Fast Credit Repair

Credit Repair Magic

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Credit Repair Magic Summary


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Author: Bruce Harley
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Credit Repair Magic Review

Highly Recommended

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My opinion on this e-book is, if you do not have this e-book in your collection, your collection is incomplete. I have no regrets for purchasing this.

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Understanding what your credit data includes and means

A credit report contains information such as Inquiries Lists who has pulled your credit report because you've applied for credit Your credit score, which is not the same as your credit report, is a three-digit score based on the report. Lenders use your credit score as a predictor of your likelihood of defaulting on repaying your borrowings. As such, your credit score has a major impact on whether a lender is willing to extend you a particular loan and at what interest rate. FICO is the leading credit score in the industry and was developed by Fair Isaac and Company. FICO scores range from a low of 300 to a high of 850. Most scores fall in the 600s and 700s. As with college entrance examinations such as the SAT, higher scores are better. (In recent years, the major credit bureaus Equifax, Experian, and TransUnion have developed their own credit scoring systems, but many lenders still use FICO the most.) The higher your credit score, the lower your predicted likelihood of defaulting on...

Obtaining your credit reports and score

Given the importance of your personal credit report, you may be pleased to know that you're entitled to receive a free copy of your credit report annually from each of the three credit bureaus (Equifax, Experian, and TransUnion). If you visit, you can view and print copies of your credit report information from each of the three credit agencies (alternatively, call 877-322-8228 and have your reports mailed to you). After entering some personal data at the Web site, check the box indicating that you want to obtain all three credit reports, as each report may have slightly different information. You'll then be directed to one of the three bureaus, and after you finish verifying that you are who you claim to be at that site, you can easily navigate back to so you can continue to the next agency's site. When you receive your reports, the best first step is to examine them for possible mistakes (more in a moment regarding fixing problems in...

Improving your credit reports and score

Instead of simply throwing money into buying your credit scores or paying for some ongoing monitoring service to which you may not pay attention, take an interest in improving your credit standing and score. Working to boost your credit rating is especially worthwhile if you know that your credit report contains detrimental information. Get all three of your credit reports, and be sure each is accurate. Be loyal if it doesn't cost you. The older the age of loan accounts you have open, the better for your credit rating. Closing old accounts and opening a bunch of new ones generally lowers your credit score. Limit your debt and debt accounts. The more loans, especially consumer loans, that you hold and the higher the balances, the lower your credit score will be.

Getting credit report errors corrected

If you obtain your credit report and find a blemish on it that you don't recognize as being your mistake or fault, do not assume that the information is correct. Credit reporting bureaus and the creditors who report credit information to these bureaus often make errors. You hope and expect that, if a credit bureau has negative and incorrect information in your credit report and you bring the mistake to their attention, they will graciously and expeditiously fix the error. If you believe that, you're the world's greatest optimist perhaps you also think you won't have to wait in line at the Department of Motor Vehicles or the post office Odds are, you're going to have to fill out a form on a Web site, make some phone calls, or write a letter or two to fix the problems on your credit report. Here's how to correct most errors that aren't your fault If the credit problem is someone else's A surprising number of personal credit report glitches are the result of someone else's negative...

Credit Ratings and Default Rates

Data vendors for credit-ratings have appeared. For individuals, Experian and Dun&Bradstreet corporations, the two biggest credit rating agencies are Moody's and Standard&Poor's. (There The credit rating agencies ultimately do not provide a whole set of default probabilities (e.g., The Ratings. 1 chance of 100 loss, 1.2 chance of 99 loss, etc.), but just an overall rating grade. It is up to the reader to translate the rating into an appropriate compensation for default risk. The top rating grades are called investment grade, while the bottom grades are called speculative grade (or junk). was for a given credit rating High-Quality Borrowers Very few investment grade bonds default and especially right after issue when they still carry the original credit rating. The probability of default is less than 3 in total over a 10-year horizon (0.3 per annum).

Beware biased advice at credit counseling agencies

So she turned to one of the large, nationally promoted credit counseling services, which she heard about through its advertising and marketing materials. The credit counseling agency Davis went to markets itself as a nonprofit community service. Davis, like many others I know, found that the service was not objective. After her experience, Davis feels that a more appropriate name for the organization she worked with would be the Credit Card Collection Agency. Unbeknownst to Davis and most of the other people who use supposed credit counseling agencies is the fact that the vast majority of their funding comes from the fees that creditors pay them. Most credit counseling agencies collect fees on a commission basis just as collection agencies do Their strategy is to place those who come in for help on their debt management program. Under this program, counselees like Davis agree to pay a certain amount per month to the agency, which in turn parcels out the money to...

Statistical Pd Modeling And Credit Scoring

In order to quantify credit risk, practitioners often build models that provide PDs of specific obligors over a given period of time. Alternatively, one often assigns a so-called credit score to an obligor, e.g., a number between 1 and 10 with 1 corresponding to low risk and 10 corresponding to high risk of default. There are two fundamentally different approaches to modeling PDs or assigning credit scores

Conceptual Discussion Credit Management

6-58 The manager of Rob's Shoe Store has been congratulated by her division manager for almost completely eliminating all bad debts. She instituted a policy of conducting extensive credit checks on all prospective credit customers and, consequently,rejects most applications.The cost of each credit report is 50 and the store's profits have declined significantly since she adopted this policy. b. The manager of Rob's Shoe Store is considering conducting her own credit checks and preparing her own credit reports in order to avoid the 50 cost of credit reports on each prospective credit customer.Why might this not be a cost-effective practice

Credit Management And Collection

Terms of Sale Credit Agreements Credit Analysis Financial Ratio Analysis Numerical Credit Scoring When to Stop Looking for Clues The Credit Decision Credit Decisions with Repeat Orders Some General Principles Credit management involves the following steps, which we will discuss in turn. Third, you must consider which customers are likely to pay their bills. This is called credit analysis. Do you judge this from the customer's past payment record or past financial statements Do you also rely on bank references Credit Management and Collection 229

Credit Decisions With Repeat Orders

What effect does the possibility of repeat orders have on your credit decision One of the reasons for offering credit today is that you may get yourself a good, regular customer. Think back to earlier material, and you will recognize that the credit decision bears many similarities to our earlier discussion of real options. By granting credit now, the firm retains the option to grant credit on an entire sequence of potentially profitable repeat sales. This option can be very valuable and can tilt the decision toward granting credit. Even a dubious prospect may warrant some initial credit if there is a chance that it will develop into a profitable steady customer. EXAMPLE 4 Credit Decisions with Repeat Orders

Wwwexperiancom Feebased site

The Experian database contains over 13 million U.S. companies and is used by people who want credit information on a business. Researchers must first register with this site before using it however, searching the database is free. Unfortunately, in order to find information about a particular company one must enter the company name with its complete address. When comprehensive information is available, Experian provides a full Snapshot report, including a credit risk category, for 19.95. When little information is available, a limited report without the risk category costs 8.00.

What are the usual steps in credit management

The first step in credit management is to set normal terms of sale. This means that you must decide the length of the payment period and the size of any cash discounts. In most industries these conditions are standardized. The third task is to assess each customer's creditworthiness. When you have made an assessment of the customer's credit standing, the fourth step is to establish sensible credit policy. Finally, once the credit policy is set, you need to establish a collection policy to identify and pursue slow payers.

Liquidity risk Longterm credit management LTCM

Meeting liabilities when they fall due is important to maintain credibility and customer confidence, as this will ensure that your credit standing will remain intact. Failure to settle on time is likely to mean credit will dry up, not only from the parties immediately affected but many other potential sources, as bad news travels fast in such circumstances.

