decimal (e.g. 10% as .10)

Interest Payments Lost

Enter the number of interest payments which are "lost" as a result of foreclosure. This is a function of government loan guarantee procedures. Enter "0" if no interest payments are lost.

Principal Balance Lost

Enter the fraction of the loan principal which will be taken as a loss at the end of foreclosure. This is a good place to show the effect of miscellaneous costs which do not really fit in other areas. Enter a fraction as a decimal (e.g. 1% as .01)

GROWTH AND OTHER TABLES

This is a summary of the many tables that used to calculate the different growth factors. They are entered in this section ad a convenience to the User. Each table can be found in the appropriate section of the model. The tables can also be examined in detail in the rates and factors section of the portfolio simulation section. These are tables that are used in the program to calculate growths rates and interest rates. They can be entered here or in the appropriate section.

Servicing Cost Growth Table

This is the only place that the Servicing Cost table can be entered. Check the factors and rates section to be certain that the table has been entered as intended.

Growth And Other Tables Screen {S4180} 

          GNMAEX     GNMA I Example
               Loan Portfolios
               Change Data

               Growth & Other Tables

                    Ancillary Income
                    Debt Interest Rate
                    Extra Premium Growth
                    Insurance Impound Growth
                    Premium Penetration
           -->>     Servicing Cost Growth
                    Tax Impound Growth

Servicing Cost Inflation Screen {S41-111} 

          GNMAEX     GNMA I Example
               Loan Portfolios
               Change Data

               Growth Service Costs
               Thru       Annual
               Month      Rate
                360      0.050000

Service Cost Inflation Rate

Enter the month and the annual percentage growth that is expected in servicing costs. The rate you enter is actually applied on a monthly basis at 1/12 of the annual rate. In this example the servicing costs would grow at .417% per month (5% / 12 months)

IMPOUND INFORMATION

Change Data Screen{S4190} 

                  Impounds 
          GNMAEX     GNMA I Example
               Loan Portfolios

               Impound Inputs

      -->>     Balances and Indexes
               How Paid Out During Year
               Insurance Growth Rate (if not inflation)
               Property Tax Growth Rate (if not inflation)
               Rate Paid to Borrowers on Impounds

               Quit Menu

We have several objectives to accomplish in this section of the program:

1. Initial Impound Balances

We must determine what the initial impound balances should be. If you know the exact amount then the task is easy. Because of the annual remittance cycle for impounds it is usually difficult to find the average annual balance. The KAL_II program will assist you in determining what the annual balances should be under the simulated conditions.

It is important to consider the value of the impounds in the present value analysis. The KAL_II program deals with these impounds in a very detailed manner. We often need to make estimates of these balances when analyzing a portfolio for purchase. In this case it is best to take rates and averages based on your own experience with the different types of servicing under investigation.

2. Average Monthly Balances

We want to determine what the tax and insurance balances will be when we take the delinquency information into consideration. Most programs will not allow any variation in the impound accounts as a result of changes in the delinquency ratios. If the delinquent ratios rise by 2% impounds in the accounts will drop.

It is always in the best interest of the firm to collect all the escrows that are due. An escrow analysis is usually performed on an annual basis to make certain that sufficient funds are being collected to pay the individual mortgagor's current tax and insurance bills.

3. Impound Growth Rates and Growth Period

In conjunction with our economic scenario we want to estimate how the impounds grow and do they grow on an annual basis or a monthly basis. The tax impounds may not grow as quickly as the hazard insurance impounds. These rate scan be set to different growth rates.

4. Impound Remittance Schedules

The remittance schedule for each type of impound account need to be determined. We use three separate schedules to remit the impounds:

a. Tax impounds are usually remitted once a year. IN the last several years it has become popular with different axing authorities to begin biannual or tri-annual remittances. Some counties will accept monthly remittances. By using different schedules you can determine the effects on earnings from these decisions by the taxing authorities.

b. Hazard insurance premiums are usually remitted on an annual basis. The remittance month coincides with when the home was purchased. It often happens that the heavy remittance months for hazard insurance occur in the summer months. If you track your escrow accounts on a monthly basis you will have enough information to determine what percent of the insurance is remitted in what period.

c Impound interest will be paid according to the remittance schedule you define in this section.

d Special insurance premiums are remitted on a regular monthly basis as they are collected.

5. Interest Paid on Impounds

Every state has different regulations concerning interest payments to the mortgagor on the impounds accounts. You can set the impound interest paid in several ways. If you expect to pay interest on all impounds all the time then set the rate in the Firm section of the program. If you are going to pay interest only in certain states then set the interest rate in the portfolio section.

Balances And Indexes Screen {S4191} 

               Cashiering Patterns
          Standard     Model Comparison
               Loan Portfolios
               Change Data

               Impound Information
 
  Monthly Property Tax :     50.00  (Average Per Loan           )
  Key to Growth Rate   :         2  (1=Inflation, 2=Growth Table)
  How Tax Impound Grows:         2  (1=Monthly,   2=Annually    )

  Monthly Insurance Pmt:     30.00  (Average Per Loan           )
  Key to Growth Rate   :         2  (1=Inflation, 2=Growth Table)
  How Ins Impound Grows:         1  (1=Monthly,   2=Annually    )

  Initial Impound Balance:       1     (1=Calculate, 2=Input)

  Extra Months Tax   :            2
  Extra Months Ins   :            2
  Distribute Total Impound :        Y      (Y=Yes, N=No)
 
  If Yes, Actual Impound Balance  4,800,000

Monthly Property Tax Payment

This is the average monthly tax payment that is deposited into the escrow account. This money is available to be used to offset or draw interest.

