Loan Servicing Valuation Model
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KAL_II Terminology
*A*
After-Tax Discount Rate (S312) - The after-tax discount rate is used to compute the Percent Value of future cash flows. It is often computed as the "weighted average cost of capital" or the marginal debt rate times 1.0 minus the marginal tax rate. Identify each period of time extending into the future when the predicted discount rate will remain the same.
Example:
Bank Borrowing
Rate is 8%
Tax Rate is 50%
----
After Tax Bank
Borrowing Rate is 4%
Debt Ratio
50%
The average cost
of capital is 11% = (18% * 50% + 4%*50% )
This is the after tax discount Rate. It should be
put into the model directly as a percent. It will remain constant
until the Debt is paid off. At this point the required return
on the investment is raised to the rate of return on equity. The
present value calculation takes this into consideration.
Amortization of Purchase and Conversion - These fields
describe the way the Purchase Price of the Portfolio will be amortized
over the future years. There are several types of amortization
used in servicing valuation models:
None - No amortization is allowed. All costs are
expensed in the period of the purchase.
Straight Line - Program assumes an even amortization
over the number of years specified.
FASB Method - This method uses the cash flows over the life of the loan to determine the amortization.
The purchase price is distributed based on the number of positive cash flow years. when the cash flows go negative the amortization stops.
The method is an attempt to match revenues and expenses. There is a variation
of this method which allows the user to set the number of years
over which this method is applied.
Declining Balance - Uses declining balance method
based on the declining balance factor. (SEE lining Balance)
Sum-Years-Digits - Uses sum-of-the-years-digit method
of calculating amortization. (See Sum-of-Years-Digits)
Years to Amortize - The number of years to use for
amortization
Declining Balance Factor - The declining balance
method is a standard accounting technique used to amortize assets.
Amortization, Existing (S31i) This is the existing
amortization before the valuation of the new portfolios. It is
used in the budgeting process and could have an effect on the
calculation of the: rates. If the existing amortization would
cause the net income of the company to go to zero, this number
would create a zero tax amount.
Ancillary Income is defined to be any income other
than service fees. This can include three principal sources:
2. Miscellaneous Income which is determined as a
dollar amount per loan that is in the portfolio. This revenue
is comprised of document fees, assumption fees, etc.
3. Special insurance commissions - When the mortgagor
collects insurance premiums for insurance agents or companies
the mortgagee receives a commission of this process.
(See Late Fees )
Average Age of the Loans - The number of years that
have passed since the loan was originated.
Average Loan Balance (S114) - The average balance
of all the loans being evaluated.
Average months Delinquent - The average number of
months that the loans are delinquent. It is possible for the loans
to average 1.5 to 3 months average delinquency.
*B*
Rank Balance P&I, Bank Balance T&I (S3111)
The mortgagor may not have access to the entire P&I or T&I
balance due to the reserve requirement at the bank of deposit.
In this instance the bank only allows credit for that portion
of the funds which are usable by the bank. Values are entered
as a fraction of the total balance i.e.. 0.970000 means that 97%
of the balances were available. The program will compute earnings
on this fraction of the deposit.
*C*
Conversion Cost - The money spent by the mortgage
to add the loans to the mortgage servicing system.
Conversion Cost Expensed - The program will "expense"
this fraction of the amount paid to convert the loans for processing
after purchase. The rest of the conversion costs will be amortized
using the method chosen below.
Cost of Advances - The Cost of Advances is the rate
paid to borrow funds which are used to remit to investors when
the borrower payments have not been received. Identify each period
of time extending into the future when the predicted rate of interest
will remain the same.
2. Spread from Market Index Enter a "2"
to input the impound rate as a spread from the market interest
index. This would coincide with the situation of using Impounds
to offset a Floating Rate Loan.
*D*
Days P&I Held - This is the average number of
days that you hold the principal and interest accounts before
remitting the total amount to the investor.
Days Payoffs Held - The number of days that the money
received from mortgagors at payoff is held before being remitted
to the investor.
Debt Interest, Existing - This is interest on the
existing Debt. It is related to the valuation through the Budgeted
Income Statement. The inclusion of additional Interest deduction
for Tax purposes could cause the After Debt Valuation to show
less effects from Tax savings. If there are no taxes to be paid
as a result of this interest deduction then the Post-Debt Analysis
would be changed.
Debt Principal Existing - This is interest on the
existing debt that the company already is carrying. It is related
to the valuation through the Budgeting Process Menu. It is important
to consider the overall Debt carry when preparing the budgets
and possibly the warehouse account analysis.