How to Determine the Rate of Interest on Your Credit Cards

Banks and financial institutions, retail and oil companies offer credit cards. These companies are obliged to tell consumers the annual percentage rate (APR) charged as well as the method used to calculate the finance charges. In addition, they are obliged to disclose the periodic rate, which is the APR divided by the number of billing cycles per year (12 per year). For example, if the APR is 15 percent, then the periodic rate is 1.25 percent per month. However, if you are not in the habit of paying off your credit card balances in full, then the effective rate is much higher than 15 percent. If you are in the habit of paying your credit card bills in full every month, then choosing a credit card that has no annual fee and a grace period becomes important. However, if you are not in the habit of paying your credit card balances off in full, the interest rates charged become important. Interest rates charged by credit card issuers can vary significantly. Some issuers charge more than...

Contact Your Creditors or Get Credit Assistance

If you are having difficulty making your payments to your creditors on time, you should contact them. Tell them of your difficulties, but stress your intentions to pay them in full at a later date when you get your financial affairs back in order. Ask if they can stretch out your payments and waive interest and penalty fees until you can get on your feet again. If they agree, put it in writing so that it is more difficult for them to change their minds. If they will not agree, seek credit counseling from a nonprofit credit counseling service. The toll-free number of a national nonprofit credit counseling office is 800-388-2227. This office will refer you to a local office. You will meet with a counselor who will, for a small fee, devise a repayment plan. Counselors will also call or meet with your creditors to get their agreement on the plan. For the plan to work, all of your creditors must agree to it and you may be precluded from taking on any new debt. If the credit counseling...

Your Credit Score Is How Youre Judged

Other items on your credit report you might be scored on include your current monthly debts versus your monthly income, number of credit accounts, late payments, unpaid accounts put up for collection, tax liens, and the number of inquiries on your credit report. As of this writing, scores do not appear on anyone's credit report. But a person's score can change over time. How bad can scoring get One bank employee told us she's seen a huge pile of loan applications on a branch manager's desk on a Friday afternoon all to be graded by one person arbitrarily, within a few minutes. One applicant, she said, was turned down because he happened to drive a truck instead of a car.

How to Get a Copy of Your Credit Report

Report at one of the Big Three agencies may also be on your reports at the other two credit agencies. But don't count on it. Contact all three. One of the agencies, Experian, has extended the free-report period to 60 days. Experian (formerly TRW) P.O. Box 2104 Allen, TX 75013-0949 (800) 682-7654 Website Equifax P.O. Box 740241 Atlanta, GA 30374-0241 (800)685-1111 Website Trans Union Corporation 760 W. Sproul Road Springfield, Pa. 19064-0390 (800) 888-4213 Website

Default Rates 1921 Credit Ratings

A credit rating is an evaluation of creditworthiness issued by a rating agency. More technically, it has been defined by Moody's, a ratings agency, as an opinion of the future ability, legal obligation, and willingness of a bond issuer or other obligor to make full and timely payments on principal and interest due to investors. Table 19-1 presents the interpretation of various credit ratings issued by the two major rating agencies, Moody's and Standard and Poor's. These ratings correspond to long-term debt other ratings apply to short-term debt. Generally, the two agencies provide similar ratings for the same issuer. Table 19-1. Classification by Credit Ratings Table 19-1. Classification by Credit Ratings

Beware of Well Fix Your Credit Operators

You come across these bozos in dozens of classified ads or even on television. They offer to fix your credit by claiming to be able to remove any negative information from your credit report. They also promise to get you a credit card even if you have bad credit. Forget those pitches. Never, but never, send those guys one dollar up-front. Otherwise, you'll learn a painful lesson that could cost you hundreds or thousands of dollars. The truth is, those credit-repair clinics can't do anything for you that you can't do yourself, for free or at a minimum cost.

Other Ways to Strengthen Your Credit

If your credit score is low, or you haven't established a credit history, you can do a couple of things to build up your profile. After 6 to 12 months, your good payment behavior on those accounts will start showing up on your credit report, and you'll have a much better chance at further credit. - Most of your financial information your salary, bank accounts, credit cards, and loan information is stored in computers at the Experian, Equifax, and Trans Union credit agencies. Your credit score will influence whether you're accepted or rejected. - Employers may also use your credit report to verify employment history. - To improve your credit report, pay your bills on time, cut down the number of credit cards you carry, don't live up to your credit limit, and pay off your outstanding debts. - Review your credit report periodically to check it for mistakes. One in four credit files contains errors. - Be sure to dispute any errors on your credit report by inserting up to 100 words on the...

Role of Credit Rating Agencies in Financial Stability and Development

Credit Rating Agencies or External Credit Assessment Institutions, as referred to in the New Basel Capital Accord provide independent, forward-looking opinions to investors on the credit worthiness or ability and willingness to service debt in full and in time of an obligor (debt issuer) with respect to a specific financial obligation, or a class of financial obligations, or a specific financial program such as a commercial paper issuance. Those opinions are expressed in the form of (a) a credit rating for various financial instruments and transactions such as corporate bonds (both financial and non-financial institutions) (b) obligations issued by sovereign (central governments) and sub-sovereign (state and local governments) borrowers, other public institutions, and supra-nationals (multilateral and regional institutions) and (c) structured finance transactions (e.g., asset-backed securities, project finance transactions, collateralized debt obligations). The ratings are based on...

How Comparable Are Credit Grades from Different Vintages

Although credit grades are an excellent predictor of defaults, their definition as well as their use in underwriting may change from time to time as RFC EXHIBIT 20.5 RFC HEL Originations Credit Grade and Debt-to-Income Ratio by Origination Year, 1995-2000* EXHIBIT 20.6 RFC HEL Originations Collateral Cross Section by Credit Grade, 1995-2000* EXHIBIT 20.6 RFC HEL Originations Collateral Cross Section by Credit Grade, 1995-2000* Credit Grade FICO scores refines its underwriting practices or responds to competitive conditions in the HEL lending industry. In addition, the credit grades of A and C D consists of several subcategories, whose changing proportion over time may contribute to changes in loan profiles. We examine the trends of collateral composition within each credit grade by tracking the FICO score, debt-to-income ratio and OLTV across different origination years. The FICO score and debt-to-income ratio are measures of borrower's creditworthiness, while OLTV is a measure of the...

Get Your Credit Record in Shape

What mistakes do lenders think home buyers make when they set out to buy a house They'll tell you that too many consumers wait until the last minute to get their credit in order. The process, they say, should begin six months before you apply for the loan (unless, of course, you have megabucks in the bank and have a squeaky-clean credit record). Here's what to do - Get a copy of your credit report. (To learn how, see Chapter 16.) Don't apply for any more credit until you go for a mortgage. A bunch of new inquiries could show up on your credit report that's a no-no in the eyes of lenders who are considering you for a mortgage loan.

Fair Credit Reporting Act Fcra

The FCRA applies to two discrete events in the investigative universe. The first relates to potential employment matters, while the other has to do with credit reports. An investigative agency conducting research that might affect the employment status of an individual has in almost all instances several obligations per the FCRA (these are trumped, by the way, by an ongoing fraud review). Foremost among these is that the subject of the review must be advised of the report and sign a release authorizing its preparation prior to the report (see Addendum 14.1 for a copy of an FCRA employment release). Other conditions include Before an adverse decision is made (meaning the subject does not get hired, or is fired), the subject must have an opportunity to review the report. This legislation stemmed from the belief that consumers were being effectively blackballed by information that may not have even pertained to them, with no ability to correct said data. Aside from the release, the...

Your Creditors Are Watching

The companies you- owe money to aren't going to give you any gifts, such as wiping . out your debt. Banks won't lend you a dime if you have a late-payment record and your credit file is also shot full of other holes. And Uncle Louie is probably still wondering when you're going to pay back the two grand he loaned you 18 months ago. The more deeply you fall into debt, the tighter the noose, it seems. You do have some options, however. But before you do anything, obtain a copy of your personal credit report from one of the three major credit bureaus. This is critical. If anything in the report is erroneous or in dispute, correct it. See Chapter 16 for phone numbers of the bureaus, and instructions. After that, here are your choices Home equity is great for cutting costs through debt consolidation, or for paying for big-ticket items such as college tuition or medical bills. The negative side of home equity is that you'll be trading unsecured debt for secured debt, which means if you...