Key to Growth Rate

Either the inflation table or a specific can be used to determine the growth rate in the tax impound account. This assume that property taxes will grow over the next years.

(1) Inflation Rate - Enter "1" to use the inflation rate table.

(2) Specific Table - Enter "2" to use the separate property tax growth table.

How Tax Impound Grows

The impounds can be set up to grow on a monthly or on an annual basis.

(1) Monthly - Enter 1 "1" to have the tax impounds grow on a monthly basis using the annual rate table.

(2) Annual - Enter a "2" to have the tax impounds grow on an annual basis.

Monthly Insurance Payment

This is the average monthly hazard insurance payment in dollars per loan.

Key to Insurance Growth Rate

Either the inflation table or a specific growth table can be used to determine the growth in the insurance impounds.

(1) Inflation Rate - Enter "1" to use the inflation rate table.

(2) Specific Growth Table - Enter "2" to use the separate Hazard insurance growth rate table.

How Insurance Impound Grows

The Impounds can be set up to grow monthly or annually:

(1) Monthly - Enter "1" to have the insurance impounds grow on a monthly basis using the annual rate table.

(2) Annual - Enter a "2" to have the insurance impounds grow on an annual basis.

Initial Impound Balance (1 Calculate, 2 Actual)

Calculate (1)

The program will calculate what the initial balance in the impound account should be based on the impound payment table and the average payment size.

Extra Months Tax

This is the number of extra months of property tax that are collected in the monthly payments.

Extra Months Insurance

This is the number of extra months of Hazard insurance that is collected during the year.

Distribute Total Impound (Yes, No)

Distribute Impound Balance (Yes)

This is the combined initial impound balance. The program will distribute this amount between the tax and hazard insurance accounts based on the monthly payments and extra months of impounds held.

Distribute Impound Balance (No)

The program will calculate what the initial impound balances should be for both the tax and insurance impound accounts.

Actual Impound Balance

If you know the beginning impound balances, enter them directly in this section. Enter the tax and insurance impounds separately. The previous amount entered for impound balances was for the combined total of both accounts.

Property Tax

This is the actual tax impound balance in the bank account.

Insurance

This is the actual hazard insurance impound balance in the bank account.

Impound Payment Schedule Screen {S4192}

                       Impound Payments
   Number of Required Payments to be Paid Out in Each Future Month
 
   Property Tax Acct   Insurance Acct    Impound Interest
   Month  Payments     Month  Payments   Month  Payments
     1 -     0           1 -     1         1 -     0
     2 -     0           2 -     0         2 -     0
     3 -     0           3 -     1         3 -     0
     4 -     6           4 -     0         4 -     0
     5 -     0           5 -     0         5 -     0
     6 -     0           6 -     0         6 -     0
     7 -     0           7 -     8         7 -     0
     8 -     0           8 -     1         8 -     0
     9 -     0           9 -     1         9 -     0
    10 -     0          10 -     0        10 -     0
    11 -     6          11 -     0        11 -     0
    12 -     0          12 -     0        12 -    12

Property Tax Remittance

This is the number of remittance payments that will be paid in each future month. There is a maximum of twelve (12) months to assign in the tables. This represents 100% of the payments received during the year.

1. For equal payments during the year, enter 1 in each month.

2. For semi-annual payments, enter 6 in two of the future months.

3. For annual payments, enter 12 in only one future month.

Hazard Insurance Remittance

This is the number of insurance payments (1-12) that will be made in the months following the start of the portfolio. The months do not represent January through December. The months represent the months from the start of the portfolio.

Impound Interest Remittance

This is the number of interest on impounds payments that must be paid to the mortgagors. Enter the pattern that will repeat in the future. The example assumes that all interest on impounds will be paid 12 months after the start of the portfolio.

Insurance Growth Rate Screen {S4193} 

          GNMAEX     GNMA I Example
               Loan Portfolios
               Change Data

               Insurance Impound Inflation
               Thru         Annual
               Month        Rate
                360        0.060000

Insurance Impound Inflation

Enter the month and the insurance impound growth rate in the table. Up to ten sets of values can be entered. The program will interpolate within each adjustment period.

Property Tax Growth Rate Screen {S4194} 

          GNMAEX     GNMA I Example
                    Loan Portfolios
                    Change Data

               Property Tax Inflation
               Thru       Annual
               Month      Rate
                360      0.020000

Tax Impound Inflation

Enter the month and the property tax impound growth rate in the table. Up to ten sets of values can be entered. The program will interpolate within each adjustment period.

Pay On Impounds Table Screen {S4195} 

          GNMAEX     GNMA I Example
               Loan Portfolios
               Change Data

                 Pay on Impounds
     Key to Rate Paid on Impounds: 1  (0=Firm,1=actual,2=spread)

               Thru       Annual
               Month      Rate
                360      0.000000

Key to Impound Rate

Every state has its own laws regarding the payment of interest on impounds. We have allowed the user a wide range of choices in this area. If you desire to pay interest on all impounds then select "0" in the key field. All portfolios that being are analyzed using the current firm file can be set to pay different rates for the interest on impounds. It is more likely that only certain segments of the portfolio will be required to pay interest on impounds. In this case you would select "1" or "2" depending on whether you want to use the spread feature or wish to enter the paying rate directly.

