Archive for August, 2013


Friday, August 23rd, 2013

After a flurry of loan purchases, I have a moment to write our blog entry. Having a realistic expectation of the purchase price of a loan you are selling is key to pleasant transaction. If your loan is written at an interest rate that is low (5% or under) and your loan runs until the year 2037 or so, you are not going to receive 95 cents on the dollar for it.
The face rate (coupon rate) of your loan you are selling and the length of time left on the loan determines the discount (along with the amortization or monthly payment amount). Long term loans at low rates inherently take a discount, landing you in the high 80’s or perhaps at most 90 cents on the dollar. Expecting -par- pricing for such a loan is not possible, or even 95 cents on the dollar is also not possible.
We also run into some variable interest rate loans, some with ‘floor’ rates of 5% or 6%, perhaps, usually these loans are tied to an index like LIBOR plus a margin of 2.25% or perhaps 2.5%. There is an argument that these variable rate loans will eventually move up in rate as time goes on. HOWEVER, please consider that the 6 month LIBOR index is at only 0.4% and has been there or so for a very long time. It would have to move tremendously higher over several years in order to move the floor interest rate of 5% or 6% on a variable loan. Also typically the variable loans have ‘cap’ adjustments of only 2% per year, or 1% every 6 months, meaning that even if rates shoot up, it will still be years before the ‘floor’ rate is even affected.
Our long track record of over 34 years in this business gives us a prospective on real world workings of loans written with a variable interest rate and having a floor to deal with. The U.S. economy would not be able to withstand a sudden and severe rise in interest rates, it has to be gradual and measured. That is exactly what the Federal Reserve is planning and even if factors like inflation or market conditions put pressure on rates going up rapidly, the result of killing off the real estate market and the interest on the national debt rising rapidly would cause economic woes that would put us in another situation like we were just a few short years ago.
The rise of interest rates is inevitable because we are just above historic lows and there is basically nowhere to go but up, however how it takes place will be over a long period of time and may plateau for a while and even pull back a bit on its way back up, depending on the economy.
Interested in getting a quote on your note you want to sell? We have done over 35 transactions this year so far and counting, those people were very satisfied. Please call, click or scan and e-mail us with your information and we’ll get right back to you.