Secured Credit Card Can Help Rebuild Your Credit

This is discussed in depth in Chapter 16. A good way to recapture a good credit position is to open a secured credit card account if you've been denied a standard card. Credit cards in general are an invitation to debt-disease, in our opinion, but to overcome your problems you may one day need money help from a bank. And that may require establishing some good marks on your credit report by proving you can pay credit card bills on time.

The Value Of A Credit Report

Since you have by now read Chapter 13, What You Think Is Helpful, But Isn't, you already have a hint about my opinion of the relative worth of credit reports. As a reminder, credit reports were at one time quite valuable because they had information that other sources didn't. As things like tax liens, judgments, court cases, and bankruptcies became ubiquitous via searches of other online records, all without the rigmarole of a release from the subject, utility bills, and so forth, the value of a credit report has plummeted. Still, credit reports do have one thing no one else has payment history on car loans, vehicle loans, student loans, and credit cards. And like the theory of tax liens (if a hedge fund manager cannot manage his own financial affairs, why let him manage a piece of yours ), the credit report can play a role in your due diligence efforts. Just remember that unlike other sources, this one comes with a price tag, the hedge fund manager's scorn. As an aside, one other...

Are unsolicited credit ratings biased downwards An ordered probit analysis

Modelling the determinants of credit ratings is one of the most important uses of ordered probit and logit models in finance. The main credit ratings agencies construct what may be termed solicited ratings, which are those where the issuer of the debt contacts the agency and pays them a fee for producing the rating. Many firms globally do not seek a rating (because, for example, the firm believes that the ratings agencies are not well placed to evaluate the riskiness of debt in their country or because they do not plan to issue any debt or because they believe that they would be awarded a low rating), but the agency may produce a rating anyway. Such 'unwarranted and unwelcome' ratings are known as unsolicited ratings. All of the major ratings agencies produce unsolicited ratings as well as solicited ones, and they argue that there is a market demand for this information even if the issuer would prefer not to be rated. The data employed comprise a pooled sample of all companies that...

The Past Chapter 7 And How It Affects Your Credit Future

Because you have filed Chapter 7, you need to take an active role in managing your personal credit record for the next few years. Even if you don't believe that you want credit now or in the future, you may find that you need to finance a large purchase, take a long trip, rent a car or travel to another country, rent a hotel room on credit, or finance a small business. If you are like most people, you will probably need credit for one of these or some other reason in the future. Therefore, it is important to be sure that your credit history is reflected accurately on your report, and that you do as much as you can now to start rebuilding your worthiness.

The Present Your Credit Report

HOW TO GET YOUR CREDIT REPORT Your credit report is a very important document which influences l jj not to grant you credit. Your credit report is also reviewed by I You may have more than one credit report. Lenders who you have borrowed money from in the past usually report your repayment history to more than one credit bureau. This means that your records might be on file with several credit bureaus. A good deal of other information about you besides your borrowing and repayment history is shown in your credit report like your social security number, your past and present addresses, employers, and even information about your spouse. There are three major credit reporting agencies in the United States called credit repositories. Each of the Big Three repositories has an 800 number so that you can call to get information about ordering your own credit report. The Big Three credit bureaus cover the entire country. There may also be smaller credit bureaus in your area who maintain...

Credit rating agency rating scales

Aaa Issuers rated Aaa offer exceptional financial security. While the creditworthiness of these entities is likely to change, such changes as can be visualized are most unlikely to impair their fundamentally strong position Aa Issuers rated Aa offer excellent financial security. Together with the Aaa group, they constitute what are generally known as high grade entities. They are rated lower than Aaa rated entities because long term risks appear somewhat larger A Issuers rated A offer good financial security. However elements may be present which suggest a susceptibility to impairment sometime in the future

Credit Enhancement

As the credit quality of the collateral to be securitized may be less than the desired ratings of the ABSs, bonds may receive credit enhancement to add support. Credit enhancement can be achieved through (1) issuance of mezzanine or subordinate debt, (2) trapping or reserving excess spread, and (3) insurance or guarantees. Like U.S. mortgage transactions, Australian MBS deals use step-down tests following a three-year lockout, which if passed, permits an increasing percentage of prepayments released to the subordinates. Typically, the step-down test calls for the satisfaction of (1) rolling average delinquency thresholds and (2) a credit enhancement multiple (for example, when credit enhancement equals or exceeds two times the initial setting).

Credit Reporting in Australia

In the United States, credit bureaus play a significant role in the lender's decision to grant credit to a loan applicant. U.S. credit bureaus maintain detailed information on a borrower's credit history. Essentially, the information is used to determine a borrower's default probability. In Australia and the United Kingdom, credit reporting has not developed to the same extent as in the United States. Because there is a general lack of credit data relative to the United States, credit reporting in Australia does not play a major role in credit decisions because it is not an accurate indicator of default. Because delinquencies often are not reported until payments are 120 days or more past due, only borrowers that have shown severe delinquency patterns are identified.12 (By U.S. standards, these are C and D class borrowers.) Among the U.S. equivalent of A and B borrowers, it is difficult to distinguish between a borrower with a slightly below-average credit history and a borrower with...

Getting a copy of your credit rating

Lenders rely on credit reporting services to decide whether to extend credit or lend customers money. It's a good idea to check your own credit rating every so often to see how your credit is being rated by these services. Thanks to the Fair and Accurate Credit Transactions Act (FACTA), signed in 2003, every U.S. citizen is entitled to a free credit report once a year from each of the three main credit reporting bureaus Equifax, Experian, and TransUnion. There are three ways to order your credit reports online, by phone, and through the mail. To order your credit report online, go to This centralized Web site sponsored by the three main credit bureaus allows you to order all three reports and view them instantly online. To order your report over the phone, call 877-322-8228. Your credit report will be mailed to you within 15 days. To order a report by mail, you will need to fill out an Annual Credit Report Request Form. You can find this form online at Then...

Regularly Review Your Credit Reports

You may also be tipped off to shenanigans going on in your name when you review your credit report. Some identity theft victims have found out about credit accounts opened in their name by reviewing their credit reports. Because you're entitled to a free credit report from each of the three major credit agencies every year, I recommend reviewing your reports at least that often. The reports generally contain the same information, so you could request and review one agency report every four months, which would enable you to keep a closer eye on your reports and still obtain them without cost. I don't recommend spending the 100 or so annually for a so-called credit monitoring service that will update you when something happens on your credit reports. If you're concerned about someone illegally applying for credit in your name, know that another option for you (in some states) to stay on top of things is to freeze your personal credit reports and scores (see the next tip).

Freeze Your Credit Reports

To address the growing problem of identity theft, increasing numbers of states are passing credit freeze laws, which enable consumers to prevent access to their reports. Many states enable consumers, typically for a nominal fee, to freeze their credit information. In some states, only identity theft victims may freeze their reports. The individual whose credit report is frozen is the only person who may grant access to the frozen credit report.

How To Read A Credit Report And What To Look

As an investor, your attention should be paid to those items that indicate any type of financial issue, whether these are termed current negative accounts, previous negative accounts, collections (as you can surmise, these are initiated when the credit grantor has exhausted other means of having the creditor pay an outstanding bill), charge-offs (this is the final, worst stage and indicates that the credit grantor believes the account will never be paid, and is thus writing it off ), judgments, liens, or bankruptcies. A summary of this information is typically located near the top of the credit report, after the person's name, address history and other identifiers are shown the following is an example. Using the Trans Union credit key, attached at Addendum 15.2, you will be able to deduce the answers to the above. First, some definitions are in order. Current negative accounts are those accounts where the creditor Reading this gobbledygook almost makes me yearn for a 50-page complaint...

