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Comparison to Other Models This article presents a complete example of a servicing valuation. A standard GNMA I portfolio is used as the basis of the example. We refer to other models and show the differences that may exist between our model and other servicing valuation models. This report shows the differences between the KAL_II Model and other servicing valuation models. The report also shows how to compare a portfolio valuation using the KAL_II Model and other servicing valuation models. The comparison is done for demonstration purposes only. Run your current model and compare the results to KAL_II Model results. Valuation results may not be the same because of the assumptions that different models use. As you go through this example you will see how the KAL_II model is better equipped to do a more comprehensive analysis. The KAL_II Model is well suited to purchase price valuation, cash flow analysis and loan servicing operational evaluation. he computer screens shown in this report were generated by the KAL_II Model. If you have a copy of the Model then run the printed reports when you are finished the analysis and make certain that all the variables are set correctly. The reports generated by the Model do not always print in the exact order as the computer screens. What we will do to make the comparison is to methodically "Turn Off" the valuation options in KAL_II that other models do not have. This allows a reasonably close comparison in value. At the completion of the analysis you will have eliminated many of the variables used in the KAL_II Model. The report shows that most valuation models do not allow for important cost and income factors which are critical to an accurate valuation of a purchase price. Principle Differences and Advantages of KAL_II The Model generates the Daily Cash Flows for every day of the loan life. The Model presents the following cash flows in a financial statement format: Regular Principal and Interest Receipts Foreclosure Receipts Payoff Amounts - P&I, Escrows, Advances, Late Fees Escrows Collected - Tax, Insurance, Premiums Investor Remittances Escrow Disbursements Foreclosure Losses We use different Delinquency Patterns to determine the cost per loan Servicing Costs per Loan used by the Model are: Regular Servicing Costs Delinquent Servicing Costs Thirty Day Collection Cost Payoff Cost Foreclosure Servicing Costs Foreclosure Losses Conversion Costs Servicing Revenues Servicing Fees Late Fees - includes current month late fees Ancillary Income that applies to all loans Special Insurance Solicitation Income P&I Balance Determination - KAL_II will calculate the daily P&I balances. The Model will calculate the initial P&I balances from delinquency and amortization data. Escrow Balance Determination - It is not necessary to estimate the initial escrow balances. The Model will determine the escrow balance during every month of the loan life while taking delinquencies, payoffs, remittances and foreclosures into consideration. Financing Analysis - KAL_II does a comprehensive analysis of the financing used to acquire servicing portfolios. ECONOMIC VARIABLES Economic Firm Screen S210 Standard Standard Model Comparison Economic Data Change Data Name of Econ File Inflation Forecast Market Index Quit Menu Our Model allows for the important rates and factors to be set independently or set as a spread from the economic factors. If set as a spread then a change in a single variable will change all dependent variables at the same time. We do not use the economic data files in this analysis. We set all Inflation and Interest factors as separate, independent variables. Economic Screen S211 Standard Model Comparison Economic Data Change Data Title: Standard Model Comparison Title - To complete an analysis, the Model requires an Economic, Firm, and Portfolio file. We labeled this file only for identification purposes. Economic Screen S212 Standard Standard Model Comparison Economic Data Change Data Inflation Rate Thru Annual Month Rate 360 0.000000 We do not use the General Inflation Factor. Economic Screen S213 Standard Standard Model Comparison Economic Data Change Data Interest Rate Forecast Thru annual Month Rate 360 .000000 We do not use the Market Index (Interest Rate Forecast) in this analysis. FIRM VARIABLES These are variables which are unique to an individual company. The variables do not usually change with different portfolios. The only exception is the interest paid on impounds. With the KAL_II Model you can set the impound payment rate for each portfolio or you can set it for the Firm. In our example we did not pay interest on the impound accounts. Each of the Firm rates has been set