(0) Firm Rate - If the firm rate is chosen then all portfolios analyzed with the active firm data file will pay interest on impounds. If only some of the portfolios will pay on impounds then select 1 or 2 for this field. Then, only those portfolios will pay interest.

(1) Actual - This will cause the program to pay interest according to the actual rate entered in the pay on impounds table found in chapter 3.

(2) Spread - This will cause the interest rate on impounds to be a spread from the market index. The spread can be either positive or negative.

LATE FEES

Late Fees are usually received from two sources:

a. Loans which have not made their payment by the Late Fee Trigger Date.

b. Loans which are more than 30 days delinquent.

The KAL_II Model allows late fees to be collected on loans that have not made their payment by the late fee trigger date. Other models only allow collection of late fees on loans that have been delinquent thirty days or more.

Late fees are an important source of ancillary income. The determination of the late fees can be a critical issue. Many models actually show an increase in value when the delinquency ratios rise. This occurs for several reasons. First, no allowance is made for the increase in servicing cost as a result of the delinquencies. Next, other models collect late fees on all loans including those in foreclosure. Finally, other models make no allowance is made for the timing of the receipt of the late fees.

Late Fees Screen {S41-10} 

          GNMAEX     GNMA I Example
               Loan Portfolios
                    Change Data

                    Late Fees

          Late Fees Triggered-------------------
               On Any Payment Received After:  16  (Day of Month)

               Late Fee on P&I              :  0.040000
               Late Fee on T&I              :  0.000000
 
          Fraction Late Fees Collected :    0.650000

          For Previously Good Loans Only--------
               Late Notice Triggered  :   17  (Day of Month)
               Cost of Late Notice    : 10.00

Late Fee Trigger Date

This is the day of the month that the late fees are triggered. The late Fees are due and payable after this date.

Late Fee on P&I

This is the late Fee that is due on the Principle and interest payment. It is expressed as a percent and is entered as a decimal between 0.0 and 1.0.

Late Fee on Tax & Insurance

This is the late Fee expressed as a percent that is due on the tax and insurance impound portion of the monthly loan payment.

Fraction Late Fees Collected

This is the percentage of the late Fees that are collected. It is represented as a percentage of the total late fees charged. It is entered as a decimal between 0.0 and 1.0.

For Previously Good Loans Only

The following information applies only to loans that were current and have now become one month delinquent. Payments that come in AFTER the trigger day incur the late fee or the cost of the late notice.

Late Notice Triggered

This is the day the late notice is sent. The date is used to determine the additional cost of loans not paying before this date. Payments which come in after this date trigger the late notice.

Cost of Late Notice

This is the cost of the late notice in dollars per late notice. It may also include the first month's collection costs.

MISCELLANEOUS

The miscellaneous section covers three areas:

. Purchase Price - In order to determine the present value of the portfolio you must decide what price you are willing to pay for the portfolio. If the price you enter is less than the break-even price you will have a positive net present value. If the price paid is greater than the break-even the net present value will be negative.

. Conversion Costs - This topic is discussed in detail in the firm section under conversion costs.

. Growth in Servicing Costs - The table for the servicing cot inflation is found under growth and other tables.

Miscellaneous Screen {S41-110}

          
          GNMAEX     GNMA I Example
                    Loan Portfolios
                         Change Data

                         Miscellaneous

   Key to Purchase Price        :        1  (1=Pct,2=Dollars)
   Price as Fraction of Balance : 0.020000  (Enter 1% as .01 )
   Price in Dollars             :     0.00

   Key to Conversion Costs      :        1  (1=Per Loan,2=Total)
   Conversion Cost Amount       :    20.00

   Key to Growth Service Costs  :        1  (1=Inf, 2=Table)

Key to Purchase Price

(1) Percentage - Enter a "1" if the Purchase Price is entered as a Percentage of the loan Balances.

(2) Dollars - Enter a "2" if the Purchase Price is entered as a total amount in dollars.

Price as Fraction of Balance

The price is expressed as a fraction of the total portfolio loan balance. If the portfolio price was 2.0% of the principal balance the number entered would be 0.20000.

Price in Dollars

The price is expressed as a total dollar amount.

Key to Conversion Costs

There are two methods available to express conversion costs:

(1) Per Loan - Enter a "1" if the conversion costs are expressed in a per loan basis.

(2) Total Amount - Enter a "2" if the following conversion costs are expressed as a Total amount for the conversion.

Conversion Cost Amount

This is either a per loan amount or a total Dollar amount depending on what was entered in Key to conversion costs field.

Key to Growth in Service Costs

The servicing cost growth table is entered in the growth table section.

(1) Spread - Enter "1" if the growth in servicing costs is tied to the inflation table.

(2) Specific Table - Enter a "2" if the separate servicing cost growth table is used.

PAYOFFS

The KAL_II program uses four methods to determine the prepay rate of a portfolio segment:

1. Experience Based Forecast
2. F.H.A. Multiplier (FHA)
3. Constant Payoff Ratio (CPR)
4. Public Services Administration (PSA)

We understand there is some uncertainty in using any one particular method. The effects on present value can be substantial if different methods are used. In years prior to 1984 it was not unusual to experience Runoff's in the range of 4%-6% per year. In recent years, runoff rates of 15%-20% have been common. What is the correct rate to use? It is really a function of the loans that you are originating or purchasing. Obviously, loans with higher interest rates will have higher prepayment rates. As current rates rise to meet the higher mortgage rates the runoff of those loans may slow down.