Declining Under Method - Under the declining-balance
method of amortization, relatively larger amounts of amortization
are recognized in the earlier years of the asset's use, smaller
amounts in later years. It is computed by applying a constant
(Declining Balance Factor) to the remaining, undepreciated Balance.
At the point the depreciation is equal to the straight line depreciation
the method is automatically switched to straight line for the
remainder of the amortized life.
Delinquency Ratio - The percentage of Loans that
are a specific number of months delinquent. The number of delinquencies
is divided by the total loan count in the portfolio being valued.
Delinquent Cost - Delinquency categories can be broken
down according to the stage of delinquency. These categories or
statuses are usually 30, 60, or 90 days. The cost of processing
a foreclosure falls into this category. The amount of cost for
the foreclosure department is divided by the number of loans foreclosed
that month and the result is the foreclosure processing cost.
Descriptive Title (Slll S211 S311) - This is a descriptive
title used by the KAL_II program that displays on the computer
screen will you are using the file for a valuation. Make the name
descriptive and you will be sure you are always using the correct
files.
Discount Rate on Equity - The discount rate on equity
is used to compute the present value of flows after considering
the effects of debt used to finance purchase of the portfolio.
Identify each period of time extending into the future when the
predicted rate of interest will remain the same.
Discount rate - Weighted Average Cost of Capital
Minimum rate of return you find acceptable - weighted average
cost of funds.
Duration - Represents the change in price for a one
basis point change in yield. It is used to leverage Interest Rate
Sensitive Instruments.
*E*
Earnings on Principal and Interest (P&I) Balances -
The P&I balances are allowed to earn interest in the valuation
models. The mortgagor does not collect this interest directly
but rather uses the cash collected and deposited with the bank
to offset other borrowings.
Escrow Balance as a Percent of Portfolio Balance -
This is the ratio of the impounds or escrows to the total loan
portfolio dollar balance.
Equity Discount - (S113) The Return on Equity that
the Shareholder require to invest their funds in the corporation.
Escrow Accounts/Impounds - The definition of the terms
escrow and impound are interchangeable. These are funds collected
for tax payments hazard insurance payments and insurance premiums.
The funds are held by the mortgagor and remitted daily or monthly
to taxing authorities and insurance companies.
Existing Amortization - The dollar amount of existing
amortization expense which is scheduled within the next year
(e.g.. 12 months from the start of the simulation).
This amount will be added to new amortization in
the Budget Analysis report in Group Simulations.
Existing Debt Interest - The dollar amount of interest
on existing debt obligations that is scheduled to be paid within
the next year (e.g. 12 months from the start of the simulation).
This amount will be added to new interest in the Budget Analysis
Report in Group Simulations.
Existing Debt Principal - Enter the dollar amount
of principal repayment on existing debt that is scheduled within
the next year (e.g. the 12 months beginning at the start of the
analysis.
Existing Debt - The debt incurred directly to purchase
portfolios will be added to this amount in the Budget Analysis
report in Group Simulations.
Existing Fixed Costs - Enter the dollar amount of
existing costs which are already required whether this portfolio
is included or not. The amount is for the entire year (e.g. the
12 months beginning at the start of the analysis). This figure
appears only in the Budget Analysis report on Group Simulations.
FHA Prepayment Tables - Every year the FHA releases
new table which describe the payoff patterns for several different
maturities of loans. These tables are used by the valuation models
to determine what the runoff will be for FHA loans.
File Name (S116 S217 S317) - This is the DOS file
name used to identify the file to the DOS Operating System.
Fixed costs Existing - These are existing Fixed Costs
which result or will result from the purchase of the portfolio
being analyzed.
Fixed Loan Rate (S114) - The average interest rate
on the fixed rate loans.
Foreclosed Monthly - This is the number of loans
that complete the foreclosure process each month.
Foreclosure Cost - The total amount of money that
is spent and not recovered from the investor or the mortgagor
to foreclose a loan. Many general ledgers do not keep details
of these costs. If you do not have a breakdown then post the total
to the HARD COST amount. There are several costs in this category:
Property maintenance fees
Inspection fees
Principal Balance Lost
Interest Advance Lost
*G*
Geographical Region - Different states or geographic
regions may have different prepayment histories. Some models allow
for you to set different patterns for different parts of the country.
GOOD_LOAN Cost - The KAL_II model defines a GOOD_LOAN
cost. This is the cost to service a loan that is not delinquent,
does not payoff, and is not a new loan.