as an actual table rate. Set each rate separately as we come to it. This is an opportunity to view the models full capability. Although the KAL_II Model allows for a maximum of ten rate changes for each of the Inflation and Interest tables we will use only one rate for the entire analysis period. Firm Screen S310 Standard Standard Model Comparison Firm Data Change Data ->> Name of Firm File After Tax Discount Cost of Advances Equity Discount Fixed Costs, Interest, Amortization Impound Earnings Methods of Amortization Pay on Impounds Reinvestment Rate Tax Rate Use of Bank Balances Quit this menu This is the Main Screen for the Firm Data Section. The screen lists all the possible inputs for a single firm. It is possible to create and save different firm files. Use these different firm files to value the same portfolio. Firm Screen S311 Standard Standard Model Comparison Firm Data Change Data ->> Name of Firm File Quit this menu Title: Standard Model Comparison Title - The Model displays this name across the top of the computer screen. This helps to remember which portfolio or firm file you are using. Firm Screen S312 Standard Standard Model Comparison Firm Data Change Data After Tax Discount Thru Annual Month Rate 360 0.080000 After Tax Discount - Remember to use the after tax discount. If your other model does not allow for an after tax discount, then use the corporate tax rate to calculate the discount directly. Firm Screen S313 Standard Standard Model Comparison Firm Data Change Data Cost of Advances Key to Cost of Advances : 1 (1=actual,2=spread) Thru Annual Month Rate 360 0.100000 Cost of Advances - This is the rate paid on the advances that are made to the investors. Most models use this rate. Enter the same rate in each model. Firm Screen S314 Standard Standard Model Comparison Firm Data Change Data Equity Discount Thru Annual Month Rate 360 0.150000 Equity Discount - The equity discount determines the present value of the cash flows after debt service. If your other model does a post debt analysis, then use the same number on each model. Firm Screen S315 Standard Standard Model Comparison Firm Data Change Data Fixed Costs, Interest, Amortization Year Existing ---Existing Debt--- Existing Fixed Cost Principal Interest Amortization 1. 0 0 0 0 2. 0 0 0 0 3. 0 0 0 0 4. 0 0 0 0 5. 0 0 0 0 Fixed Costs, Interest and Amortization - With the KAL_II Model you can develop a Five Year Budget. In order to do this effectively you must add fixed costs to the analysis. These are costs associated with this particular portfolio or group of portfolios. Use this information to develop a consolidated financial plan. The plan may include all portfolios on the books and any additions or deletions that might occur over the next five years. Enter all zeros in this section. Firm Screen S316 Standard Standard Model Comparison Firm Data Change Data Key to Impound Earnings Rate : 1 (1=actual,2=spread) Impound Earnings Thru Annual Month Rate 360 0.080000 Impound Earnings - This is the interest rate that the escrow balances earn. Most models use this rate and it can be the same for both models. Firm Screen S317 Standard Standard Model Comparison Firm Data Change Data Methods of Amortization Fraction Purchase Price Expensed : 0.000000 Fraction Conversion Cost Expensed: 1.000000 Amortization of Purchase & Conversion: 1 (0 = None ) (1 = Straight Line ) (2 = F.A.S.B. Method ) (3 = Declining Balance) (4 = Sum-Years-Digits ) Years to Amortize Over 10 Fraction Expensed - In this example we amortized the purchase price. However, we expensed the conversion cost in the first year. Amortization Methods - It is best to use a straight line amortization method when comparing different models. There are many methods available and the models may treat the methods differently. The F.A.S.B. method of amortization would make the valuation results vary more than the other methods. Firm Screen S318 Standard Standard Model Comparison Firm Data Change Data Key Rate Paid on Impounds : 1 (1=actual,2=spread) Pay on Impounds Thru Annual Month Rate 360 0.000000 Pay on Impounds - This the annual interest paid to the mortgagors on their impound accounts. Both models should use the same interest rate. If your other model uses a spread from the earnings rate then enter that total rate into the KAL_II table in the relevant section. Firm Screen S319 Standard Standard Model Comparison Firm Data Change Data Reinvestment Rate Key to Reinvestment Rate : 1 (1=actual, 2=spread) Thru Annual Month Rate 360 0.080000 Reinvestment Rate - The Model uses the reinvestment rate to determine the modified internal rate of return. If your model does not calculate the modified internal rate of return then set the reinvestment rate equal to the