Rather than attempt to exactly predict runoff it is better to look at several different scenarios. What we really are trying to do is to estimate Risk. The easiest method to use is the Experience-Based Forecast. You can enter exactly what you feel is a reasonable estimate of Runoff. In addition, you can use this method to enter the actual runoff for the year and approximate the change in value of your segments or of your total portfolio.

Another factor to consider is that different types of loans may experience different runoff rates. ARM loans may not payoff as quickly as the fixed rate loans. If any loans have high prepayment penalties this may also slow down the runoff.

In order to determine how the program has calculated the runoff, examine the backup screens in Chapter 7. This will give you the payoff probabilities for each month of the loan life.

Differential Interest

There are two fields labeled "Interest Due on Payoffs". One field is the interest due from the mortgagor. The second field is the interest that is paid to the investor. Interest differential is the difference in interest received from payoffs and the interest remitted on the payoffs. It is very possible that the interest collected does not equal the interest remitted. If this occurs there may be an additional payoff cost.

It is also possible there could be a gain from this differential. If you find there is a negative cost in the payoff cost field, check the two interest owed fields and make certain you have set the fields correctly.

Transition Table Probabilities

The probability of payoff you enter in the transition table will not be reflected in the payoff table given in Section 7. Only the prepayment pattern selected in this section is shown in that table.

Prepayment Penalties

If you service loans that require prepayment penalties, show these costs as a reduction in the payoff cost.

Payoffs Screen {S41-120} 

          GNMAEX     GNMA I Example
               Loan Portfolios
                    Change Data

                    Payoffs
          General Factors---
       ->>     Cost to Process Payoff     50.00
               Interest Owed on Payoff        2
          
          Forecasting Parameters---
               1. Estimates of Remaining Loans
               2. F.H.A. Experience     
               3. Constant Percentage
               4. P.S.A.
          
          Choice of Method---
               Select Method                 1
          
               Quit this menu

Cost to Process Payoff

This is the total dollar cost to process a single payoff. It may vary with different firms. The amount should include the full cost, including facilities and data processing expense, of the payoff for a single loan.

Days Interest Owed on Payoff

This is the interest that the mortgagor owes the mortgagee. If there is a difference between what is received by the mortgagee and what is paid to the investor then the difference is shown in the payoff costs and can be seen in Chapter 8 as differential interest.

(0) No Interest - No interest is owed by the mortgagor when the loan is paid off.

(1) Actual Days - Enter a "1" if the interest owed by the mortgagor is the actual days until payoff (VA loans).

(2) Full Month - Enter a "2" if a full month's interest is owed by the mortgagor (FHA loans).

Forecasting Parameters - Payoff Method

Experienced Based Probabilities Screen {S41-123} 

          GNMAEX     GNMA I Example
               Loan Portfolios
                    Change Data

          Experienced Based Probabilities
               Thru       Annual
               Month      Rate
                 12      0.920000
                 60      0.750000
                120      0.500000
                360      0.200000

Experienced Based Forecast

This is an estimate of what percent of the remaining loan balances will be after each period expires. It is an estimate you make of what the runoff is expected to be for the entire life of the loan. Base the estimate on the loan interest rate, loan type, loan age, location, etc. When using this method you have the advantage of specifying exactly what you want to happen. In our example, 92% of the loans payoff in the first year, 75% have paid off by the fifth year, 50% payoff by the tenth year and 20% payoff in the last year.

FHA Experience Multiplier

This method uses the available F.H.A. tables to calculate the payoff probability. The tables are updated on an annual basis. The FHA multiplier tells the program the factor by which to multiply the standard F.H.A. prepayment rate.

Constant Percentage Probability Screen {S41-125}

          
          GNMAEX     GNMA I Example
               Loan Portfolios
                    Change Data

          Constant Percentage Probability
               Thru       Annual
               Month      Rate
                  0      0.000000
                360      0.200000

Constant Payoff Function (CPR)

This is the actual rate at which the loans will run-off. Enter the period through which the rate stays constant. The loans paying off will be determined by multiplying the portfolio balance by the CPR.

P.S.A. Payoff Factor

Public Services Administration - If the P.S.A. method is used then this is the multiplier that will be applied to the standard annual PSA prepayment rate.

Enter Number of Selection

The program will use whichever method of the four available. Enter the number of the method you want to use.

REMITTANCE PROCESSING

One of the primary benefits of collecting funds from the mortgagors is the right to hold these funds for negotiated length of time. These funds are often used by mortgagees to offset fixed rate loans. The mortgagee is able to borrow from the bank at a rate that is substantially less then the current interest rate.

The KAL_II model provides a thorough examination of these funds. You can quickly and effectively determine how changes in the investor requirements will affect the different sources and uses of funds. In addition, the Model provides standard valuation variables, such as P&I constants and average P&I balances.

The following is a list of topics that are discussed in the manual. Not all these topics are presented in this section. Check the index to find the topic that you are interested in.