*H*
Half Life - Prepayment can be expressed in years
of the half life. This means that 50% of the loans will have paid
off when the loans have reached 50% of their maturity. The pattern
assumes a straight line amortization for the entire life of the
loan. If the half life is 15 years then 50% of the loans will
exist at the end of the fifteenth year. The annual runoff will
be equal to 50% divided by 15 years or 3.34% per year.
*I*
Impounds - Escrows amounts - The terms escrow and
impound are interchangeable.
Impound Earnings Rate - The interest rate earned
on impounds is often input as the compensating balance rate earned
on demand deposit accounts. Identify each period of time extending
into the future when the predicted rate of interest will remain
the same.
Actual Rate - This would correspond to the situation
where you were able to directly set a long term fixed rate on
your Impounds.
Spread from Market Index - This would coincide with
the situation of using Impounds to offset a floating rate loan.
Inflation Forecast - (Inflation Rate) ( S112 S212)
Inflation Forecast Specific - Inflation rates are
applied to revenues costs and expenses. It is possible to set
some rates individually while other rates are tied to a general
inflation factor.
Insurance Premiums - These are earnings from the
insurance premiums that the mortgage company gets to keep as a
commission. These are Premiums from Special insurance that is
sold through the mortgage company to the mortgagors. The insurance
is accidental death mortgage life fire and extended coverage.
Monthly Premium - Current payment by borrower
Commission - Portion of Premium immediately earned by Servicer
Key Premium Growth It can grow at economic inflation rate or other inputted rate.
Current Balance - Amount of Premium is currently held. Balances are remitted to the insurance company along with Hazard Insurance.
Penetration - Portion of existing loans that owe insurance Premiums.
Interest Rate, Average per Loan - The average loan
interest rate is a weighted average for the portfolio. The loan
amount is used as the weighted factor applied to the loan interest
rate.
Interest on Advances - The interest that you pay
on the advance account. This money is borrowed from the bank and
appears on your balance sheet if you advance from a separate account
.
Interest Rate Forecast (Market Index) (S213) - This
rate is used to build interest rate scenarios. It can be set as
the prime rate or as a market rate on short term investments.
You have a choice in the interest rate scenario that you build
how you want to express the market rate of interest. Other factors
can then be tied to this rate.
IRR - Internal Rate of Return - The rate of return
on the investment that equates the present value of the cash flows
to zero.
*J*
*K*
*L*
Late Fees - Fees are entered as a percent of a loan's Principle
& Interest and loan's Tax & Insurance deposits. Since
this can vary over the loan's life, the user can check these late
fees by running General Factors. Late fees are triggered if:
b. A current loan's payment comes in after a designated
date. Prepaying loans don't pay late fees if payment is made by
the 30 of the month. No late fees are collected on Payoffs for
that month.
Late Fee Trigger Date - This is the day the late
fees are charged to the mortgagor accounts.
Late Fee, Percent Collected È - Late fees are
charged to the mortgagor's account each month on the late fee
trigger date. The fees are not always collected by the mortgagor
for a variety of reasons. This is the percent of the late fees
that were charged that the mortgagor expects to collect.
Loan Count - The number of loans you are valuing
this should not affect the present value as a percent.
*M*
Marginal Tax Rate - The marginal tax rate is the
combined federal and state tax rate paid on the next revenues
in addition to the existing operation. It is used to determine
the amount of tax paid, the "tax shield" of interest
and amortization, and the effective after-tax cash flow.
Market Index - (See Interest Rate Forecast) Market
Index, Market Interest Rate, Forecasted Interest Rate
Modified Internal Rate of Return - IRR assumes all
cash flows are calculated at the IRR. Actually, the reinvestment
rate may be substantially different from the IRR. Most models
use the IRR instead of the reinvestment rate. Present Value analysis
assumes funds are reinvested at the discount rate.
*N*
Name of Firm File (S311) - This is the descriptive
name of the set of Firm Data that you specify. The name may be
up to 60 characters long. The name will appear on the screen while
working With this set of data. The name will also appear on the
Output Reports.
Nominal Internal Rate of Return - This is actually
the Yield for the Investment. It assumes that the Reinvestment
Rate is the same as the IRR for the overall Investment. Because
of this, the Nominal IRR is almost always higher than the Modified
Internal Rate of Return. The program will not calculate the IRR
if is negative or if the full analysis is not run.
Modified Internal Rate of Return - This IRR is
calculated using the Reinvestment Rate as entered into the Firm
Section. It assumes all funds are reinvested at the Reinvestment
Rate.
*0*
Original Term in Years - The original amortization
period of the loans.
*P*
Payoff Cost - This is the cost of the payoff department.
If 100 loans paid off in June and the department spent $5,000
in June then the payoff cost is $10.00 per loan.
