Real estate abstract
Methods, system, and article of manufacture are provided for processing
real estate loans based on loan data including personal data relating
to a borrower, financial information relating to the borrower's
financial position, and loan conditions including a loan term and
information on the corresponding real estate, related to a real
estate loan. Such methods, system, and article of manufacture generate
a comparison model including an ability-to-pay rate reflecting an
interest rate on the loan reflecting the borrower's ability to repay
a loan having the loan conditions, a default rate reflecting an
interest rate realizable if the loan is foreclosed and a new loan
secured by the real estate originated, and a minimum rate reflecting
an interest rate realizable if protocols from a sale of the real
estate before expiration of the loan term are determined to be acceptable
and a new loan secured by the real estate originated. Using a relationship
determined from the ability-to-pay rate, the default rate, and the
minimum rate of the comparison model, as well as a predetermined
current return rate, the methods, system, and article of manufacture
select an acceptable return rate for the loan.
Real estate claims
What is claimed is:
1. A method for determining acceptable interest rates for real
estate loans comprising the steps, performed by a processor, of:
(a) receiving loan data including personal data relating to a borrower,
financial information relating to the borrower's financial position,
and loan conditions including a loan term and information on the
corresponding real estate, related to a real estate loan;
(b) analyzing the borrower's financial information to determine
an ability-to-pay rate reflecting an interest rate on the loan based
on the borrower's ability to repay a loan in accordance with the
loan conditions;
(c) determining from the loan data a default rate reflecting an
interest rate realizable if the loan is foreclosed and a new loan
secured by the real estate originated;
(d) determining from the loan data a minimum rate reflecting an
interest rate realizable if proceeds from a sale of the real estate
before expiration of the loan term are determined to be acceptable
and a new loan
secured by the real estate originated; and
(e) selecting an acceptable return rate reflecting lender preferences
based on the ability-to-pay rate, the default rate, the minimum
rate, and a predetermined current return rate.
2. The method of claim 1, wherein the loan conditions include a
loan amount and a loan rate, and wherein the selecting step includes
the substep of:
modifying the loan conditions to provide the acceptable return
rate.
3. The method of claim 2, wherein the modifying step includes the
substep of:
iteratively performing steps (b) though (e) with the modified loan
conditions.
4. The method of claim 1, further comprising the step of:
displaying a form reflecting the acceptable return rate such that
it advises an investor of possible investment strategies.
5. An apparatus for determining acceptable interest rates for real
estate loans comprising:
a memory having program instructions; and
a processor responsive to the program instructions and configured
to:
receive loan data including personal data relating to a borrower,
financial information relating to the borrower's financial position,
and loan conditions including a loan term and information on the
corresponding real estate, related to a real estate loan,
analyze the borrower's financial information to determine an ability-to-pay
rate reflecting an interest rate on the loan based on the borrower's
ability to repay a loan in accordance with the loan conditions,
determine from the loan data a default rate reflecting an interest
rate realizable if the loan is foreclosed and a new loan secured
by the real estate originated,
determine from the requested loan data a minimum rate reflecting
an interest rate realizable if proceeds from a sale of the real
estate before expiration of the loan term are determined to be acceptable
and a new loan secured by the real estate originated, and
select an acceptable return rate reflecting lender preferences
based on the ability-to-pay rate, the default rate, the minimum
rate, and a predetermined current return rate.
6. The apparatus of claim 5, wherein the loan conditions include
a loan amount and a loan rate, and wherein the apparatus further
comprises:
means for modifying the loan conditions to provide the acceptable
return rate.
7. The method of claim 5, further comprising:
means for displaying a form reflecting the acceptable return rate
such that it advises an investor of possible investment strategies.
8. A method for determining acceptable interest rates for real
estate loans comprising the steps, performed by a processor, of:
(a) receiving loan data including personal data relating to a borrower,
financial information relating to the borrower's financial position,
and loan conditions including a loan term and information on the
corresponding real estate, related to a real estate loan;
(b) analyzing the borrower's financial information to determine
an ability-to-pay rate reflecting an interest rate on the loan based
on the borrower's ability to repay a loan in accordance with the
loan conditions;
(c) determining from the loan data a default rate reflecting an
interest rate realizable if the loan is foreclosed and a new loan
secured by the real estate originated;
(d) determining from the loan data a minimum rate reflecting an
interest rate realizable if proceeds from a sale of the real estate
before expiration of the loan term are determined to be acceptable
and a new loan secured by the real estate originated;
(e) generating a comparison model from the borrower's financial
information, the comparison model including the ability-to-pay rate,
the default rate, and the minimum rate;
(f) analyzing the comparison model to determine a relationship
among the ability-to-pay rate, the default rate, the minimum rate,
and a predetermined current return rate;
(g) extracting lender preferences from a constraints database;
and
(h) selecting an acceptable return rate for the loan based on the
relationship, the lender preferences, an the personal data.
