TX CUREN February 12 2009
Making Sense of Mortgage Economics Nizar Hashlamon VP, Prime Alliance Solutions, Inc.
How aware Are you?
CUs First Mtg Originations 56788**
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30 Yr Fixed Rate
Sources of funds...
Supply and Demand Return on Risk
Economic Growth Inflation Expectations Interest Rate Risk Default & Prepayment Risk
Underlying Consideration
Economic Growth Indicator
Purpose
Impact on Rates
Inflation Expectations Real Rate = offered Rate + Premium for Expected Rate of Inflation $10,000 at 10% 1 year balloon Return = $11,000 10,000 + {10,000 X 0.10} 6% inflation $11,000 would be worth $10,377 Offered rate is 10% Real rate is under 4% {377 / 10k}
if the CU wants a 4% return they have to offer the rate at 10%
Interest Rate Risk Net interest Income (NII) Arises because interest income and interest expense donâ&#x20AC;&#x2122;t change in an equivalent manner as market rates change.
Net Economic Value (NEV) Is the value of its asset bonds less its liability bonds.
Default and
Prepayment R i s k
Two Assets Loan Servicing
Many
Business
LINES
Portfolio Investment
ORIGINATE to Sell
Pricing Strategies
e v i t a l Re to
The Competition
e v i t a l Re to Investment Yields L o an R ate = Y ie ld C u r ve + Ne t Ch a rge- o f f s + Ne t Ops Ex pe n se + De s i re d Spre ad
e v i t a l Re to
Cost of Funding Loan Rate = Cost of Funds + Net Charge -offs + Net Ops Expense + Desired Spread To CU needs
Net Profit = Revenues â&#x20AC;&#x201C; Costs Revenue Sales Premiums Net Warehoused income Discount Points SRP Fees
Cost Cost to Originate Rebate Hedge cost LLPAs
Reve n u e s
Do the Math!
Sales Premiums = 99.1593 - 100 = -0.841 Net Warehoused = income
(Note Rate â&#x20AC;&#x201C; Cost of fund) X 15 days 365
= (5.625- 4.00)/365 X 15 = 0.06678
Discount Points = 0 = 1.25 SRP = 1.0 Fees
Total Revenue = 1 .476
5.625 Note Rate
Do the Math!
Co st Cost to Originate Rebate Hedge Cost LLPAs
= 0.75 =0 = 0.12
= 0.25
Total Cost = 1 .120
= d l t s Y ie o C e u n e v e R 0 2 1 . 1 6 7 4 . 1 6 5 3 . = 0
Do the Math!
5.625
Note Rate
With 0.356 net profit
or 5.875
Note Rate With 0.175 net profit
What can we affect... Cost to Originate
Member Experience
Speed
Products
Putting it all together Evaluate
Execute
Build sound strategy
Identify your business line
Questions? Nizar Hashlamon
571.748.7770 or email: nhashlamon@primealliancesolutions.com