1. Principal & Interest Balances

Initial balance
P&I constant
Length of time that the balances are held
Remittance method
Remittance schedule
Average monthly balance

2. P&I Advance Account

Initial advance required
Monthly advance requirement
Recovery of the advances

3. Payoffs Funds

Length of time that payoff funds are held
Interest owed to the investor on payoffs
Remittance method
Remittance schedule

Remittance Method

We have provided for the most common types of remittance processing. The category "Other" can be used to create your own particular investor remittance pattern. In addition, it is possible to alter the first five patterns to your own particular needs. Each of the first five patterns have predefined variables to make it easier to do a quick analysis. It is interesting to change these patterns and examine how the changes affect the servicing valuation or the cash flows.

a - GNMA 1 GNMA I Type Servicing

b - GNMA 2 GNMA II Type Servicing

c - FNMA MBS Federal National Mortgage Association
Mortgage Backed Securities

d - FNMA AES Federal National Mortgage Association
AES Servicing

e - FHLMC PC Federal Home Loan Mortgage Corp
Participation Certificates

f - Other Investor Owned Servicing

New Clearing Patterns

We recognize that new remittance requirements may be established with each new security that is developed. There should be sufficient flexibility in the model to provide for any of these new changes.

P&I Advance Accounts

Each segment of a portfolio can be a different loan servicing type. When the segments are consolidated the program will analyze each segment separately and then combine the results. Segments that share P&I accounts can be defined in the group section. When segments share P&I accounts it is possible for an advance from one segment can be paid by the positive cash balance available in another segment. This is particularly helpful when evaluating GNMA loan servicing.

Remittance Clearing Pattern to Investors

This table defines how you expect the remittance checks to clear your bank account. The program will begin the pattern on the day of the month that you remit to the investors. In our GNMA I example that day is the 15th of the month. We allow no checks to clear the first day after remitting. On the second day (after remitting) 60% of the checks clear. By the 20th of the month 70% of the checks will clear. Remember that this is a cumulative percentage. All checks must clear by the end of the month. The program interpolates between each fraction. If you expect all funds to clear the same you remit day you put 100% on the 15th of the month.

This pattern is very important to the daily cash flow calculation. Most accounting departments have a good idea of what this pattern looks like. It is helpful to monitor your clearings on a monthly basis in order to determine any changes in that pattern. A late mailing to the investors will immediately show up in your remittance clearings.

The clearance pattern screen will not appear unless the remittances begin some time in the middle of the month. You set the table to begin the clearings after the day of the month that you remit.

Remittance Pattern Screen {S41-130}

          
          GNMAEX     GNMA I Example
               Loan Portfolios
                    Change Data

               Remittance Processing
               Key to Type of Servicing :  a
 
                    ( a. GNMA 1       )
                    ( b. GNMA 2       )
                    ( c. FNMA MBS     )
                    ( d. FNMA AES     )
                    ( e. FHLMC PC     )
                    ( f. Other        )

Key to Type of Servicing

This input field describes the remittance requirements for the investor who owns the loans that are being evaluated. The categories listed above can be altered to suit your particular requirements. They are offered only as a starting point for the simulation.

Once you change remittance types the changes you made to the prior remittance type will be lost. Keep a record of types that you define yourself. It is easy to forget exactly what you used for a definition. The program will print a copy of the data entered here as part of the reports for this section.

Remittance Processing Screen {S41-13F} 

          GNMAEX     GNMA I Example
               Loan Portfolios
                    Change Data

               Remittance Processing

     Description of Servicing Method:      GNMA I Example
 
     For Surviving Loans---------------
          Delay in Remitting Payments       :   0  (Months)
          Day of Month to Remit             :  15  (0 = Pass thru)
          Must Deposit All Funds            :   Y  (Y=Yes, N=No )
          Advance Required                  :   2  (0, 1=Int, 2=P&I )
          Maximum Period of Advances        : 360  (Months          )
          Remittance Clears Same Day        :   N  (Y=Yes, N=No     )
          Calculate Initial P&I Receivables :   Y  (Y=Yes, N=No     )
 
          For Loans Paying Off--------------
          Interest Owed on Payoffs          :   2  (0,1=Days,2=Full)
          Must Pass Payoffs As Received     :   N  (Y=Yes, N=No    )
          (if Yes, Days to Wait Until Pass)     0  (Days    )
          (if No, Delay in Passing Payoff)      1  (Months 1)

Description of Servicing Method

This refers to the type of loan servicing that is being evaluated. If you add your own input definitions, then "NAME" the servicing method for future reference.

Delay in Remitting Payments

This is the number of months that pass before remitting the funds to the investors.

Day of Month to Remit

This is the day of the month that the funds are remitted. If "0" is entered then the Remittance is considered as a "Pass-Through". The clearance pattern screen will begin check clearances as of the date that you enter here.

Must Deposit All Funds

This determines whether all funds must be deposited into the account.

(Y) Deposit - All funds are deposited into the bank accounts.

(N) No Deposit - Funds are not deposited into the bank accounts.

Advance Required

This field defines whether you must advance payments to the investor whether they are received or not.

(0) No Advance - If "0" is entered then no advances are required to this investor.

(1) Interest - Indicates that interest must be advanced on the remittance date to the investor.

(2) P&I - Indicates that interest and Principle must be advanced to the investor for all loans due for the prior month.

Maximum Period of Advances

This is the number of months that you are required to continue making the advances. If the loans are delinquent you must continue to advance through this month.

Remittance Clears Same Day

This tells the program whether the remittance to the investor clears the same day.

(Y) Same Day - Remittance clears the same day.

(N) Later Date - Remittance clears at a later date.