9. An apparatus for determining acceptable interest rates for real
estate loans comprising:
a memory having program instructions; and
a processor responsive to the program instructions and configured
for:
receiving loan data including personal data relating to a borrower,
financial information relating to the borrower's financial position,
and loan conditions including a loan term and information on the
corresponding real estate, related to a real estate loan,
analyzing the borrower's financial information to determine an
ability-to-pay rate reflecting an interest rate on the loan based
on the borrower's ability to repay a loan in accordance with the
loan conditions,
determining from the loan data a default rate reflecting an interest
rate realizable if the loan is foreclosed and a new loan secured
by the real estate originated,
determining from the data a minimum rate reflecting an interest
rate realizable if proceeds from a sale of the real estate before
expiration of the loan term are determined to be acceptable and
a new loan secured by the real estate originated,
generating a comparison model from the borrower's financial information,
the comparison model including the ability-to-pay rate, the default
rate, and the minimum rate,
analyzing the comparison model to determine a relationship among
the ability-to-pay rate, the default rate, the minimum rate, and
a predetermined current return rate,
extracting lender preferences from a constraints database, and
selecting an acceptable return rate for the loan based on the relationship,
the lender preferences, and the personal data.
Real estate description
BACKGROUND OF THE INVENTION
1. Field of the Invention
This invention generally relates to methods for assisting in the
determination of an optimal investment plan and, more particularly,
to a method for selecting a rate of return on a nonperforming loan
that minimizes the investor's loss potential.
2. Description of the Related Art
Maximizing the rate of return on investment dollars is the goal
of all investors. Banks and similar institutions in the real estate
business maximize their return realizable on loans by, for example,
lending money to customers to purchase property and charging interest
for the loan at a rate above their borrowing cost. The loan instrument
is often referred to as a promissory note that specifies a principal
amount borrowed from the lender and an interest rate, and is secured
by a mortgage or deed of trust on the property. The lender's rate
of return corresponds to the interest rate.
Promissory nots typically require the borrower to make periodic
(often monthly) payments to the lender. Each payment usually includes
a portion of the principal and interest. Generally speaking, the
borrower completes her loan obligation by making a lump sum payment
before the end of the period to satisfy the loan.
But not all borrowers can consistently make loan payments. Due
to events often out of their control, for example, unexpected medical
expenses or a layoff, borrowers sometimes stop making payments.
Sometimes they stop making payments for only a short period of time
and sometimes they stop making payments altogether. For these nonperforming
loans, the lender has a number of options, each of which provides
the lender with a different rate of return. Although all of the
options are viewed as unattractive when compared to the lender's
originally expected rate of return on a loan, the investor's objective
in selecting an option is to choose one that maximizes the rate
of return and minimize the loss potential.
One option is to foreclose on the property. The foreclosure process
is a legal proceeding by which the lender will ultimately obtain
title to the property. Invariably, the lender then sells the property.
The cost of a foreclosure and holding the property until it is sold
increases the lender's overall investment in the property. Unless
the sale price for the property is substantially higher than the
original value, the increased investment due to the foreclosure
may reduce the lender's rate of return on the loan. The difficulties
and contingencies of the foreclosure make it an unfavorable approach
for dealing with certain nonperforming loans.
Another option is to allow the borrower to sell the property and
pay off the loan. Although this option may seem appealing because
it avoids dealing with the costly foreclosure procedure, selecting
this option may give the lender less than the outstanding amount
owed on the loan, unless the borrower is able to pay the difference
between the lower sale price and the outstanding amount on the loan.
When the lender's proceeds from the sale is less than the full amount
of the loan, this is called a short payoff. A short payoff reduces
the lender's rate of return on the loan, making the second option
also unattractive to the lender for dealing with certain nonperforming
loans.
A third option, which also avoids a costly foreclosure, would be
for the borrower to simply sign over the deed for the property to
the lender. The lender thus accepts a deed-in-lieu of foreclosure.
Like the first option, this one burdens the lender with holding
the property for a period of time and selling it, and, like the
second option, the lender may have to sell the property for less
than its market value or the outstanding amount of the loan. For
at least these reasons, this option is also unattractive to the
lender for dealing with certain nonperforming loans.
