Loan Servicing Valuation Model
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KAL_II - Introduction
The KAL_II Model is a new and different approach
to loan servicing valuation. Mr. Lyle Kalish developed the Model
as a result of needs that were not addressed by available valuation
software.
The Model represents a third generation of valuation
software. In the early days of servicing transfers, we used a
formula of paying three to five times the first year's service
fee. Many companies continue to use this method of pricing servicing
portfolios.
Second generation models use a simplified present
value analysis of the expected future cash flows. These models
are static in that there is a single forecast for a group of portfolios
starting from today. You cannot add or subtract future portfolios
to this forecast. The result of this analysis provides very little
information about the expected results of your operation over
the next five years. These models also assume that all receipts
and payments occur at the beginning or end of each month. This
method provides little information about the nature and characteristics
of daily receipts and remittances.
The KAL_II Model provides three distinct and unique
features:
The KAL_II Model is an accumulation of experiences
from years spent examining loan servicing portfolios. As a result
of these experiences we believe that:
SERVICING COST
The KAL_II Model uses a fnctional approach to develop
the servicing cost per loan. To find the servicing costs used
by the Model you first divide your servicing operation into functional
units. These units might include customer service, escrow, investor
reporting, collections, and payoffs. The number of loans processed
by each unit is used to determine a unit functional servicing
cost. You enter these unit costs into the model. The final servicing
cost per loan will then depend on the type of loan, the delinquency
ratios, the prepayment patterns, and the remittance schedule required
by the investor.
The KAL_II Model will tell you what it costs to service
a particular type of loan. Changes in segment characteristics
are automatically transformed into a new cost per loan serviced.
Each portfolio you analyze will have a different servicing cost.
You combine all your segments to give a consolidated servicing
cost which is unique for your portfolio. An advantage of this
approach is the ability to show the value of operational improvements
as an increase in the consolidated portfolio value.
The KAL_II Model also provides a method for evaluating
portfolio additions using fixed and marginal costs. You enter
the servicing operation's fixed costs in a separate section of
the Model and you enter the current marginal cost as the servicing
cost per loan. The Five Year Earnings Forecast shows the effects
of different marginal costing strategies. COLLECTIONS, DISBURSEMENTS AND REMITTANCES
The KAL_II Model provides a complete analysis of
the daily, monthly and annual cash flows associated with loan
servicing. The Model simulates the timing of the collections and
the estimated amounts of the collections. Tax and insurance payments
are remitted at different times of the year.
KAL_II uses a daily schedule of mortgagor receipts
and investor remittances to find the value of the P&I and
T&I account balances. The Model bases the present value analysis
of the cash flows on these daily remittances and receipts. This
method eliminates the need to determine monthly or annual estimates
of your average P&I and T&I accounts. The Model will forecast
what the advance balances, and average cash account balances should
be. FORECASTING AND PLANNING
Last, and most important, the KAL_II Model provides
you with a mechanism for quick and easy strategic forecasting.
This forecasting function uses the same information you enter
in the other sections of the Model. The result is a five year
financial forecast of earnings, cash flows, and portfolio balances.
This forecast includes your current and projected fixed costs,
portfolio additions and sales, debt service, and the amortization
of your current portfolio. Construct realistic situations which
you believe may occur in the next few years. The Model translates
situational goals and objectives into earnings forecasts and future
loan schedules.
KAL_II is unique in its ability to do three important
functions simultaneously: loan servicing valuation, operational
evaluation, and long range strategic planning. The Model provides
information about cash flow sensitivity that is impossible to
determine with any other cash flow model. Only our system provides
for the level of detail necessary to investigate critical decisions.
Besides the KAL_II Model, we have programs which
will help you in the development of your forecast and evaluations.
These programs provide you with the ability to examine your operation
in ways not possible with other software.
We want the opportunity to tell you more about our
Model and our servicing support programs. Let us show you exactly
what the KAL_II Model can do. You have our assurance that the
Model will help you make better decisions about your portfolio
and your operation. |