Notes and yields - Posted by Randy -IL-

Posted by Michael Morrongiello on April 07, 2000 at 23:30:10:

In your example the $40K 1st lien represents a 80% LTV starting point and that is good with a buyer who has sub prime credit and credit scores in the 550-600 FICO range. Any note funder including myself would probably limit our exposure to no more than 80% (ITV) investment to value with this type of debtor on an unseasoned note as the upper limit of exposure into the property so by STARTING the loan amount out at the 80% threshold to begin with you can mitigate the discount effect.

The 2nd issue is the actual note interest rate. It would be foolish to finance this type of borrower with a 9% +/- interest rate since my requirements for this type of debtor are going to be in the 11.0%-12.0 % range and this will have the effect of discounting the note down to a “cash” value today of between 84% -86% of its balance.

To get the discount minimized we need to get that note interest rate up. I would use an interest rate in the 11%-12% range on the note itself. Now with that type of structure; A buyer who is putting down 10% cash money, has decent employment stability, a note that has an interest rate of 11%-12% on it, and also starts out with its LTV of no more than 80% of the sales price you can acheive the 93% -95% payout depending on the actual size of the loan we would be purchasing. The larger the loan size the less discount. On smaller loan balances under $50K there would be a sligthly larger discount.

Hope the above input helps…

To your success,

Michael Morrongiello

Notes and yields - Posted by Randy -IL-

Posted by Randy -IL- on April 07, 2000 at 13:01:34:

Hello all,

I have a general grasp on how to discount very basic notes to certain yields (HP12c). But what I don’t know is what yields are marketable. I know that it depends on several factors like:

Buyers credit
Down payment
Property FMV
investment to value
second mort. terms
income ratios

A quick example:
FMV= $50K
Cash Down= $5K
Owner held 2nd= $5k
First Mort. $40k

How would the first and second need to be structured to get the best sell rate for the first (maybe 90-95%)?

Assume that the buyer is just an average credit Joe Buyer with no BK, foreclosures, repos, but maybe some late pays. (I’m not much on credit scores, but please enlighten me)