discount rate. This will not affect the present value or break-even price in the pre-debt analysis. Firm Screen S31-10 Standard Standard Model Comparison Firm Data Change Data Tax Rate Thru Annual Month Rate 360 0.350000 10 Tax Rate - Every Model uses some form of tax rate. Use the same rate in both models. Screen S31-11 Standard Standard Model Comparison Firm Data Change Data Fraction of P&I Bank Balances Usable: 1.00000 Fraction of T&I Bank Balances Usable: 1.00000 Fraction of P&I/T&I Bank Balances Usable - Most models allow for only a fraction of the Bank Balances to be useable during the month. If the model that you are comparing to does not have this feature then set the Bank Balance field to 100%. LOAN PORTFOLIO VARIABLES Portfolio Screen - S410 Standard Model Comparison Loan Portfolios Change Data How Categories Defined * Amortization Factors Beginning Status * Cashiering Patterns * Debt Financing * Extra Income Sources ** Foreclosure ** Growth & Other Tables ** Impound Late Fee ** Miscellaneous Payoffs Remittance Process Service Fees Transition and Cost ** Quit Menu * - We do not use these data screens in the comparison. ** - These fields can be similar for most portfolios being evaluated by the same company. This is the KAL_II Loan Portfolio Data Screen. Each line on this screen represents a set of input factors that you enter as data to the KAL_II Model. It is not necessary to enter all the input factors. You can determine a value for the servicing from a minimum set of portfolio segment data. As you expand the valuation you will be able to determine a more accurate value for loan servicing. What we are going to do in this section of the report is to show how you can use the KAL_II Model to compare valuation results from other models. I have not chosen a specific model but have provided a set of guidelines to use when running comparisons. No two models will compare exactly. The reason for this is that each model uses a different set of assumptions. One model may discount annual cash flows while another may discount monthly cash flows. Each model uses different assumptions such as when the loans payoff during the discounting period. 1. HOW LOAN CATEGORIES ARE DEFINED The KAL_II Model breaks down the delinquencies into the actual categories used by the company doing the analysis or by the company selling the servicing. To simplify the comparison we have eliminated all but the two most commonly used categories, delinquent and foreclosure. The determination of the effects of different delinquency patterns is one of the key advantages of the KAL_II Model. In our Model, servicing costs are a function of the normal servicing costs and the delinquent servicing costs. Changing the delinquency pattern over future years will show you the financial effects on the portfolio value. Portfolio Screen - S411 Standard Standard Model Comparison Loan Portfolios Change Data Definition of Loan Status Categories Status Length in Months 0 Good Loan 1 1 Delinquen 1 2 Foreclose 1 3 Off Books 0 Good Loan - All portfolios must have "Good Loan" as the first category. This category is always one month long. Delinquent - We use a one month delinquency category in the comparison. The Model will only charge a single month's late fee for each delinquent loan. Other models use a field called "Average Months Delinquent" to calculate the late fee income. If we set the Delinquent period to "two", that will represent an average delinquency of two months. If the period is two months long then there will be two late fee charges for each delinquent loan. The additional financial data required to determine the late fees is presented later in this article. Other models will often price higher as you increase the delinquency ratios. There are several reasons this happens. First, no allowance is made for the late fees not collected when the loans foreclose. Second, no allowance is made for the higher servicing costs which results from the increased delinquencies. Finally, no allowance is made for the timing of the late fee collection. Foreclosure - Normally we would allow from six to nine months to foreclose a loan. By setting our foreclosure period to one month we can simulate how other models use the foreclosure information. In this comparison, the foreclosure ratio entered in the Transition and Cost Section will equal the percentage of loans that complete foreclosure each month. The initial foreclosure ratio is set to zero. We assume we are not buying the current foreclosures. Off Books - All Portfolio definitions must have Off Books as the last status. The Off Books status is always "0" months long. 2. PORTFOLIO AMORTIZATION INFORMATION This section contains amortization information for a specific