Note questions

[Linda L.]

I was browsing some notes.

Came across this one.

LTV Ratio:	51.990%
Original Loan Amount:	$33,000.00
Principal Balance:	$31,193.80
Est. Market Value:	$60,000.00
Valuation Type:	Current Appraisal
Valuation Date:	11/15/2012
Note Rate:	16.000%
Sold Rate:	8.000%
Payment Information
Funding Date: 11/28/2012 Payments: Monthly Next Payment Due: 09/01/2013 Monthly Payment: $655.45

Fully Amortizing loan paid in 7 years. For sale at par principal balance and an 8% annual interest rate.

What does it mean? the note is for sale without discount, and note rate becomes 8%(50% off)?

[Dion DePaoli]

Yea, that is a screwy way to say what I think they are trying to do.

I will walk through what I see for you:

• Loan Amount = $33,000
• Payment = $655.45
• Amortization (m) = 84

If we use these, we can figure out what the effective Note Interest Rate actually is, so we can understand the 8% vs 16%. This payment is a 16% principal and interest payment on the loan amount and amortization.

"Sold Rate" is not a standard industry term.

PAR means the loan is for sale at the current Unpaid Principal Balance ($31,193.80). The use of this term seems to be misused.

The whole 8% concept makes the post confusing. The only way a note with a 16% interest rate sells for less 'yield', is if you sell only a partial amount of the payment...OR.... you sell the loan at a 'premium'. It doesn't appear like they are trying to sell in a true premium idea, where you the buyer would essentially play 'par plus', meaning the current UPB plus $X of the future interest.

If you look at the last sentence in the post, it sounds like he is trying to articulate that, "Fully Amortizing loan paid in 7 years. For sale at par principal balance and an 8% annual interest rate.", where he conditioned that the loan is being sold with an 8% 'yield' (he uses interest improperly).

The loan has a 16% rate, he can't change that. At a par purchase, the yield would be generically at 16%. So selling it for 8% means he is trying to clip some of the interest out for himself.

It is not really clear how they are trying to structure this in order to achieve retaining half of the interest and passing through the other half to a Buyer of the note. The problem with the deal is then, you (the Buyer) would have all of the risk of default on YOUR invested capital, which is the par loan balance. The Seller retains zero risk of loss or default.

That is not a deal I would consider and there might be security issues with the manner in which they are structuring this trade. The Seller is no longer selling the 'whole loan', he is selling a portion of the interest stripped out from the whole loan and it really looks like a pass-through security. That would require the Seller being a licensed SEC broker/dealer, if indeed the verdict, that is a security not a whole loan.