The Role Of Ebitda In Credit Analysis

The dialogue between Phil Atlee and his niece shows that similar companies with similar net income can have substantially different total enterprise values. Much in the same way, companies with similar interest coverage can have substantially different default risk. In credit analysis, as in valuing businesses, EBITDA can discriminate among companies that look similar when judged in terms of EBIT. Consider the fictitious examples of Rock Solid Corporation and Hollowman, Inc. (Exhibit 8.3).

Dynamic Credit Enhancement

Credit enhancement for the class C notes is typically a note reserve account and excess spread. Exhibit 23.8 provides an example of typical required reserve account levels based on excess spread. Note that the levels require more cash as excess spread declines. This is achieved by trapping excess spread in the deal in lieu of paying it out to the seller. It also illustrates that the lower the excess spread level, the longer it will take to fund the account to required levels.

Example 212 Credit Scoring

This score is above the cutoff level for predicting bankruptcy, and thus would be considered favorably in terms of evaluating the firm's creditworthiness. see box p. 615. The nearby box describes how statistical scoring systems similar to the Z score can provide timely first-cut estimates of creditworthiness. These assessments can streamline the credit decision and free up labor for other, less mechanical tasks. The box notes that these scoring systems can be used in conjunction with large databases on firms, such as that of Dun & Bradstreet, to provide quick credit scores for thousands of firms. We told you earlier where to start looking for clues about a customer's creditworthiness, but we never said anything about when to stop. A detailed credit analysis costs money, so you need to keep the following basic principle in mind Credit analysis is worthwhile only if the expected savings exceed the cost. 21. Credit Management and Collection The system, called Decision Index, was created...

Maintaining Good Credit

The key to maintaining good credit is to follow a few simple rules - Don't be too close to your credit limits. Typically, lenders will compare your credit card balances to the total amount of credit you have available. The more cards you have close to the limit, the more of a risk you are to lenders. Get a copy of your credit report and correct any errors on an annual basis. As many as 40 percent of all credit reports contain errors, so get out your red pen. Call Experian (TRW) at (800) 682-7654, Equifax at (800) 685-1111, or Trans Union at (800) 888-4213 for details on how you can get a copy of your credit report. It will probably cost you 8. Find out how many inquiries there are on your credit report. The more inquiries there are, the less likely you are to get the credit you're seeking. For example, every time you apply for a credit card, an inquiry about your credit application is included in your credit report. If too many credit card companies inquire at once, they may be...

Evaluation of Creditworthiness

In Chapter 15, we described how rating agencies assess the credit quality of a corporate bond issuer. The rating agencies evaluate the four Cs of credit analysis character, capacity, collateral, and covenants. When evaluating a customer's creditworthiness, the same four Cs are used, with one slightly modified instead of convenants, there are conditions. The four Cs as they apply to the analysis of a customer's credit-worthiness are then Firms use the following sources of information to assess the credit-worthiness of customers The credit rating assigned by rating agencies and reports on the customer, such as those of Dun & Bradstreet and TRW. In setting credit policies, firms must consider the cost of these sources, such as fees for credit reports, as well as the costs of personnel and other resources in evaluating the information contained in the credit reports.

Check Your Credit

Now that you're avoiding late fees and overdrafts,you should also review your credit report for accuracy on a regular basis. Check in with each of the three reporting agencies Equifax 800-685-1111 or Experian 888-397-3742 or TransUnion 800-888-4213 or If you visit their Web sites, poke around until you find the free or nearly free options You can pay extra for immediate online access,enhanced reports that provide more information or a more readable format,com-bination reports that give you all three agencies'data plus your credit score, and services that promise to monitor your report and alert you if anything goes awry.These services are the ones displayed most prominently on the Web sites just be aware that you can have a no-frills,yet complete,copy of your credit report mailed to you for 10 or less. Under some circumstances,for example, if you have been the victim of identity theft, the fee is often waived. Check each reporting agency's...

Credit Analysis

There are a number of ways to find out whether customers are likely to pay their debts, CREDIT ANALYSIS that is, to carry out credit analysis. The most obvious indication is whether they have Procedure to determine the paid promptly in the past. Prompt payment is usually a good omen, but beware of the likelihood a customer will pay customer who establishes a high credit limit on the basis of small payments and then its bills. disappears, leaving you with a large unpaid bill. If you are dealing with a new customer, you will probably check with a credit agency. Dun & Bradstreet, which is by far the largest of these agencies, provides credit ratings on several million domestic and foreign firms. In addition to its rating service, Dun & Bradstreet provides on request a full credit report on a potential customer. Credit agencies usually report the experience that other firms have had with your customer, but you can also get this information by contacting those firms directly or through a...

The Credit Decision

If there is no possibility of repeat orders, the credit decision is relatively simple. Figure 2.9 summarizes your choice. On the one hand, you can refuse credit and pass up the sale. In this case you make neither profit nor loss. The alternative is to offer credit. If you offer credit and the customer pays, you benefit by the profit margin on the sale. If the customer defaults, you lose the cost of the goods delivered. EXAMPLE 3 The Credit Decision

Credit Scoring

Credit scoring is a method of credit selection that firms commonly use with high-volume small-dollar credit requests. Credit scoring applies statistically derived weights to a credit applicant's scores on key financial and credit characteristics to predict whether he or she will pay the requested credit in a timely fashion. Simply stated, the procedure results in a score that measures the applicant's overall credit strength, and the score is used to make the accept reject decision for granting the applicant credit. Credit scoring is most commonly used by large credit card operations, such as those of banks, oil companies, and department stores. The purpose of credit scoring is to make a relatively informed credit decision quickly and inexpensively, recognizing that the cost of a single bad scoring decision is small. However if bad debts from scoring decisions increase, then the scoring system must be reevaluated. For a demonstration of credit scoring, including use of a spreadsheet...

Credit Information

If a firm does want credit information on customers, there are a number of sources. Information sources commonly used to assess creditworthiness include the following 2. Credit reports on the customer's payment history with other firms. Quite a few organizations sell information on the credit strength and credit history of business firms. The best-known and largest firm of this type is Dun and Bradstreet, which provides subscribers with a credit reference book and credit reports on individual firms. Experian is another well-known credit-reporting firm. Ratings and information are available for a huge number of firms, including very small ones. Equifax, Transunion, and Experian are the major suppliers of consumer credit information. 3. Banks. Banks will generally provide some assistance to their business customers in acquiring information on the creditworthiness of other firms. Figure 21.2 illustrates part of a Dun and Bradstreet credit report, called a payment analysis report (PAR)....

Credit Reports

Credit reports, discussed further in Chapter 15, are available with, among other things, a signed release from the hedge fund manager. In the old days (you know, when we old-timers walked five miles to school, uphill, each way), credit reports had more value because they imparted more otherwise unavailable data than just whether someone has paid a Sears card on time. Nowadays, most of the negative items that a credit report mentions, including bankruptcies, tax liens, court cases, and other similar matters, are recorded elsewhere, as well. What's more, these records are stored in publicly searchable arenas, not requiring a release from the subject. So what's left of the valuable portion of credit reports is solely the hedge fund manager's actual credit history. And although on occasion this can prove useful, given the rare case in which a hedge fund manager is not paying his credit cards, mortgage, auto loans, or student loans on time, or in the situation where the manager is...

Credit Management

Like most other aspects of finance, credit management in the multinational corporation is similar to but more complex than that in a purely domestic business. First, granting credit is more risky in an international context because, in addition to the normal risks of default, the multinational corporation must also worry about exchange rate fluctuations between the time a sale is made and the time a receivable is collected. For example, if IBM sold a computer to a Japanese customer for 90 million yen when the exchange rate was 90 yen to the dollar, IBM would obtain 90,000,000 90 1,000,000 for the computer. However, if it sold the computer on terms of net 6 months, and if the yen fell against the dollar so that one dollar would now buy 112.5 yen, IBM would end up realizing only 90,000,000 112.5 800,000 when it collected the receivable. Hedging can reduce this type of risk, but at a cost.