Calculate Initial P&I Receivables

This applies to a purchase where there is an initial principle and interest advance that needs to be determined.

(Y) Advance - The program will calculate the P&I advance based on the initial delinquency ratios.

(N) No Advance - Do not calculate an initial P&I advance.

Interest Owed on Payoffs

This is the interest owed by the mortgagee to the investor. If the mortgagee cannot collect a similar amount from the mortgagor then an interest differential will be included in the calculated payoff cost.

(0) None Owed - If "0" is entered then no interest is owed on payoffs.

(1) Days - Indicates that the interest calculate on a per diem is owed to the investor.

(2) Full Month - Indicates that the full months interest is owed regardless of the payoff date.

Must Pass Payoffs As Received

Indicates whether the payoff amount must be passed through as it is received. Either the payoff is held for a number of days or the payoff is held for a number of months.

Pass Payoffs - "Yes"

Enter the number of days that is allowed before the payoff funds must be sent to the investor.

Passing Payoff - "No"

Number of months you are allowed to wait until the funds are passed to the investor.

Clearance Investor Remittance Screen {S41-13G} 

     GNMAEX          GNMA I Example
                    Loan Portfolios
                    Change Data

          Clearance Pattern of Remittance to Investors
 
     Day     Fraction     Day     Fraction     Day     Fraction
                                               21
                                               22     0.8000
                                               23
                                               24     0.9000
                           15     0.0000       25
                           16     0.6000       26
                           17                  27
                           18                  28
                           19                  29
                           20     0.7000       30     1.0000
 
               Entry-->>____________<<

Investor Clearings

Indicate when during the month funds in this category are deposited in the bank by entering the fraction of the total amount that has been deposited by the end of the day. Enter only the days for which you have data. The program will interpolate between your entries. To blank out an entry, enter minus one (-1) Fractions must be increasing. Press {ESC} when finished

SERVICING FEES

Servicing Fees are usually charged in two different ways. First, there is the conventional fee that is expressed as a percentage of the loan balance. With this type of fee the annual servicing fee revenue will reduce in proportion to the loan balances. loan balances are reduced through normal amortization, payoffs and foreclosures. The second method charges a flat fee to the owner of the loan. As an example, this may be $75.00 per loan. Although the revenue received under this method may not be as high initially, the servicer usually does not have responsibility for additional charges such as foreclosure losses. In addition, as time passes the revenue per loan will stay constant. Under the first method the fees received for low balance loans may not totally offset the servicing costs.

Service Fees Screen {S41-14} 

GNMAEX       GNMA I Example
              Loan Portfolios
               Change Data

               Servicing Fees

          Type of Fees  : 1  (1=Pct of Balance, 2=Dollars/Loan)

               Thru       Annual
               Month      Rate
                360      0.004400

Type of Fees

Servicing fees can be expressed as either a percentage of the remaining loan balances or as a dollar per loan amount.

(1) Percent - Enter a "1" to show annual rate as a percentage (%) of the loan Portfolio balance.

(2) Dollar/Loan - Enter a "2" to show annual rate as a fixed dollar amount ($$$) per loan.

Servicing Fee

On each line, enter the month and the annual rate at which servicing fee is earned on the declining loan balance. Months must be increasing.

GNMA_I servicing has a standard servicing fee of 44 basis points.

TRANSITION AND COST

Transition Tables are used by the KAL_II Model to show how the portfolio changes over time in respect to:

1. Probability of delinquency patterns
2. Payoffs within each delinquency category
3. Costs to service good loans
4. Costs to service each delinquency category

A transition table is a SET of probabilities, payoff ratios and processing costs that remain constant over a period of time. This period can be any length from one month to 360 months. Transition tables are established at the your discretion. The transitions tables define the loan administration costs and, therefore, have a significant impact on the valuation of the portfolio. These tables are used to simulate expected market and operational conditions in sufficient detail to show the cost effects of changing operational conditions.

A maximum of ten transition tables can be defined for each loan portfolio segment. A complete set of probabilities and costs can be used for each of these transition tables.

There are many reasons why you would want to use several transition tables. You may feel that we are in a economic period that has an unusual amount of Foreclosures. At some point in the future, economic conditions will change and we will again experience lower foreclosure ratios.

Being that the cash flows are heaviest in the early years it might be important to determine delinquency pattern for the next ten years using one pattern for each year. The remaining years will use the last pattern entered. The program will always extrapolate the final patterns or rates entered to the end of the portfolio life.

DELINQUENCY PROBABILITIES

A transition table defines the probabilities that a loan will do one of the following at the end of each loan status:

a. move on to the next status,
b. become a current loan,
c. pay off.

The sum of these probabilities must always equal one. In this section of the program you define what will be the probability of each of these states occurring.

These probabilities can be determined in several ways. First , they can be calculated directly from the firm's monthly delinquency ratios provided by the delinquency reporting system. Second, we have provided tables that show certain delinquency patterns and the probabilities associated with each pattern. The tables use average delinquency ratios to give a starting point when determining the delinquency probabilities. Finally, there is a spreadsheet program that will calculate the probabilities for a specific delinquency pattern.