The lender's fourth option is to recognize the loan as a complete
loss, writing off the principal. This option may only be appropriate
when the anticipated coast associated with alternatives such as
the foreclosure option (payoff of a superior lien, for example)
exceed anticipated revenues from a sale of the property. For obvious
reasons, this option has the lowest rate of return for the lender,
making it the least attractive option for dealing with nonperforming
loans.
A fifth option is to modify the conditions of the loan. This may
mean decreasing the interest rate for a period of time, capitalizing
past due payments into the principal amount of the loan, or making
another type of modification. This allows the lender to obtain a
rate of return that may approach its expected rate of return for
the loan, making it a more favorable approach for dealing with certain
nonperforming loans.
A sixth option is to allow an assumption of the loan by a third
party who would assume responsibility for loan payments that the
borrower can no longer satisfy.
A simplification of the fifth option has the lender arrange a repayment
plan whereby the borrower repays a percentage of the past due payments
each month in addition to the regular payment. This option is appropriate
under limited circumstances, i.e., primarily when the borrower's
financial information indicates either funds on hand or expected
income sufficient to satisfy both primary payments on the existing
loan and additional payments. This repayment plan may give the lender
a rate of return higher than any other option, which makes it perhaps
the most favorable approach for dealing with certain nonperforming
loans.
With so many options, each with its own advantages and disadvantages,
and related variables, lenders find it difficult to determine the
best option for a particular situation. Historically, lenders have
examined each option and tried to implement the one that seemed
most viable. Lenders have heretofore been unable to evaluate the
acceptability of the different options using a quantitative analysis
and comparison.
It is therefore desirable to seek techniques that can provide lenders
with
a scheme for applying selection criteria in a consistent manner
to better inform lenders considering options for nonperforming loans.
The scheme should also help lenders select the best option for each
case, considering the borrower's financial condition and any hardships
that caused the lender to categorize the loan as a nonperforming
one.
SUMMARY OF THE INVENTION
In accordance with the present invention, as embodied and broadly
described herein, a method for selecting a business plan for nonperforming
real estate loans comprises the steps, performed by a processor,
of: receiving loan data about a borrower including personal data
relating to the borrower, financial information relating to the
borrower's financial position, and an unpaid loan amount, and loan
conditions including a loan term, a loan amount, and an interest
rate, relating to a real estate; analyzing the borrower's financial
information to determine an ability-to-pay rate reflecting an interest
rate indicting the borrower's ability to repay a loan having the
loan conditions; comparing the ability-to-pay rate and the interest
rate of the loan conditions to determine whether the borrower can
repay the unpaid loan amount; and generating a repayment plan reflecting
the ability to pay rate and the loan conditions if the comparison
indicates that the borrow can repay the unpaid loan amount.
In accordance with another aspect of the present invention, when
the comparison of the ability-to-pay rate and the interest rate
of the loan conditions indicates that the borrow cannot repay the
unpaid loan amount, the method for selecting a business plan for
nonperforming real estate loans comprises: determining from the
loan data a default rate reflecting an interest rate realizable
if the loan is foreclosed and a new loan secured by the real estate
originated; determining from the requested loan data a minimum rate
reflecting an interest rate realizable if proceeds from a sale of
the real estate before expiration of the loan term are determined
to be acceptable and a new loan secured by the real estate originated;
generating in the processor a comparison model from the customer's
financial data, the comparison model including the ability-to-pay
rate, the default rate, and the minimum rate; analyzing the comparison
model to determine a relationship among the ability-to-pay rate,
the default rate, the minimum rate, and a predetermined current
return rate; extracting lender preferences from a constrains database;
and selecting an acceptable return rate for the loan based on the
determined relationship, the lender preferences, and the personal
data.
It is to be understood that both the foregoing general description
and the following detailed description are exemplary and explanatory
and are intended to provide further explanation of the invention
as claimed.
BRIEF DESCRIPTION OF THE DRAWINGS
The accompanying drawings, which are incorporated in and constitute
a part of this specification, illustrate an embodiment of the invention
and, together with the description, explain the advantages and principles
of the invention. In the drawings,
FIG. 1 is a diagram illustrating a relationship among rate of return
associated with nonperforming loan options consistent with the present
invention; and
FIG. 2 is a flow chart of the operations of an investment planing
system consistent with the present invention;
FIG. 3 is a block diagram of the investment planning system consistent
with the present invention;
FIG. 4 is a flow chart of the steps performed by the model generators
of the investment planing system consistent with the present invention;
FIG. 5 is a flow chart of the steps performed by the analyzer of
the investment planing system consistent with the present invention;
and
FIG. 6 is an exemplary analyze sheet generated by the investment
planing system consistent with the present invention.