portfolio segment. The portfolio segment we are comparing is representative of GNMA I loan servicing. Portfolio Screen S4120 Standard Standard Model Comparison Loan Portfolios Change Data Amortization Factors Title of Portfolio: Standard Model Comparison Number of Loans: 1000 How Enter Balance: 1 (1=Average, 2=Total) Loan Balance 50000 (Prior to This Month's Payment) Original Amort Pd: 360 (Months) Original Maturity: 360 (Months) Average Loan Age: 12 (Months = Maturity-Remaining Life) Portfolio Category: P (P=Purchase, E=Exist, N=New Prod) When Become Active: 0 (Number of months in future,0=Now) Type of Loans: 1 (1=Fixed, 2=GPM, 3=ARM) Fixed Interest Rate: .11 Annual Percent Every Model uses the information in this screen. The key input fields are: Number of Loans - Enter the beginning number of loans How Enter Balance - The balance can be enter either as a single total or as a total per loan. Portfolio Category and When Become Active - This variable will determine when to add the new loan servicing to the current portfolio. If you want to simulate your production, purchases, and sales over the next five years, this is the ideal tool. You can start a portfolio any time within the next five years. In this case we show the portfolio beginning on the first day of the analysis. Type of Loan - Enter "1" for a fixed rate loan type. The Model can also evaluate Adjustable Rate Mortgage loans and Graduated Payment Mortgage loans. 3. BEGINNING LOAN STATUS Screen S413 Standard Standard Model Comparison Loan Portfolios Change Data Beginning Loan Distribution Initial Loan Status Entered As -->> 1 Number of Loans: 1000.00 Status Percentage Good Loan 1.0000 Delinquen 0.0 Foreclose 0.0 Entry-->> << (Pct Left to Allocate 0.000000) Initial Loan Status - The KAL_II Model will accept the initial status in either delinquency loan counts or delinquency ratios. A "1" tells the program to expect delinquency ratios. Good Loan - This is the number or percentage of loans that are current an the end of each period. We begin with a portfolio that is 100% current. 4. CASHIERING PATTERNS To determine the daily cash flows you must tell the KAL_II model how you expect to receive the cash during the month. There are four patterns that are usually examined: 1. Mortgagor receipts from current loans 2. Mortgagor receipts from delinquent loans 3. P&I, late fees, service fees, etc. received from payoffs 4. Cash received from loans completing foreclosure The KAL_II Model uses this information to determine the current month's late charges and also the changes that will occur in the P&I and T&I accounts. All monies received from payoffs, foreclosures and loans coming current are posted on a daily basis to the relevant bank accounts. All investor and impound remittances are also shown on a daily basis. Portfolio Screen S4141 Standard Standard Model Comparison Loan Portfolios Change Data Cashiering Patterns Current Loans Delinquent Day Still Current Coming Good Payoffs Foreclosure 1 1.000000 1.000000 1.000000 1.000000 2 3 4 5 6 7 ... ... ... 27 28 29 30 1.000000 1.000000 1.000000 1.000000 Cashiering Patterns - We set the patterns to show all cash received on the first day of the month. This will duplicate the assumptions that most other models use. We will set the number of days to hold the P&I in a latter section of the model. In the KAL_II Model we present each of these screens separately. We have combined them for the purposes of presentation in this report. 5. DEBT FINANCING Many models perform some degree of debt financing analysis. The KAL_II Model does an after debt service analysis that includes the determination of the present value, internal rate of return and break-even price. We will not use these functions for purposes of the comparison. Turn these features off by entering zero in each data entry field. Portfolio Screen S4150 Standard Standard Model Comparison Loan Portfolios Change Data Debt Factors Fraction Financed with Debt : 0.0000 (0.0 to 1.0 Purchase Price) Key to Debt Interest Rate : 1 (1=actual,2=spread market) Months Between Principal Pmts: 1 Key to Repayment Method : 1 (1 = Use up available funds ) (2 = Equal Principal Payment) (3 = Equal to Amortization ) For Equal Payments: Number of Years of Payments : 1 Fraction Financed With Debt - This is the portion of the portfolio financed with debt. The debt interest rate table follows this screen. Key to Debt Interest Rate - The debt interest rate can be the market interest index or a specific debt interest rate. Key to Debt Repayment Method - There are three methods allowed for the debt repayment. Months Between Principal Payments - This determines how often the principal repayments occur. Number of Years of Payments - This applies if you