Delinquencies and Transition Probabilities

In our GNMA I Example file we have defined a 3.3% probability that a Good_Loan will become one month delinquent. Therefore, the number of thirty day delinquency loans will be:

9000 (Good_Loans) x 3.3% (Prob)  = 297.0 (Del_1_Mon Loans)

The new thirty day delinquent ratio will be approximately:

297.0 (Del_1_Mon) / 9980 (Remaining Loans) = 3% Delinquency

In this brief example we have not included the loans that have come current from each loan status category, the loans that have been foreclosed and the loans that have paid off. The example at the end of this section works through the first month of the portfolio life.

In the GNMA I example we have supplied with the KAL_II model we use three transition tables. The delinquency ratio patterns are as follows:

GNMA I Example - Transition Table Delinquencies 

Period        Month     30     60     90   +120    F/C   Total
Table One      1-24   3.00%  2.50%  2.00%  1.50%  1.00%  10.00%
Table Two     25-60   2.50%  2.00%  1.00%   .75%  1.00%   7.25%
Table Three  31-360   2.50%  1.50%  1.00%   .75%  1.00%   6.75%

There is an extended example at the end of this section of the manual.

PAYOFF PROBABILITY

It is possible to change the computed payoff probability and set the prepayment specifically for each delinquent category. This recognizes the fact that delinquent loans may prepay differently than current loans. 

          Probability of Paying Off

       From                         Probability of
       Status                         Paying Off

     Good Loan     -     Del 1  Mon          Computed
     Del 1 Mon     -     Del 2  Mon          Computed
     Del 2 Mon     -     Del 3  Mon          Computed
     Del 3 Mon     -     GT 90 Day             .200
     GT 90 Day     -     Foreclose             .200
     Foreclose     -     Off Books             .400

In this example we have allowed the program to determine what the probability of payoff is for the first three loan categories. We then entered a 20% payoff probability for DEL_3_MON and GT_90_DAY. The probability of payoff for FORECLOSE is set to be 40%.

COST TO PROCESS GOOD LOANS

An important function of the model is to allow an analysis of the servicing value based on different marginal servicing costs for each loan status category. The cost to process loans in each status directly effects the overall servicing costs and, therefore, the value of the portfolio. The operational servicing cost data should be sufficiently understood to be able to determine what is the marginal cost to process loans in each loan status category. The total servicing costs for each period are shown on the earnings screen in the portfolio section. By using this screen as a comparison to the firm's actual servicing cost input cost data used in the model can be verified to the actual servicing results. Keep in mind that there are nine possible transition tables. Each table can have a separate set of processing cost data. This allows the cost structure of the servicing operation to be varied many times over future years.

The marginal costs are adjusted by the inflation rate on servicing costs (see Miscellaneous Screen). The cost to process the Good_Loan status is given in annual amounts on a per loan basis. The other categories are given as the additional or marginal cost to process the loan status category on a monthly basis. Individual statuses can be selected using the arrow keys. Enter the value and press {Enter}.

Annual versus Monthly Costs

The program uses an ANNUAL cost per loan for the cost to service a Good Loan. This is the cost to service a loan before any Delinquency, payoff, or late notice cost is added. It is assumed that most users will have a good idea of their annual processing costs.

The program uses MONTHLY cost per loan for all other categories.

Today's Costs

All costs in these tables should be stated in today's dollars. The program will adjust for inflation according to the factors input in the relevant cost and inflation sections.

COSTS TO SERVICE DELINQUENT STATUS CATEGORIES

Developing the servicing cost for each status can be a time consuming process. It is often best to start with a few categories and learn to use them effectively. As the simulation is developed over time it may be helpful to expand the cost accounting System to track the desired categories and be able to generate the data for direct input to the program.

Marginal Servicing Costs

Costs to process a status are always given as the monthly marginal cost for the entire loan status time period.

Example - Loan Servicing Costs

     From               Cost to Process
     Status                in this Status

     Good Loan -          32.00     Annual
     Del 1 Mon -           4.00     Monthly
     Del 2 Mon -           6.00     Monthly
     Del 3 Mon -           8.00     Monthly
     GT 90 Day -          12.00     Monthly
     Foreclose -          15.00     Monthly

In this example the cost to process a GOOD_LOAN is $32.00 per year or $2.67 per month. The Additional cost to process a loan that is one month delinquent (DEL_1_MON) is $4.00 making the total cost for the month equal to

$2.67 Cost to process GOOD_LOAN ($32.00/12 months)
+4.00 Marginal Monthly cost to process DEL_1_MON status
---------
$6.67 Total Monthly Servicing costs

The Marginal cost to process a DEL_2_MON would then be $2.67 plus $6.00 or $8.67 per Month.

Finally, if a loan is in Foreclosure the total cost to process a Foreclosure is:

$ 2.67 GOOD_LOAN
+15.00 Marginal Cost to Process FORECLOSURE
------------
$17.67 Total Monthly Processing Cost

This is the cost to process Foreclosures, not the total Loss on the Foreclosed loan. Review the foreclosure section of the Manual for the inputs for loans in Foreclosure.

We have provided the user with this cost mechanism because we recognize the important effect that delinquent loans can have on the cost to service a loan. It is beneficial to the user to see how a better collection program can affect the cost to service the segment under consideration. A decrease in delinquency ratios should produce a significant decrease in servicing costs. This type of analysis is helpful in justifying the additional dollar outlays that often accompany increases in servicing productivity.