Payoff Differential Interest - This is the interest
lost if the mortgagor must remit more interest to the investor
than was pad by the mortgagee.
P&I as a Percent of Balance - This is the ratio
of the average P&I balance to the total portfolio loan balance
in dollars.
P&I Bank Balance - That fraction of bank balances
from the Principal and Interest payments which are available for
investment. The program will compute earnings on this fraction
of the deposit.
P&I Constant - is the amount of the mortgagor payment
for principal and interest each month. For the portfolio being
valued this amount will be constant over the amortization period
of the loan. As the loan matures there will be a greater portion
of the payment that is principal and less that is interest.
Percent of Interest Bearing Escrows - Many states
require the mortgagee to pay interest to the mortgagor on the
impounds accounts that the mortgage collects each month. When
only a portion of the portfolio Loans are in interest paying states
then an estimate of that amount of loan balance must be made and
interest is paid only on that portion of the total balance.
Percent Principal Advanced - If the investor contract
requires it, each month the mortgagor must advance to the investor
any amounts of P&I that have not been collected from the mortgage.
Due to the availability of funds the mortgagor may not have to
borrow the entire amount that is due. The "percent advanced"
is the percentage that is borrowed from the bank and remitted
to the investor.
Percent Principal on Interest Bearing Escrows - The
dollar amount of the loan balances that have properties located
in states that require the mortgagor to pay interest on the impounds
collected each month from the mortgagee.
Prepayment Rate - Every month a small percentage
of mortgage loans payoff before the original maturity date. This
is know as prepayment. In order to determine a value for a given
set of loans we must estimate haw many loans will prepay in each
year. These patterns change as the loans mature.
Purchase Price Fraction - The program will "expense"
this fraction of the amount paid for a portfolio directly. The
rest of the purchase cost will be amortized using the method chosen
below.
*Q*
*R*
Rate Paid on Impounds - Many states require that
servicers pay interest on funds held in "impound" accounts.
Identify each period of time extending into the future when the
predicted rate of interest to be paid will remain the same.
Reinvestment Rate - The Reinvestment Rate is the
amount that can be earned with short term investments. It is used
to compute the interest earned by compensating balances and in
the Debt Analysis to determine the effect of holding cash while
debt is being repaid. This is the Discount rate that would be
applied to all future investments. It is actually the Weighted
Average Cost of Capital or Discount Rate.
Required Return on Equity - This is the return that
Stockholders require for the use of their equity. It is always
higher than the Bank Rate. It represents what the Stockholders
are willing to earn in exchange for leaving their funds in the
Corporation.
*S*
Servicing Cost - The annual cost to service the
mortgage loan. It may be the total cost, the variable cost or
the direct cost. It is the decision of the company doing the valuation
as to the desired cost to use.
Service Fee Revenues - Service fees are the fees
charged by the mortgagor to the investor of the loan to service
the loan. The mortgagor is responsible to collect and remit taxes,
hazard premiums and special insurance. If the investor requires,
the mortgagor will also be responsible for the foreclosure losses.
There are two methods that are used to collect service fees:
2. Dollar Amount per Loan - This can be a set rate
in dollars per loan. When loan balances are too loan to warrant
a Percentage method, then a dollar amount is used. This is especially
true- in low dollar high interest rate loans such as Mobile Home
Loans. Changes in service fee rates may occur during the life
of the loans. Up to ten changes can be made.
Only current loans generate Service Fees. If a percent
is used, then service fee revenue is calculated on the beginning
of the month's scheduled balance.
Sum-of-the-Year's-Digits - Each year's amortization is calculated by using the sum of the total years amortized life as the denominator of a fraction of the depreciable base (Purchase price plus unexpensed conversion cost). Thus, for a portfolio with a ten year amortization period, the denominator would be 55 (10+9+8+7+6+5+4+3+2+1). The numerator is the remaining years of life. For year one, this would be ten. The first year's amortization would be:
*T*
T&I Bank Balance - That fraction of bank balances
from the Tax and Insurance payments which are available for investment.
The program will compute earnings on this fraction of the deposit.
Terminated Loans - This is the total of all loans
that have paid-off or been foreclosed on. It should balance out
the Loan Status screen to show where all the loans went.
Thirty Day Collection Cost - This cost represents
money spent on the mortgagors who make their payment before the
end of them month. These costs are not usually recognized. The
KAL_II model determines these costs from the cashiering schedules.
*UVW*
*XYZ*
Years to Amortize - The number of year over which
the purchase price will be amortized. This does not affect the
loan prepayment.