DETAILED DESCRIPTION
Reference will now be made in detail to an implementation of the
present invention as illustrated in the accompanying drawings. Wherever
possible, the same reference numbers will be used throughout the
drawings and the following description to refer to the same or like
parts.
Overview
Systems consistent with the present invention provide a comprehensive
decision making tool for lenders to select the optimal business
plan for nonperforming loans. This is accomplished by generating
models for each alternative available to the lender for a nonperforming
loan consistent with information on conditions related to the loan
and the borrower'financial position. There is a model for each of
the foreclosure, short payoff, deed-in-lieu of loan, write off (also
known as a "charge off"), and loan modification options.
Some models, such as those for the foreclosure, short payoff, and
deed-in-lieu of loan options pay little attention to the borrower's
financial position. They focus primarily on information related
to the loan conditions and past experience with similar nonperforming
loans. The loan experience information generally includes the lender's
costs associated with adopting the modeled approach.
Other models, such as those for the write off and loan modification
options, pay less attention to the loan experience information,
and concentrate primarily on the loan conditions. The loan modification
model primarily concerns the information on the borrower's financial
position.
Although not a formal model, the repayment plan option may be selected
based on the information related to the models. Based on the borrower's
financial position, the lender may find that repayment plan offers
the highest rate of return.
After the models are generated, the results can be compared effectively
to choose the best approach for handling the nonperforming loan.
This comparison involves determining the lender's potential gain
or loss related to the selection of each option. The objective is
to select the option with the best potential rate of return for
the lender.
The comparison also concerns a determination of the location of
a calculated rate corresponding to the borrower's ability to continue
making loan payments, i.e., an "ability-to-pay rate,"
in relation to at least three potential rates of return available
to the lender. The first is the lender's potential rate of return
on its investment if the lender chooses to select a business plan
related to the model for a foreclosure. The second is the lender's
potential rate of return on its investment if the lender chooses
to select a business plan related to the model for a short payoff.
The third is the lender's potential rate of return on its investment
if the lender chooses to invest the same money at prevailing interest
rates. This aspect of the comparison is explained best with reference
to FIG. 1.
Loan Modification Option
FIG. 1 shows a scale 110 of potential rates of return for lenders
in connection with options for dealing with nonperforming loans,
including "Default Rate" 120, "Minimum Rate"
130, and "Current Rate" 140. At the left, lower end of
scale 110 is a rate of return related to a foreclosure. As shown,
this "Default Rate" 120 is typically the lowest potential
rate of return that a lender may obtain from a nonperforming loan.
The acronym "REO" stands for "Real Estate Owned",
which refers to the practice of the lender taking ownership of the
property. It is important to note that the lender is also viewed
as an investor, having invested money in the loan to receive a return
on that investment.
Default Rate 120 comes from an REO model that determines the lender's
likely costs associate with a foreclosure based in part on the lender's
past experience with similar foreclosures and in part on information
on the property itself. These "predicted" foreclosure
costs (e.g., expenses for legal proceedings and related administrative
fees) are added to any other costs associated with the nonperforming
loan (e.g., taxes, insurance, and other expenses involved in holding
the property before resale), and the total costs are subtracted
from the lender's likely cash proceeds from a sale of the property.
All proceeds and expense amounts are economically discounted to
a net present, or economic value associated with this foreclosure
scenario. The result constitutes the lender's anticipated economic
value of the nonperforming loan, and is used to calculate Default
Rate 120 based on the lender's investment and the period of that
investment. The Default Rate 120 is calculated in two steps: (1)
determining a value for the periodic cash flow that would be generated
from the anticipated economic value invested at the Current Rate
140, and (2) determining the interest rate at which the cash flow
would be generated from the newly-modified loan balance.
Considered a minimum rate of return, the rate of return 130 for
a short payoff situation is typically higher than Default Rate 120
because the short payoff does not require the lender to incur costs
associated with a foreclosure. Because the anticipated costs are
lower, the anticipated proceeds net of costs is then higher. Thus,
Minimum Rate 130 is shown to the right of Default Rate 120, or higher
on the illustrated scale 110. Minimum Rate 130 is determined from
a short payoff model that determines the lender's likely costs and
anticipated economic value associated with a short payoff of the
loan. Minimum Rate 130 is then calculated in the same fashion as
Default Rate 120, although Minimum Rate 130 does not involve the
predicted foreclosure costs. Instead, Minimum Rate 130 is calculated
in a manner similar to that described for Default Rate 120. It also
accounts, however, for a proposed sale price for the property with
the sale to occur sooner than a sale in the foreclosure option.