Transition Table Screen {41-15}

     
                        GNMAEX     GNMA I Example
                        Loan Portfolios
                        Change Data

          Transition Table:  1

     Which Applies from Month:  1 thru Month:  24
     From         Prob Move on      Prob Pay    Cost to Process When
     Status       To This Status    Fully         In This Status
     
     Good Loan - Del_1_Mon  0.0330  Computed     Good Loan    32.00  Annually
     Del_1_Mon - Del_2_Mon  0.8330  Computed     Del_1_Mon     4.00  Per Month
     Del_2_Mon - Del_3_Mon  0.8000  Computed     Del_2_Mon     6.00  Per Month
     Del_3_Mon - GT_90_Day  0.2500  Computed     Del_3_Mon     8.00  Per Month
     GT_90_Day - Foreclose  0.3330  Computed     GT_90_Day    12.00  Per Month
     Foreclose - Off Books  0.7500  Computed     Foreclose    15.00  Per Month

                    Entry--

Transition Table

Each transition table is given a number beginning with 1 (one).

Transition Table Thru Month

This is the beginning month and ending month which this transition table covers. In this example transition table #1 covers the period from 1 month to 24 months. If a second table is not entered the program will extend this table to the last month of the Simulation.

Probability of Move to This Status

In these fields you define the probability that the loan will go to the next status. These probabilities are used to determine what the delinquency pattern will be in any month during the life of the portfolio.

Probability of Paying Off

The payoff ratio is used to calculate the probability of the loan paying Off at the time the loan LEAVES the loan status category. There are nine possible transition tables so there can be ten sets of payoff probabilities.

If it is possible to determine the probability of payoff for each loan status then enter these payoff probabilities into the data fields. The program will then use these probabilities instead of those calculated using the prepayment method entered in the payoff section. If you are uncertain what the actual prepayment probabilities are, then use the computed feature.

COMPUTED PROBABILITY

The program will compute the probability of payoff for each status by entering "C" in the {Prob_ Pay_Fully] field. The data entered in the payoff Section is used to determine what the payoff probability will be (Experience, FHA, CPR or PSA).

Only one payoff method can be selected for each portfolio segment. The program uses the selected method for all transition tables in this portfolio segment analysis. If you chose a value other than "Computed" as the probability, the program will override the payoff method selected in Section 4.K.

Cost to Process in This Status

Enter the cost to service the loans in this portfolio segment. The Good_Loan cost is in annual dollars per loan and the delinquency costs are in additional (marginal) monthly costs per loan.

Example - Loan Status Probability

This example traces the loan status calculations for the first month delinquency. It is important to follow through a single month in order to determine how the probability ratios should be calculated. This example uses a different portfolio description in order to provide a simpler example.

    Loans    Loan Status Probability                Payoff Probability

     930     Good Loan -     Del 1 Mon     0.0500      1.0 %
      40     Del 1 Mon -     Del 2 Mon     0.2000     10.0 %
      20     Del 2 Mon -     Del 3 Mon     0.3000     20.0 %
      10     Del 3 Mon -     GT 90 Day     0.4000     30.0 %
       0     GT 90 Day -     Foreclose     0.5000     Computed
       0     Foreclose -     Off Books     0.7500     Computed



GOOD-LOAN     MONTH ONE
              BEGIN     DEL-1    PAYOFF     CURRENT     TOTAL
Probability              5%        1%          94%      100%
GOOD-LOAN      930      46.5       9.3        874.2     930

This means that there is a beginning balance of 930 loans in the GOOD-LOAN status category. Of this balance 46.5 loans move on to DEL-1-MON, 9.3 loans payoff and the remainder, 874.2, stay current in the GOOD-LOAN status. 

DEL-1-MON     MONTH ONE

              BEGIN     DEL-2     PAYOFF   CURRENT     TOTAL
Probability              20%      10%        70%        100%
DEL-1-MON       40        8       4          28         40

This means that eight loans go on to the DEL-2-MON status, 4 loans payoff and the remainder, 40, become current.

DEL-2-MON MONTH ONE 

              BEGIN     DEL-3     PAYOFF     CURRENT    TOTAL
Probability               30%      20%        50%        100%
DEL-2-MON       20        6        4          10          20

This means that six loans go on to the DEL-3-MON status, 4 loans payoff and the remainder, 10, become current.

DEL-3-MON MONTH ONE 

              BEGIN    GT-90      PAYOFF     CURRENT    TOTAL
Probability             40%        30%        30%       100%
DEL-3-MON       10      4           3          3         20

This means that four loans go on to the GT-90-DAY status, 3 loans payoff and the remainder, 3, become current.

We take the sum of the individual calculations as follows: 

            BEG   GOOD  1-MON  2-MON  3-MON  GT-90    OFF     END
GOOD-LOAN   930  874.2   46.5                         9.3    915.2
DEL-1-MON    40   28.0           8.0                  4.0     46.5
DEL-2-MON    20   10.0                  6.0           4.0      8.0
DEL-3-MON    10    3.0                         4.0    3.0      6.0
GT-90-DAY     0                                                4.0
OFF BOOKS                                                     20.3
Totals     1000  915.2   46.5    8.0    6.0    4.0   20.3   1000.0





After Month One there are :

            915.2     Loans in     Good_Loan status, 
             46.5     Loans in     Del_1_Mon, 
              8.0     Loans in     Del_2_Mon, 
              6.0     Loans in     Del_3_Mon, 
              4.0     Loans in     GT_90_Day, and 
             20.3     Loans        Paid-off. 

Since no loans completed the GT-90-DAY status there can be no loans in foreclosure.