use equal principal payments to retire the debt. Portfolio Screen S4151 Standard Standard Model Comparison Loan Portfolios Change Data Annual Debt Rate Thru Annual Month Rate 360 0.00000 6. EXTRA INCOME SOURCES Extra Income Screen S4160 Standard Standard Model Comparison Loan Portfolios Change Data Extra Income Sources Income that applies to all loans-------------------------- Extra Income : 12.00 ($/Loan/Year) Key to Growth : 2 (1=Inf, 2=Table) Customer Base Cross Selling (Servicing Premiums)---------- Monthly Premium : 0.00 (per Loan ) Commission : 0.000000 (Fraction of Premium) Key Premium Growth: 2 (1=Inf, 2=Table ) Current Balance : 0 (1) Income That Applies to All Loans - This is the amount per loan that is usually titled "Ancillary Income". We multiply this amount times all loans in the portfolio. Enter the dollars per loan that you expect to earn in ancillary income on all loans. If you are using the late fee data fields then do not include the amount of income you expect to earn from late fees in this section. (2) Servicing Premiums - This is also called insurance solicitation income or premium income. When you enter all zeros in these fields you effectively turn off this option. Portfolio Screen S4161 Standard Standard Model Comparison Loan Portfolios Change Data Premium Penetration Table Thru Annual Month Rate 360 0.00000 Portfolio Screen S4162 Standard Standard Model Comparison Loan Portfolios Change Data Ancillary Income Growth Thru Annual Month Rate 360 0.04000 Portfolio Screen S4163 Standard Standard Model Comparison Loan Portfolios Change Data Premium Growth Thru Annual Month Rate 360 0.00000 7. FORECLOSURE FACTORS Portfolio Screen S417 Standard Standard Model Comparison Loan Portfolios Change Data Foreclosure Factors Hard Out-of-Pocket Cost : 1500 Hard Costs Recovered : 0.000000 Service Fees Recovered : 0.000000 P&I Advances Recovered : 1.000000 Tax & Ins Advances Recov : 1.000000 Interest Payments Lost : 0 Principal Balance Lost : 0.000000 Hard Costs - These are losses associated with a foreclosed loan. In our comparison we will set this variable to be the total amount lost, from any source, due to foreclosure. This eliminates the need to determine what the other foreclosure losses might be. Service Fees - Our Model assumes that you do not recover service fees for foreclosures. In reality, foreclosures last longer than one month. This one month assumption means that most models will collect service fees on loans through the entire foreclosure process. As a results, only the last month services fees are lost. P&I, T&I Advances Recovered - In this comparison we assume that we recover all advances. The Hard Cost field includes the total amount lost. The hard cost field should also include any advances you do not expect to recover. Interest Payments Lost - We do not use this filed in our comparison. Principal Balance Lost - We do not use this field in our comparison. 8. GROWTH AND OTHER TABLES Screen S4180 Standard Standard Model Comparison 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 The only table in this section that is not found elsewhere is the Servicing Cost Growth Table. Use this section to examine or change the other tables. It is best to enter the table data in the order that the program follows. SERVICING COST INFLATION Portfolio Screen S41-111 Standard Standard Model Comparison Loan Portfolios Change Data Growth Service Costs Thru Annual Month Rate 360 0.040000 Service Cost Inflation - This is a standard feature on most models. Enter the annual inflation rate of the servicing costs. The rate will apply to all servicing costs including foreclosure costs, delinquency costs, payoff costs and collection costs. 9. TAX AND INSURANCE IMPOUNDS In KAL_II you enter the average monthly tax and insurance payment amount. You do not enter an estimate of the monthly balance of the impound accounts. To make comparisons with other models you must first estimate the monthly impound payments. The Model then simulates the monthly receipts and disbursements. You can determine these receipts and disbursements by using the backup screens in the portfolio section of the KAL_II Model. Impounds - Major Screen Portfolio Screen S4190 Standard Standard Model Comparison 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 These screens are available to enter impound information on a portfolio segment. We do not use all the screens in our comparison but it is still important to go through the process of setting values for each of the variables. This insures that the Model will not use incorrect data fields. Balances and Indexes - Minor Screen Portfolio Screen S4191 Standard 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: 2 (1=Monthly, 2=Annually ) Initial