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Loans

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... FHA, VA (as little as 3% down!) Rates: Fixed, 30 vs. 15, ARMs ARMs: 3 and 1, 5 and 1, X and Y Index, Caps, Resets Other Terms: Buydowns, ... – PowerPoint PPT presentation

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Title: Loans


1
Loans
2
Loans
  • GK, Chps. 9 10
  • Economic Environment
  • Commercial and Industrial Lending
  • Real Estate and Consumer Lending

3
Economic Environment
  • Pattern of Interest Rates with unfolding Business
    Cycle.
  • Predict Business Cycle (Trough, Growth, Boom,
    Peak, Slowdown, Recession, Trough) ?
    Pattern of Interest Rates
  • 1-period ahead relatively easy (Simulation)
  • Discussion here is expectation 2 periods
    ahead.

4
Business Cycle and Interest Rates
  • Trough Low economic activity low demand for
    funds, high demand for safe, liquid investments ?
    Low relative rates, curve
  • Growth to Peak Increasing economic activity
    high demand for funds, low demand for
    interest-rate investments ? Higher relative
    rates, to flattening curve
  • Slowdown?Trough Slowing economic activity, early
    high demand for funds gives rise to drop off ?
    High rates drop, with inverted-curve returning to
    positive slope

5
Commercial Lending
  • Asymmetric Information (AI) gives
  • Adverse Selection The reason bad borrowers are
    coming to banks is they cant get capital
    elsewhere, but AI makes it hard to separate from
    good borrowers
  • Moral Hazard Given loan granted, higher-risk
    activities may be substituted to gain extra
    return that goes to owners, not loan.MONITOR!

6
The Business Dynamics of Loans
  • Trade-off between
  • Interest and fees gained, and
  • Credit Risk of default and costs
  • Types
  • Lines of Credit, Term Loans, Bridge Loans
  • Technology has buffered
  • Securitization of loans Mtgs, Cars, CCs
  • Credit Scoring and Credit Risk transfer

7
Definition of Collateral
  • Reduces Risk, but Increases Monitoring
  • Characteristics of good collateral
  • Durability is the ability of the asset to
    withstand wear. Durable versus nondurable
    collateral.
  • Identification due to physical uniqueness or
    serial numbers.
  • Marketability of the property if resold.
  • Stability of value over the period of the loan.
  • Standardization by government or industry
    guidelines in grading quality of assets.

8
Types of Collateral
  • A/R Pledging or Factoring
  • Inventory
  • Securities
  • Property or Equipment
  • Loan Guarantees US Govt, State

9
Lending Evaluation
  • Six Cs
  • Character (personal traits)
  • Capacity (cash flows)
  • Capital (net worth)
  • Collateral (pledged assets)
  • Conditions (economic conditions)
  • Compliance (Legal standing)

10
Methods of Pricing
  • Markup BPs over index (prime)
  • Cost of Funds WACC Profit Goal
  • Relationship Not just loan, but fees made
    elsewhere as an offset
  • Match funding BPs over match funds cost of
    money
  • Adjustable rate not just market yields, but
    also risk changes
  • Requires extra monitoring and compliance review

11
Real Estate
  • Residential, Commercial, Farm, Multi-family
  • Origination, Securitization and Servicing
  • Brokering, Securitization Resale and Real Estate
    Industry assistance

12
Real Estate Loan Characteristics
  • Downpayment 5 , 10 , 20
  • lt20 usually requires Private Mortgage
    Insurance (PMI)
  • Loan then for (RE value-DownPymt)
  • Prepay makes std 30 year mortgage into an average
    7-12 year loan.
  • Falling interest rates can make this average even
    shorter.
  • RE good loan as well collateralized

13
Residential RE Loan Terms
  • Guarantor
  • FHA, VA (as little as 3 down!)
  • Rates
  • Fixed, 30 vs. 15, ARMs
  • ARMs
  • 3 and 1, 5 and 1, X and Y
  • Index, Caps, Resets
  • Other Terms
  • Buydowns, Assumables, Balloons, Points, Graduated
    Payments (GPMs), Growing Equity (GEMs), Shared
    Apprec

14
Commercial Real Estate
  • Land, construction and real estate development,
    and commercial properties
  • Construction loans
  • Disbursements over time as project completed
  • Usually of Bridge variety
  • Land serves as collateral for loans.
  • Pricing Prime Plus
  • Origination as high as 3 Points

15
Consumer Lending
  • Personal Loans
  • Small Dollar, usually no collateral
  • Open Lines (CC) or Closed (Auto/Boat)
  • Higher Risk ? Higher Rate
  • Attempt to diversify geographically

16
Consumer Loan Types
  • Auto/Boat/Other Asset High Competition, Med
    Risk
  • Can be securitized with high volume
  • Credit Cards High Competition, Hi Risk
  • 25-30 day int grace on purch, immed int on cash
    advanceFEES!
  • Lines of Credit Low Competition, Med Risk
  • Revolving Lines with Check Writing

17
Other Consumer Lending
  • Mobile Homes
  • Balloon Loans
  • Leasing High Competition, Low Risk
  • Bank buys and rents to customer
  • Open-end Customer must buy (sell) at end of
    lease, Pay diff to residual value
  • Closed-end Bank takes asset back.
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