Credit Enhancements

Most CLO structures contain some form of credit enhancement to ensure that the CLO securities sold to investors will receive an investment grade rating. These enhancements can be internal or external. Generally, credit enhancements are made at the expense of lower coupon rates paid on the CLO securities. While we discuss credit enhancements with respect to CLO trusts, these provisions are equally applicable to CBO trusts. Subordination is the most common form of credit enhancement in a CDO transaction and it flows from the structure of the CLO trust. This in an internal credit enhancement. For instance, CLO trusts typically issue several class or tranches of securities. The lower level, or subordinated tranches, provide credit support for the higher rated tranches. As we discussed previously, the equity tranche in a CLO trust provides the first loss position with respect to a basket of loans. This tranche provides credit enhancement for every class of CLO securities above it.' Over...

Credit Performance

In Australia, mortgage interest on owner-occupied housing is not tax deductible. As a result, borrowers have a considerable incentive to pay their mortgages ahead of schedule (assuming prepayment penalties do not apply). Because homeowner equity is a strong deterrent against default, the lack of a tax deduction on mortgage interest has contributed to Australia's superior mortgage credit performance relative to the United States. In addition, Australia's strong mortgage performance is thought by many to be the result of one or more of the following

Guide to Fannie Mae Dus Mbss

Securitized multifamily Delegated Underwritings and Servicings loans (DUS) have strong prepayment protection and carry the creditworthiness of Fannie Mae. This versatile sector can be used in fixed-income portfolios as (1) Substitutes for convex alternatives, such as corporates, agencies, or Treasuries (2) higher quality substitutes for non-agency multifamily or commercial MBSs or (3) alternatives to asset-backed or PACs. To help broaden the understanding of this unique asset class, we have prepared this guide to DUS MBSs, divided into the following sections

Key Determinants of HEL Speeds

The differences between HEL and conforming loan prepayments can be accounted for by the characteristics of HEL borrowers and loans discussed in the previous section. Based on our loan-level studies,12 we have found that, in addition to loan age and the level of interest rates, some of the most important variables for determining prepayments are the amount and term of prepayment penalties, borrowers' credit, average loan size, LTV, loan term, including the presence of balloons, geographical distribution, loan purpose, and borrowers' debt-to-income ratio. To these we can add the costs of refinancing, which depend on the credit status of the borrower as well as the competitive conditions in the industry, and the amount paid in points at origination (rarely available on a pool level).

Interest Rate Driven Refinancings

Baseline levels are lowest for the highest credit grade, the increase in prepayment speeds is inversely related to the credit grade. This is expected, since higher credit borrowers experience a proportionally larger increase in the refinancing incentive compared to the incentive available from credit improvements alone than the lower credit ones. In addition, the relatively greater financial resources and sophistication of higher credit borrowers make them more likely to take advantage of declines in interest rates.

Prepayments on RFC Fixed Rate SubprimeHELs

Loan characteristics such as loan balance, loan purpose (purchase vs. refinance vs. equity takeout), WAC, term, margin, LTV, prepayment penalty term and level of documentation, and borrower's characteristics such as the credit grade, the FICO score, and debt-to-income ratio. Each loan record includes a full history of payment activity, including delinquencies, foreclosures, and REOs. This feature allows a straightforward calculation of prepayments on floating-rate loans, as well as partial prepayments.

Interest Rate Effects

Changes in the level of interest rates are the most important determinant of voluntary prepayments. In contrast to conforming loans, where this sensitivity is primarily in effect for loans that are in the money, RFC HEL loans retain strong sensitivity to interest rates even when the collateral is out of the money. The extension risk in this case is due to the decline in equity takeouts and credit-driven refinancings as interest rates increase. In a sufficiently strong rate selloff, a borrower who has improved his credit standing may still face a higher loan rate than the one he is holding, diminishing his incentive to refinance. (Although the effect is always mitigated by the possibility of obtaining a higher OLTV loan in a higher credit grade.)

Baseline Curve and Main Determinants of Defaults

Because the RFC HEL collateral is of high subprime credit grade, and the seasoning of most loans is relatively short, only 570 defaults have been observed to date. Their history aggregated by loan age is shown in Exhibit 20.19. The defaults appear to increase to about 3.5 CPR over

Default Risk Multipliers

Based on the proportional hazards analysis, defaults are best predicted by credit grade, original loan term (30-year nonballoon vs. 15-year nonballoon vs. 15-year balloon loan), OLTV and owner occupancy. These four variables account for about 84 of the fit, with the credit grade contributing more than half of that amount. Among macroeconomic variables, we have identified the effect of the national level of household debt service burden, although the statistical significance of the variable is relatively low. Over the time period examined, which includes 1995 to the present, we did not find any meaningful relationship between the default rates and other macroeco-nomic factors such as unemployment and home price appreciation.17 Credit Grade EXHIBIT 20.22 RFC HEL Originations Default Rates by Credit Grade

Major Determinants of Voluntary Prepayments

Our analysis indicates that the most important collateral determinants of voluntary prepayments are loan type (new versus used versus land home), OLTV, location of unit (MH park versus private land), term of the loan, Salomon Smith Barney's credit score, size of the unit, loan purpose (purchase versus refinance), and loan size, in that order. Together with the external inputs of the level of MH shipments and interest rates, these eight variables account for 94 of the fit.13

Borrower Characteristics

Salomon Smith Barney's credit score is the most significant borrower characteristic for voluntary prepayments (as it is for defaults it is by far the strongest predictor of default behavior). Not surprisingly, lower credits prepay more slowly than higher ones. (Trading up in credit, which is so prominent for home equity loans, does not play a significant role here.) There seems to be little dependence on relative savings, suggesting that credit impairment (or enhancement) has similar effects of turnover and refinancings.22 After the loan age exceeds five years, the explanatory power of credit wanes. Reasons for this decline fall into three broad categories. First, the behavior of borrowers with different credit scores may converge as other variables become more significant after an appreciable amount of time has passed. Second, the value of the credit score itself may age, so that it fails to accurately represent a borrower's credit profile after five or more years have elapsed. And...

Which Characteristics Best Predict Defaults

Based on PHA, the most important determinants of defaults are Salomon Smith Barney's credit score, location of unit (MH park versus private land), OLTV, the national level of personal bankruptcies (number of quarterly filings for personal bankruptcies per 1,000 population), loan type (new versus The definition of the baseline case, indicated in bold, and the risk multipliers are given in Exhibit 21.28. As for voluntary prepayments, the multiplier for some continuous variables, such as the credit score, OLTV, and loan term, is a piecewise linear function of the underlying characteristic, obtained by interpolation between the midpoints of the ranges shown.

Macroeconomic Factors

35The relative change in defaults from 1994 to 1998 becomes even more pronounced if, in addition to the location of the unit, borrower's credit score and original loan A detailed discussion of personal bankruptcies is outside the scope of this chapter. However, over the 1990 to 1994 period, the level of bankruptcies was closely correlated with unemployment, mirroring the state of the economy. Subsequent to this period, personal bankruptcies started to increase sharply, as shown in Exhibit 21.35. The increase was in line with the deteriorating credit performance of the consumer loan industry, such as credit card receivables, and can be attributed to a number of factors. These include the development of technology-driven, economy-of-scale players, intense competition for market share, high consumer debt leverage levels, demographic shifts in the population, and rising disposable income. The dependence of MH default rates on personal bankruptcies is therefore a reflection of broader...