Impound Balance: 1 (1=Calculate, 2=Input) Extra Months Tax : 0 Extra Months Ins : 0 Distribute Total Impound : N (Y=Yes, N=No) If Yes, Actual Impound Balance 0 Monthly Property Tax - the average monthly amount paid by the mortgagor. It is an average of all loans in the portfolio segment being analyzed. You can obtain this information from an analysis of your portfolio data. If you only have a single impound amount to work with then use the tax field as the single impound account. We adjust the impound balances annually for inflation. Monthly Insurance Payment - This is the monthly hazard insurance payment collected from the mortgagor. Initial Impound Balance - The KAL_II Model will determine what the initial impounds should be if the information is not available. To do this, the Model uses the delinquency statuses, the extra months collected, and the impound remittance cycle. Enter a "1" in this field. Extra Months Tax/Insurance - These fields are set to zero. The fields are normally used to determine the initial impound balances. They are the number of additional months of impound payments held by the mortgagee. Two months is usually the maximum allowed. Distribute Total Impound - Enter a "N" in this field. The Model will calculate what the initial impound balances should be based on the delinquency ratios and the extra months of reserves required by the mortgagee. Actual Impound Balance - We do not use this field in the comparison. FIELDS USED BY OTHER MODELS Average Impounds per Loan - In order to compare with other models it is necessary to determine what amount to enter in the monthly payment field that will create the average escrow balance for the year. If we assume that we pay taxes once a year then the average balance would occur six months after the start of the portfolio. This balance would represent the average for a full year (the impound account contains 0 payments in January and at 12 payments in December). It is necessary divide by the number of loans in existence in the sixth month to see if you have determined the correct monthly payment. Impounds as a Percent of Principal Balance - Some models use a percentage of principal balance to determine the impounds. This represents a percentage of the principal balance at the end of the six months of payments. Determine the dollar amount of the impound balance and divide by the number of loans in existence in the sixth month. The result is the average monthly impound payment. How Paid Out During Year - Minor Screen Portfolio Screen S4192 Standard Standard Model Comparison Loan Portfolios Change Data 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 - 0 1 - 0 2 - 0 2 - 0 2 - 0 3 - 0 3 - 0 3 - 0 4 - 0 4 - 0 4 - 0 5 - 0 5 - 0 5 - 0 6 - 0 6 - 0 6 - 0 7 - 0 7 - 0 7 - 0 8 - 0 8 - 0 8 - 0 9 - 0 9 - 0 9 - 0 10 - 0 10 - 0 10 - 0 11 - 0 11 - 0 11 - 0 12 - 12 12 - 12 12 - 12 REMITTANCE PATTERNS FOR IMPOUNDS Impounds are paid monthly according to the tax payment dates or according to the insurance policy date. You can estimate the remittance schedules by monitoring the impound accounts on your servicing system. Since this feature is not available on most models we will make the basic assumption that we pay escrows once a year. We have already set the individual tax and insurance monthly payments to reflect an average balance for the year. Month - the month following the addition or starting of the portfolio. Property Tax to State - the number of months of tax or insurance payments you remit during a particular month. These fields are set up to remit twelve payments in the twelfth month following the start of the portfolio. Insurance Growth Rate - Minor Screen Portfolio Screen S4193 Standard Standard Model Comparison Loan Portfolios Change Data Insurance Impound Inflation Thru Annual Month Rate 360 0.040000 Insurance Impound Inflation - There are several alternatives to use for this field: 1. General inflation factor 2. Inflation on impounds 3. Specific insurance inflation factor Property Tax Growth Rate - Minor Screen Portfolio Screen S4194 Standard Standard Model Comparison Loan Portfolios Change Data Property Tax Inflation Thru Annual Month Rate 360 0.040000 Property Tax Inflation - If your other model allows for inflation of tax impounds then set this value to the same rate. Your model may have separate values for inflation on tax and hazard insurance. In this case, enter each inflation rate separately. Rate Paid to Borrowers on Impounds - Minor Screen Portfolio Screen S4195 Standard Standard Model Comparison Loan Portfolios Change Data Pay on Impounds Key to Rate Paid on Impounds : 1 (0=Use Firm Rate, 1=actual, 2=spread) Thru Annual Month Rate 360 0.000000 Pay on Impounds - Use this field if you pay interest on the impound accounts. For our example we set this field to zero. 10. LATE FEE COLLECTIONS The KAL_II Model collects late fees on loans that have not made their payment by the late fee trigger date. Other models only collect late fees on loans that have been delinquent thirty days or more. To compare with other models we must turn off the first month late fee field. We accomplished this when we assumed that all funds are received on the first day of the month. Many models show an increase in value when the delinquency ratios increase. 