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Valuation Questions to Answer 1. Assumptions that the models make. Model Budgeting model and how to structure it. Model Transition Matrix (Discussion) 2. How does KAL_II compare to other models ANALYSIS Absolute 1. must determine what the actual costs, rates, etc. Relative Assume normal or optimal Costs Rates Etc. Look at same servicing as different types ARM VS Fixed Different Interest Rates ACQUISITIONS 1. Market Demand for Servicing - what are the demand factors? Interest Rate, Marketing Gains, New Production, Expansion Plans, Servicing Costs, Marginal Servicing Costs, Foreclosure Losses. 2. Building your portfolio in future years. Show what you want to accomplish and how the model will help determine quick estimates 3. Cost of the acquisition. How quickly do I recover my original investment?. When do I start to have a positive income? 4. How do different companies value the same Portfolio and arrive at a different price. 5. How much is my portfolio worth and what minimum price would I accept for it. 6. How small a portfolio is worth looking at and why. What is the Acquisition cost trade-off. Fixed/Variable costs Analysis. 7. Portfolio Growth over the next Three Years 8. Purchasing portfolios. How do different levels of delinquencies and foreclosures affect the price paid for a portfolio. 9. What type of costing should I use when bidding on portfolios? Should I include: Corporate Overhead, fixed costs? 10. What is my incremental cost to service a loan. How long can I use incremental costing to purchase portfolios? AMORTIZATION OF THE PURCHASE PRICE 1. What effect does different amortization levels have on price? 2. How do the different amortization methods compare[are? 3. What are the advantages and disadvantages of each? ANCILLARY INCOME We need to determine the Income per loan as well as the total ancillary income as a percent of Revenue BANK BALANCES Daily Bank Balances 1. How do I examine my daily bank balances? Monthly Bank Balances 1. What advances will I have to make this year and when? 2. How much do I really earn on these balances. 3. Why you would use more than one bank account for the GNMA T&I and P&I balances. 4. How do the prepayments affect my bank balances? 5. How much will increased delinquencies affect my bank balances 6. What should the P&I and T&I accounts be under ideal conditions? 7. What should the accounts be at time of acquisition? CASH FLOWS 1. Different cashiering patterns from different types of servicing: AES - clears every day no P&I advance MBS Regular PC's 2. Flows In Investment Capital Debt Contributed Capital 3. Flows Out Dividends Operating Losses REO Losses Tax Payments - Delayed CASHIERING 1. Lockbox considerations. How much could you save and how? 2. How will these change with increased collection efforts? COLLECTION 1. Should we increase or decrease our collection efforts? 2. How do we analyze our collection efforts. 3. What does collection effort do to reduce the probability of delinquency? i.e. Increase the effort and increase the cost. 4. Buying Delinquent Portfolios vs Current portfolios 5. How do collection patterns affect price? COST - PORTFOLIO SEGMENTS 1. Value of ARM/GPM Servicing. 2. What are the additional costs for the different investors? 3. What are the additional customer service costs for the different loan types? 4. How does my portfolio compare to the average. 5. As portfolios are added there is an increased Reporting requirement ARM Servicing 1. What does it cost to service adjustable rate loans? Do an analysis of 200 Loans (develop the servicing cost model) COST - CONVERSION 1. How are Conversion Costs handled? 2. Determination of Set-up costs and how they are calculated and amortized. 3. Look at the effects that set-up cost has on your portfolio purchases. 4. What are the First Year costs? COST - PER LOAN 1. The difference between Marginal Cost and Actual Cost to Service. 2. What should my servicing cost be for my portfolio? 3. What value do specific productivity improvements have? DEBT FINANCING 1. Determine Sources and Uses of Funds. 2. What methods are available for financing of the portfolio 3. Portfolio Refinancing. 