Opening the Next Frontier in Credit Card Asset Backed Securities

ERISA-eligible Class C notes offer institutional investors an opportunity to improve yield by participating in triple-B-rated credit enhancement. In our view, sophisticated institutional investors should consider buying these securities for four main reasons Until recently, in many credit card structures, BBB-rated credit enhancement consisted primarily of a receivables interest subordinated to the Class A and to the Class B certificates. The interest was traditionally sold to banks and insurance companies in the form of a collateral invested amount (CIA) on a private-placement basis. Trading restrictions and the lack of ERISA-eligibility, however, prevented a broad market for CIAs from developing. In this chapter, we provide background on the development of credit card ABS credit enhancement, a detailed look at the structure and its risks, and a framework for finding relative value in these securities.

Putting Class C Notes In A Historical Context

Over the past several years, the market for credit card credit enhancement has evolved significantly. Institutional investors have become increasingly comfortable with the deal structures, credit card originators' performance as issuers, and the underwriting standards and performance of most credit card collateral. As a result, these investors have grown more willing to purchase more deeply subordinated classes. In addition, traditional buyers of investment-grade corporate debt have developed an interest in purchasing lower-rated ABS as an attractive source of yield and portfolio diversification. Of course, issuers have always looked to create more cost-effective credit enhancement structures (see Exhibit 22.1). Constant innovation has enabled issuers to lower incremental funding costs, improving shareholder returns. At the same time, issuers have enhanced their own funding liquidity by expanding their investor bases (see Exhibit 22.2). The latest improvements have led to the...

Class C Note Structure And Its Protections

For the purposes of this discussion, we will focus on the sensitivity of the Class C notes to losses and look specifically at structural protections, which are activated as losses rise and which serve to build credit enhancement beneath the Class C notes. The structure does not shield the Class C notes (nor the CIA certificates) from a rapid deterioration in collateral credit performance. For example, should the portfolio experience an upward spike in charge-offs or a downward spike in portfolio yield (among other possibilities), excess spread might diminish too rapidly for the reserve account to build up sufficient cash. These factors could combine to trigger an early amortization event before the reserve account is adequately funded. Therefore, safeguards built into the Class C note structure (and the CIA certificate structure) provide only limited protection against a highly accelerated deterioration of the portfolio.

Rating Agency Approaches To Sizing And Rating Class C Notes

To determine the level of credit enhancement required to support a given rating, the rating agencies use certain benchmark scenarios to evaluate possible future master trust performance under severe stress. As of this writing, S&P and Fitch IBCA are the only two rating agencies that have published methodologies to evaluate these scenarios as they relate to the Class C notes. The methodologies, not surprisingly, are derivatives of how each agency generally views credit card securitization. In addition, each brings a unique approach to evaluating the qualitative aspects of a transaction, including an analysis of the issuer's ability to achieve the objectives of its business strategy within a highly competitive industry. Fitch IBCA Performance of historical collateral Cardholder credit scores Effects of competition, co-branding, etc. Originator's operations Concentration Seasonality In terms of sizing, the rating agency view the Class C note as an equivalent form of credit enhancement to...

Determining Relative Value For Class C Notes

Based on structure alone, in the case of triple-B-rated sellers, Class C notes should trade at levels that are tighter than the seller's unsecured debt. Even though a correlation exists between collateral credit performance and corporate downgrade risk, corporate debt can be downgraded for other reasons as well. For example, the rating agencies may be uncomfortable with the seller's expansion into a new business line or proposed acquisition and take a rating action on the unsecured debt. Such an action would have no impact on the Class C notes. However, structure is not the only relevant consideration. At 7 to 10 of a typical transaction, Class C notes tend to have small tranche sizes. For example, on a 500 million transaction, the size of the Class C note would likely be 35 to 50 million. On a 1 billion transaction, the Class C note might only be as large as 70 to 100 million. As a result, the liquidity of Class C notes tends to be somewhat lower than that of comparable corporates...

Fundamental Analysis Of Credit Cards

Pool performance is measured and triggers are generally set against defined levels of these four factors. Securitization structures are dynamically credit-enhanced, trapping excess spread and or early amortizing under adverse pool performance. Understanding these key factors allows the analyst to evaluate the sufficiency of the credit enhancement in relation to the expected loss scenario, maturity, and cash flow of the pool. Excess Spread Servicing fees, interest expense, and credit losses are deducted from gross yield and comprise excess spread. Excess spread is the most important and comparable analytical factor in credit card analysis. The rating agencies heavily weight excess spread to determine required credit enhancement.

General Features Of Uk Mbs Deal Structure

Cash raised from investors for the assets (loans, in this case). The seller will also typically establish an initial cash reserve to act as credit enhancement. An appointed servicer generally the seller acts as servicer collects the cash from the borrowers, which is paid to investors. Any excess spread income is passed back through the reserve and, if not needed to meet the requirements of the structure, is paid to the seller. As the credit quality of the collateral to be securitized may be less than the desired ratings of the ABSs, bonds may receive credit enhancement to add support. This credit enhancement may take several forms, including reserves, excess spread, liquidity support, subordination, and surety wraps.

Bank and Nonbank Structures

Bank Structures Banks use equitable assignment and pass-through principal and interest right away. Credit enhancement typically includes a combination of individual and pool mortgage insurance, excess interest, and subordination. Bank structures will use pool mortgage insurance policies because it is generally their practice not to insure loans that are originated with an LTV less than 80 . The pool policy is purchased by the bank for these loans if they are included as collateral for the deal. Bank structures need to comply with Prudential Statement C2 Funds Management and Se-curitization (prescribed by the regulatory authority APRA), which administers rules for the sponsoring bank that provides facilities to the structure. This means that liquidity facilities (interest-rate swaps, etc.) provided by the sponsoring bank have to comply with guidelines to ensure that it is not providing credit enhancement. Banks typically issue floating-rate pass-through securities with a 10 cleanup...

Rating Agency Treatment

S&P, Moody's, and Fitch play important roles in the Australian MBS market. Regardless of which rating agency assigns ratings to an MBS pool,10 there are many transaction-specific factors that must be examined before the rating agency can determine its required level of credit enhancement. Each rating agency analyzes current macroeconomic conditions, housing market value trends, and issuer servicer performance trends. Although the rating agencies' models are somewhat unique, there are adjustments made by each to account for borrower profile and loan characteristics, such as debt-to-income ratio, documentation, geographic location, loan size and purpose, LTV, and so on.11 However, a transaction-specific examination reveals several pivotal factors in the determination of an Australian MBS class rating. The rating agencies aim to set the credit-enhancement requirement at a level adequate to protect investors from underlying asset defaults. The rating process includes an assessment based...

Home Ownership Culture

The predominant culture of pride in home ownership in Australia advocates paying back a loan as soon as possible, normally via partial repayments of principal. It is also part of the reason for the excellent credit performance of Australian mortgages. Commonwealth Bank reported 98 of its home-loan customers taking advantage of partial repayments in 1998. Australian homeowners are less likely than U.S. homeowners to fall behind in their scheduled mortgage payments. Exhibit 29.10 shows Australian mortgage credit performance as measured by 60+ day delinquencies since 1996 (data from S&P). The figure also shows U.S. 60+ day delinquency data on conventional loans as reported by the Mortgage Bankers Association for the same period. Exhibit 29.10 shows that delinquency frequency is

The Impact of Mortgage Insurer Ratings

A mortgage insurer's rating plays a significant role in the sizing of the rating agency's required credit enhancement. Rating-agency loss estimates will vary based on the assumptions used (this typically depends on the collateral type). However, the insurer's rating directly impacts the required level of credit enhancement. Exhibit 29.21 shows the level of credit given by S&P and Fitch for the mortgage insurer's rating. To explain the importance of the insurer's rating, Exhibit 29.22 illustrates a representative Australian residential MBS pool. Exhibit 29.22 lists the stress assumptions used to determine the loss severity for triple-A and assumes an average LTV of 80 . The credit enhancement for a class of securities is determined by multiplying the frequency of default (shown in the figure as Benchmark Default Probability) and loss severity. For the triple-A scenario, 10 x 56.6 equals credit enhancement of 5.66 . Once the credit enhancement is determined, it is reduced by an amount...