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 do not allow for late fees not collected due to foreclosure. Finally, no allowance is made in other models for the timing of the receipt of the late fees. (1) Late Fees Triggered - We assume you collect late fees on all loans that are not current as of the late fee trigger date. Other models will only collect late fees as of the first day of the first month of delinquency. (2) For Previously Good Loans - This cost recognizes the cost of sending the first month collection notice. It may also include the cost of first month collection expenses. Portfolio Screen S41-10 Standard Standard Model Comparison Loan Portfolios Change Data Late Fees Late Fees Triggered------------------- On Any Payment Received After: 15 (Day of Month) Late Fee on P&I : 0.040000 Late Fee on T&I : 0.000000 Fraction Late Fees Collected : 0.900000 For Previously Good Loans Only-------- Late Notice Triggered : 10 (Day of Month) Cost of Late Notice : 0.00 Late Fee Triggered - This is the day of the month that you would normally post the late charges to loans that have not made the current payment. We do not use this field since we assumed that all funds are received on the first day of the month. Late Fee T&I - Most models charge late fees based on the P&I constant of the loan being analyzed. It is also possible that loans pay late fees on the tax and insurance payment. For our comparison we have turned this feature off by setting the amount of penalty equal to zero. Fraction Fees Collected - This is a standard field used by most servicing models. Enter the value you would normally use. For Previously Good Loans - The fields in this section are normally used to determine the first month collection expense. We will not use these fields in the comparison. 11. MISCELLANEOUS Portfolio Screen S41-110 Standard Standard Model Comparison 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 : 0.00 Key to Growth Service Costs : 2 (1=Inf, 2=Table) (S41-111 Servicing Cost Growth Table is in Growth & Other Tables) Purchase Price - You can enter the purchase price as total dollars or as a percent of the principal balance. In our example we used a purchase price of 2% of the principal balance. This amount is amortized over the period defined in the firm data section. Amortization significantly affects the present value and the cash flows. It will not affect the break-even price. Conversion Costs - If the other model uses conversion costs then set both fields to the same amount. Growth in Servicing Costs - This is the specific inflation factor for the servicing costs. The servicing cost inflation factor is entered in the "Growth and Other Tables" section of the Model. 12. PAYOFF INFORMATION The KAL_II Model allows for the following payoff tables: Estimates of Remaining Loans - You enter exactly what you expect the runoff to be over the next thirty years. The actual remaining balance is set for each of ten periods. F.H.A. Experience - This is the F.H.A. experience table. You can set the runoff to a factor times 100% of F.H.A. Constant Percentage - CPR - The runoff is equal to this percentage times the remaining loan count. Public Services Administration - P.S.A. - This is a combination of two methods, F.H.A. and CPR. It is entered as a factor times 100% of PSA. Portfolio Screen S41-120 Standard Model Comparison Loan Portfolios Change Data Payoffs General Factors--- Cost to Process Payoff 0.00 Interest Owed on Payoff 2 Forecasting Parameters--- 1. Estimates of Remaining Loans 2. F.H.A. Experience 1.00 3. Constant Percentage 4. P.S.A. Choice of Method--- Select Method 2 Quit this menu Cost to Process - KAL_II uses many different servicing costs to determine the value of the portfolio. This information is also used to calculate the Five Year Budget and the Projected Income Statements. Very few models use any factor beyond a single cost per loan. We will set all other costs in this comparison to "$0.00" and use a single cost per loan. Days Interest Owed - The number of days that the mortgagor owes the mortgagee upon payoff. Set this factor to two. Make sure the interest owed on payoffs field (remittance table) agrees with this factor. Payoff Experience - We use FHA in this example because most models will allow this option. Select Method - You must select the method you are using. 