4. Should I borrow or use the available funds in my accounts 5. What are the tax effects of financing portfolio purchases? Ways to finance portfolio purchases When we evaluate Servicing do we use the Pre-debt or After-Debt evaluation? DISCOUNT RATE 1. The Rate selected may vary according to the risk of the portfolio under analysis. ECONOMIC SCENARIOS 1. What will happen next year 2. Show the effects of different economic scenarios in interest rate. 3. What will happen if rates go back to 18%? What happens to the advance account when rates rise/fall? FIRM CHARACTERISTICS 1. Differences between S&L, Bank, Mortgage Company, Insurance Company, Other Corporation FINANCING GROWTH 1. What effect does debt financing have on the portfolio? FORECLOSURE 1. Cost, Length of time to F/c 2. Examine under what circumstance we should buy f/c loans out of the pools. 3. Investigate Foreclosures and how they can affect the value of servicing. Model at 9 months and 15 months. 4. Take VA no-bids into consideration by grouping the portfolios into regions. 5. If the loans on a new portfolio will be going to foreclosure quickly (within the first month) then -1 is the month before the model starts. GROUP SIMULATIONS 1. Show the effects of the different combinations of Advance accounts using different portfolios. 2. What is my optimum grouping for my portfolio? INTEREST RATE 1. Expected Interest Rate vs Future rate K = K* + IP + DP + LP + MP k* = Risk Free Rate on Short Term U.S. Securities Inflation Premium Default Premium Liquidity Premium Market Risk Premium INVESTMENT CRITERIA 1. Present Value - Dollars, Percent, Net present value. 2. Duration - Be able to calculate duration and use this for matching of different financing strategies. INVESTORS GNMA 1. What is the advance account using different Economic scenarios. 2. How will the use of multiple GNMA bank accounts affect my daily cash flows? 3. The required amount of funds are supposed to be in the account. What if you don't do this. What difference does it make if I borrow the money? What happens if I don't deposit the money in the account? Should we combine GNMA advance accounts. What is the difference? The difference is between what I must borrow at and what I can earn. GNMA II 1. These investors must receive payment on the 18th of the month. The money is removed from your bank account on the 18th. KAL_II DIFFERENCES 1. No service fees are collected on delinquent accounts. Cash is received only if the accounts are current or have come current during the month. 2. The Loan administration cost is broken down into the important components. The cost to service a good loans is establish and the cost to service each Loan State us then determined. 3. The model allows for intra monthly cash flows. This is a better assumption than assuming that all funds arrive at the beginning of the month. INCOME LOAN ADMINISTRATION 1. Discussion of Service fees when loans that are delinquent come current or payoff. 2. Insurance Solicitation - show cost vs value. Effects of Penetration. LOAN AMORTIZATION Loan Age Older - Lower marginal cost Lower delinquency ratios Lower servicing cost Lower f/c, and payoffs Loan Balance How does value vary with loan size? Loan Life What difference does age make in price? Loan Location Distribute into segments and consolidate. Loan Types Look at the changes in price for different TYPES of Loans. i.e. GNMA, FNMA, Delinquents, Low F/C, e What Types of Servicing are available and the advantages of each PAYOFF 1. - How does the cost of a payoff affect value. What does it cost? Look at P&I advances as a benefit. Look at recent changes in the payoffs. 2. Interest Differential - GNMA Interest to the date of payoff requires interest be paid for the entire month to security holders is the cost to Mortgage Company? Need to run both scenarios using different assumptions 3. How does payoff history affect price? PORTFOLIO SEGMENTS 1. What are the important differences between two portfolios? 2. What is the best segmentation method? PRODUCTION 1. What should production be to cover my prepayments? REMITTANCE PATTERNS 1. If I settle on the 21st of the month, how do I fund between the time the security checks go out on the 14 and the funds received from settlement arrive on the 22. Do I borrow or use my equity to fund the accounts. REO COSTS RISK 1. How can I use the Model to measure risk? SENSITIVITY ANALYSIS 1. What is a Standard Example? 2. What affects the Value the most. 3. What are some quick guidelines? TAX 1. What happens if you don't pay taxes? TRANSITION TABLES 1. Use a set of transition Tables for each of the first Three years. WAREHOUSE 1. What should be my warehouse line strategy for advances 2. What happens to the warehouse line during periods of changing prepayment patterns? What happens when payoffs slow down. 3. What warehouse lines will be required for this portfolio? 4. What will my warehouse account vary by during the year.