Single AssetIssuer CMBS

CMBS issuance has been single-asset issuance (see Exhibit 28.4). Since 1997, there have been five transactions totaling more than US 5.7 billion. These first transactions were based almost entirely on the credit rating of a single tenant or entity. The early-1997 transactions were smaller issues financing assets that could have been financed by a single lender. In early 1997, single-asset CMBS issues had a significant financing cost advantage versus traditional mortgage rates, with transactions such as Mooncrest Funding PLC achieving a triple-A cost of LIBOR plus 17.5bp. This Citibank transaction was issued as one 205 million triple-A class guaranteed by CAPMAC. However, since 1998, CMBS pricing has not been interest rate competitive with the portfolio mortgage lending market. Single-asset transactions since late 1997 have only taken place if the underlying assets have been too large for any one lender to finance, leaving the CMBS market as the most...

Borrower Credit

Our loan-level analysis has found that the strongest predictor of defaults is the letter credit grade assigned to each borrower by RFC. The majority of loans originated by RFC are in the two highest subprime credit grades, A and A-. The A credit grade has accounted for 45 to 49 of originations since 1997, while the proportion of A - credit borrowers has stayed in the 23 to 29 range. Less than 8 of the borrowers are in the lowest C D credit grades. The debt-to-income ratio, which is another significant credit variable, has improved in the past three years for RFC originations. After exceeding 40 in 1996, it has declined gradually to 38 in 1999 and has Differences in credit grades imply differences in other collateral characteristics, as shown in Exhibit 20.6. Not surprisingly, loan balances, loan terms, and FICO scores decrease with decreasing credit standing of the borrower. On the other hand, the proportion of loans that are equity takeout debt consolidation loans, the percent of...

Prepayment Model

Application of the RFC HEL prepayment model proceeds through a sequence of steps. First, the loans in a deal are distributed into 20 to 30 groups according to key collateral characteristics, such as prepayment penalties, the WAC, loan age, and so on. For each collateral group average values are computed for relevant loan-level variables including the credit grade, LTV, loan balance, loan purpose, loan term (including balloon level-pay split), and level


As we noted, Salomon Smith Barney's credit score is by far the most important determinant of defaults. The score is constructed from the information reported by the borrower on the loan application and from credit bureau reports. It is designed to simplify the measurement of various credit-related characteristics on defaults, while maintaining the predictive power of all of the components. The definition of the credit score is independent of origination year, enabling a uniform comparison of collateral of varying vintage. For loans originated between January 1992 and March 1999, the credit score ranges from about -2.0 to 4.4 and has a mean and standard deviation of 0.91 and 0.62, respectively. Exhibit 21.29 shows the actual default rates for loans originated since 1992, as a function of loan age for five different groups of borrowers, separated by credit score (the approximate mean value of the credit score for each group is given in the legend). The clear separation of curves...

Location of Unit

EXHIBIT 21.31 Conseco Originations Distribution of SSB Credit Score by Origination Year, 1988-1998 EXHIBIT 21.31 Conseco Originations Distribution of SSB Credit Score by Origination Year, 1988-1998 the section on voluntary prepayments, a borrower located in a MH park has a higher likelihood to sell the property than a borrower who owns or leases land. If the equity in the property is very small, such a borrower may simply decide to default and move, becoming, in effect, a convenience defaulter. A third reason is the greater financial and credit strength of borrowers who own or lease the land. For example, owners of land have higher credit scores than park residents (0.98 versus 0.84), higher disposable incomes ( 1,500 versus 1,300 per month), and lower debt-to-income ratios (36 versus 37.5 ).29 Those who lease the land generally fall between the two categories. Exhibit 21.32 shows the actual default rates for three groups of borrowers based on the location of unit, for loans...


We have accomplished this by analyzing prepayment patterns on more than 940,000 Conseco MH loans originated since the early 1980s. In the process, we uncovered the main determinants of voluntary prepayments and defaults, and quantified their effect. For voluntary prepayments these include loan type (new versus used versus land-and-home), OLTV, location of unit (in a MH park versus on private land), unit size and loan purpose, as well as external factors, such as the level of MH rates and shipments of new MH units. Defaults were mostly explained by Salomon Smith Barney's credit score and, to a smaller extent, by a combination of loan and unit characteristics. Of external factors, we found that defaults depend on the rate of MH inflation and price depreciation, as well as the national level of personal bankruptcies.


Credit card Class C notes represent the next logical step in the development of credit card ABS credit enhancement. The rating agencies have sized the structural cash flow protections to withstand severe stresses. As our analysis shows, Class C notes can tolerate historical loss multiples of approximately two times under extremely conservative monthly payment rate assumptions and 2.5 to 3 times under more typical scenarios. For corporate debt buyers, the securities offer a means to engage in structured products with simple cash flows, similar risks, and, arguably, less potential ratings volatility.

How It Works

An interesting aspect for the Class C investor is that the notes may mature before the senior classes. The C class may not be repaid, however, unless sufficient cash exists to fully repay them. At some time before the maturity of an outstanding triple-B class, a determination will be made concerning the ability to replace the triple-B credit enhancement layer. If there is no ability to replace, an accumulation period will begin for the senior classes that rely on the triple-Bs for credit enhancement. The issuer will begin to accumulate cash in the principal funding account. These funds are for the benefit of the senior notes until sufficient cash exists to repay them and the senior noteholders are, in essence, defeased.

Asset Selection

Time stamp aside, we agree with the thesis that the high yield market is not as efficient as other markets and, as a result, there are opportunities for CDO managers who are well versed in fundamental credit analysis and have access to timely information to outperform their competitors.5 The high yield market does not price every asset accurately. An experienced manager knows which assets are cheap relative to default probability and which are priced properly. Those CDO managers with strong research teams, good

Time Stamp or Cohort

The prices of high yield bonds and bank loans during the ramp-up period can also have a big impact on the performance of a CDO. As we mentioned earlier in this chapter, during the fall of 1998, prices for high yield bonds dropped and spreads widened considerably for technical reasons, although underlying credit fundamentals were relatively stable. CDO managers that purchased collateral during that time frame were able to buy good credit quality collateral at discounted prices. Discounted prices allowed managers to purchase much more collateral than they had projected without going down the credit spectrum. Many of these deals, consequently, have asset buffers that are significantly above their minimum overcollateralization tests. These managers did not time the market it was fortuitous that they came to the market during that period.

Mortgage Originators

Credit Unions are cooperatives owned and controlled by customers. Member deposits fund loans to other members. They offer a wide range of services, but, unlike banks, are nonprofit organizations. Building Societies share some of the characteristics of banks (being similarly regulated by the APRA) and credit unions, funding their loans from member deposits. Home loans are their main business.


Credit card rates for Australian cardholders average about 14 for prime quality borrowers. Credit limits are growing, but recent sources show an average of about A 3,000. Opposing the increasing consumer credit trend, income growth stands at approximately 4 in Australia.

Loan Performance

Loan performance is sensitive to changes in interest rates as well as to changes in housing values. Looking forward, Australian loan performance will be tested by recent increases in rates (1.50 since November 1999) and the possibility for a softer housing market. Nonetheless, Australians have demonstrated discipline in maintaining their mortgages through several economic cycles. As a result, Australian MBS credit performance exceeds its U.S. and U.K. counterparts historically. Looking ahead, loss performance may worsen somewhat because of weakened credit underwriting standards. In the event that housing prices fall, the weaker credit is more susceptible to default. Therefore, LTV remains a key collateral statistic and house prices a key determinant in performance. For Australian MBS investors, mortgage insurance coverage and other credit-enhancement protections have been more than adequate to protect against credit losses.