13. REMITTANCE PROCESSING The KAL_II Model allows for a very detail description of the investor remittance schedule. The monthly remittance is broken down into two components: 1. Surviving Loans - The normal monthly remittance of interest and amortized principal. The only factor used on this screen will be Day of Month to Remit. The day you remit will determine how large the P&I balance will become before it is remitted to the investor. By altering this day you can change the average P&I balance for this portfolio. 2. Loans Paying Off - The principal balance from loans paying off is treated separately. When loans pay off the servicer holds the principal balance for a predetermined amount of time. Increased runoff will significantly increase the payoff amounts and, in turn, increase the earnings on P&I. We will set this factor to "5" as an estimate of what most other models would use. Remittance Pattern Screen Portfolio Screen S41-130 Standard Standard Model Comparison 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 ) Remittance Pattern Information Portfolio Screen S41-13f Standard Standard Model Comparison Loan Portfolios Change Data Remittance Processing Description of Servicing Method: GNMA I/Standard For Surviving Loans--------------- Delay in Remitting Payments : 0 (Months ) Day of Month to Remit : 15 (0 = Pass Through) 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 : Y (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 - KAL_II provides most standard investor remittances as part of the program. There is also a field for User Defined remittance patterns (Selection f). Use this field when defining the "Standard" remittance pattern. Delay in Remitting Payments - Enter "0". Day of Month to Remit - Entering 20 in this field will tell the Model that you expect to hold the P&I amounts for 20 days before sending the money to the investor. You can determine what the average P&I balance is dividing the Average Yearly P&I Balance (Portfolio Section of KAL_II) by the portfolio balance. Must Deposit - Enter "Y". Advance Required - This is the principal or interest advance that many investors require. GNMA I loan servicing requires that you advance both principal and interest.. The size of the advance is determined by the delinquency ratio and the average number of months that the loans are delinquent. KAL_II will automatically determine the required advance on a daily basis. Other programs hold this advance constant while the delinquency ratios vary. Maximum Period of Advance - Set this field to a maximum of 360 months. 14. SERVICE FEES Portfolio Screen S41-14 Standard Standard Model Comparison Loan Portfolios Change Data Servicing Fees Type of Fees : 1 (1=Pct of Balance, 2=Dollars/Loan) Thru Annual Month Rate 360 0.004400 Servicing Fees can be either in 1. basis points or 2. dollars per loan. The loans we are evaluating have a 44 basis point servicing fee. 15. TRANSITION TABLES KAL_II uses Transition Tables to show how the portfolio changes over time in relation 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 Portfolio Screen S41-15 Standard Standard Model Comparison Loan Portfolios Change Data Transition Table: 1 Which Applies from Month: 1 thru Month: 360 From Prob Move on Prob Pay Cost to Process When Status To This Status Fully In This Status Good Loan - Del 1 Mon 0.0300 Computed Good Loan 80.00 Annually Delinquen - Foreclose 0.0340 Computed Delinquen 0.00 Per Month Foreclose - Off Books 1.0000 Computed Foreclose 0.00 Per Month Transition Table - The KAL_II Model allows for nine separate transition tables. Each table can have a unique set of characteristics. We use a single table for the life of the loan in this comparison. From Status - This describes the different loan status categories that were set up in the "How Categories Defined Section". No input is necessary for these fields. Probable Move to This Status - We are using only one delinquency category and we are defining that category as one month long. The delinquency ratio will be equal to the probability or 3%. The foreclosure category is one month long and is equal to .03 times .034 or .1% a month. Prob Pay Fully - You can set this field to individual payoff ratios for each loan status category. By entering " Computed" you direct the Model to use the payoff experience that you entered earlier in the model. Cost to Process - We use a single cost of $80.00 per loan to define our servicing cost. This is an all inclusive number. We did not use any other costs in the analysis. This allows a direct comparison with other models' servicing cost number.