Innovation and Small Business Loan Underwriting

The innovation in small business lending that has received the most attention in the recent academic literature is small business credit scoring. But despite the abundance of research on this innovation there are still some interesting and unanswered questions about the nature of its overall impact. On the consumer side, credit scoring was first used in the 1950s and is now widely used for most types of consumer lending. It was adapted by large banks to the micro-end of small business lending in the 1990s for loans below a specified ceiling set by the adopting banks - the ceiling appears to range from 100,000 to 250,000. The credit scoring models themselves appear to combine data on the entrepreneur from credit bureau reports with mercantile credit information from third party information exchanges such as Dun and Bradstreet, along with other entrepreneur and firm information.7 The general finding in the empirical literature on small business credit scoring is that the use of this...

Nonrecourselimited recourse

Non-recourse limited recourse is one of the key distinguishing factors underlying project finance. Classic long term lending typically depends on cash flows but the facilities' ultimate credit rationale resides upon the creditworthiness of the borrower, since the lender will have a claim over the company's assets. In a project financing, this is rarely the case since the size of the operation may dwarf the size of the participating companies' balance sheets. Moreover, the borrowing entity may be a special purpose vehicle with no credit history. or liabilities of an individual project. Non-recourse financing therefore depends purely on the merits of a project rather than the creditworthiness of the project sponsor. Credit appraisal therefore resides on the anticipated cash flows of the project, and is independent of the creditworthiness of the project sponsors. In such a scenario, the project sponsor has no direct legal obligation to repay the project debt or make interest payments.

Banking Industry Consolidation and Small Business Lending

There is also evidence that suggests that the impact of consolidation and the associated shift in the size structure of the banking market on small business lending may be relatively benign. One study found that the likelihood of an SME receiving a line of credit from a small bank is roughly proportionate to the presence of small banks in the local market (Berger et al. 2007). Other studies found that while merged banks tend to reduce their small business lending, other banks in the local market tend to increase their small business lending (Berger et al. 1998, Alessandrini et al. 2008). And, yet another study found that whether a merged bank decreases its small business lending depends on how the acquisition is handled organizationally. If the acquired bank is allowed to keep its charter and operate as a separate subsidiary, small business lending tends not to change after the acquisition. However, the merging of charters tends to be associated with a reduction in small business...

Okay Heres the Money Part

It's figuring out how to reach them that gives you a run for your money (no pun intended). You know that you need short-term and long-term goals, so take out two pieces of paper and let's get started. On the first piece of paper, write down any short-term goals you want to accomplish. These may include, but are not limited to, creating an emergency fund and paying off your credit cards and student loans.

The Meaning of Banking

In Figure 1.1, Dl is the demand for loans, which falls as interest rates increase. In Figure 1.1, i* is the market clearing interest rate, that is, the interest rate that would prevail in a perfectly competitive market with no intermediation costs associated with bringing borrower and lender together. The volume of business is shown as 0B. However, there are intermediation costs, including search, verification, monitoring and enforcement costs, incurred by banks looking to establish the creditworthiness of potential borrowers. The lender has to estimate the riskiness of the borrower and charge a premium plus the cost of

Expectations for the future some thoughts

Moreover, we stand today on the modernization of the old Basel Accord for a determination of capital requirements more sensitive to changes in creditworthiness. But we are completely unaware of the impact that such modification will have on the supply of debt, and therefore on the equilibrium between small, medium and big companies. Also, in this case, we deal not only with credit spreads at equilibrium but also with the access to debt. What would happen if small and medium enterprises (SMEs) would be forced to be systematically below their optimal

Measuring Your Financial Health

Determining assets, liabilities, and your (financial) net worth Requesting (and fixing) your credit reports Making sense of your credit score Understanding bad debt, good debt, and too much debt Calculating your rate of savings Assessing your investment and insurance know-how

Other Functions Of Financial Markets And Institutions

In principle, individuals or firms with cash surpluses could take out newspaper advertisements or surf the Net looking for counterparts with cash shortages. But it is usually cheaper and more convenient to use financial markets or institutions to link the borrower and the lender. For example, banks are equipped to check the borrower's creditworthiness and to monitor the use of the cash.

When Its Time to Kiss Your Banker Goodbye 149

Credit Unions Also Offer 100,000 Insurance Protection 159 16 How Strong Is Your Credit Rating 169 Your Credit Score Is How You're How to Get a Copy of Your Credit Beware of We'll Fix Your Credit Maintaining Good Other Ways to Strengthen Your Credit Unions Offer the Cheapest Get Your Credit Record in Shape Check Your Credit Your Creditors Are Watching Don't Stop at Repaying Rebuild Your Good Credit 248 A Secured Credit Card Can Help Rebuild Your Credit 248 Come Clean with Your

Content and research method

Prior to delving into the case studies in this volume, and those in Volume II - Resources and Infrastructure, this introductory, analytical chapter, replicated in each volume, discusses current trends in project finance and important themes that run through the case studies. When a specific case is referred to, the chapter in which it is discussed is noted if it appears in this volume and a note to see Volume II - Resources and Infrastructure is provided if it appears in Volume II. Information for both this chapter and the case studies was gathered from the financial press credit rating agency analytical reports and on-site and telephone interviews with commercial bankers, investment bankers, project sponsors, institutional investors, rating agency analysts and others. On-site interviews generally ranged between including construction risk, operating risk, market risk (applying to both inputs and outputs of a project), regulatory risk, insurance risk and currency risk. These risks...

Exhibit 214 Bond Type Based on Market Price

Investment Grade-High Creditworthiness Speculative-Low Creditworthiness When Ederington, Yawitz, and Roberts (1987) investigated the relation between bond yields and both ratings and accounting measures of creditworthiness, they found that both types of information influenced bond yields. Thus, according to their study, the bond of a firm with a high rating would sell at a higher price than the bond of a firm with a lower rating if the two firms have similar financial ratios and their bonds have the same features (for example, similar seniority, coupon, collateralization, and options).

Strategic versus Tactical Allocations

Another example is credit derivatives. These are investments that expand the frontier of credit risk investing. The fixed income world can be classified simply as a choice between U.S. Treasury securities that are considered to be default free, and spread products that contain an element of credit risk. Spread products include any fixed income investment that does not have a credit rating on par with the U.S. government. Consequently, spread products trade at a credit spread relative to U.S. Treasury securities that reflects their risk of default. Credit derivatives are a way to diversify and expand the universe for investing in spread products. Traditionally, fixed income managers attempted to establish their ideal credit risk and return profile by buying and selling traditional bonds. However, the bond market can be inefficient and it may be difficult to pinpoint the exact credit profile to match the risk profile of the investor. Credit derivatives can help to plug the gaps in a...

Battling Debts Biggest Culprit

That's why you should treat your credit card as a tool, not a cure-all. The rule of thumb If you don't have the cash, don't use the card A credit card should be used as a convenience for emergencies it is nothing more than a tool. Having a credit card or two is a necessity, but becoming laden with 20,000 in credit card debt is a burden and a very common one. Typical clients of Credit Counseling Centers of America are dual-income families with high incomes. However, they have fallen into the habit of overspending they have no savings and up to 20,000 in credit card debt. To save a few hundred dollars a year on finance charges (and work at maintaining a squeaky-clean credit report), follow the tips listed in Chapter 13 on how to cut your credit card costs in half.

Sources of Advantage from Geographic Proximity

In the case of consumer lending, soft information is less likely to be an important component of lending for several reasons. One reason is that consumer loans tend to be smaller in size than commercial loans, and therefore the marginal costs incurred in acquiring soft information may not be cost-effective.5 A second reason is the existence of credit bureaux that collect and maintain large databases on each individual's past credit experiences. To the extent that information on credit accounts is transmitted to the credit bureaux, the informational advantage possessed by local lenders because of past credit relationships with a prospective borrower is diminished (though for the provision of depository services and other activities not reported to the credit bureaux, the information advantage would be maintained). These credit bureaux have the effect of taking what may previously have been considered soft information possessed by a single lender and hardening it in a form that is...

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