The third return rate, Current Rate 140, is the rate of return
corresponding to the prevailing or current interest rate on new,
non-distressed loans purchased by the lender, which is the reason
for the reference to "Market Rate" associate with Current
Rate 140. The reason for including Current Rate 140 in scale 110
is because it provides a good measure against the alternatives,
i.e., Default Rate 120 and minimum Rate 130, when considering information
on the borrower's financial position. The use of Current Rate 140
permits the lender to make a well-informed selection of the loan
modification option when considering the alternative rate of return
for the additional investment associated with lending the borrower
more money for the loan modification. It also permits the lender
to consider the repayment plan scheme as an option because it too
concerns the lending of additional money to the borrower.
Although the relationship illustrated in scale 110 may not always
be accurate, for example if Current Rate 140 is lower than Minimum
Rate 130, for purposes of this description scale 110 is assumed
accurate. If the relationship is different at the time the lender
is considering the options and, for example, Current Rate 140 is
lower than Minimum Rate 130, this would affect the lender's selection
of an option.
For the lender to consider the loan modification option effectively,
an ability-to-pay rate 150 is calculated from the borrower's financial
information. This rate corresponds to an amount of money that the
borrower is considered to be able to pay for a loan based on his
available net income. The calculation considers the borrower's total
income, total reasonable expenses, with the difference between these
figures providing the borrower's available net income. Depending
on where the ability-to-pay rate 150 falls on scale 110, the lender
can make an objective decision whether the loan modification is
a better option than the alternatives, i.e., foreclosure and short
payoff. For example, if a borrower's ability-to-pay rate 150 falls
on scale 110 at position A, then the lender may select the foreclosure
option, in which case its return rate would be Default Rate 120.
The foreclosure option in this case may be preferred because Default
Rate 120 is the best rate of return the lender can hope to obtain
on a loan with the borrower, with those financials.
If a borrower's ability-to-pay rate 150 falls on scale 110 at the
arrow labeled B, or between Default Rate 120 and Minimum Rate 130,
then the lender may select the short payoff option, presuming borrower
willingness. In this case, the lender's return rate would be Minimum
Rate 130. The lender may thus avoid a foreclosure on the property
and the lower return rate offered by that option. At the same time,
Minimum Rate 130 provides a better rate of return than the lender
can hope to achieve otherwise in view of the borrower's current
financials.
When ability-to-pay rate 150 falls at either point A or B, it may
also be a signal to the lender to reconsider aspects of the borrower's
financial information. For example, the lender may wish to suggest
ways to increase the borrower's ability-to-pay rate above Minimum
Rate 130, because otherwise the lender may choose to liquidate the
nonperforming loan either by the foreclosure or short payoff options.
If ability-to-pay rate 150 falls on scale 110 above Minimum Rate
130, for example, at the arrow labeled C, then the lender is likely
to select a loan modification because the borrower's financials
suggest the ability to pay the lender previously unpaid loan payments.
The lender at this point would select an appropriate modification
that provides a rate of return that corresponds to the borrower's
ability-to-pay rate 150. Depending on how high ability-to-pay rate
150 falls on scale 110, the lender may also determine that a loan
repayment plan is the optimal approach for the borrower to make
up for previously unpaid loan payments. For example, if ability-to-pay
rate 150 falls above the Current Rate 140, the lender knows that
the borrower can afford to make monthly payments that would provide
the lender with a rate of return on the investment greater than
Current Rate 140. Thus, the lender's overall objective is selecting
a loan modification or repayment plan is to achieve a rate of return
as close as possible if not better than Current Rate 140.
General Procedure
FIG. 2 is a flow chart of the preferred steps used by systems consistent
with the present invention to enable a lender to select an optimal
business plan for a nonperforming loan. The optimal business plan
provides the lender with the highest rate of return given the parameters
of the loan and the borrower's financials.
The present invention is preferably implemented in software that
includes program code for input screens (including edit logic to
modify the inputs), analytical calculations, and logical cross-checks
to determine warnings, comments, recommendations, signature authority
limits that appear on the business plan. The analytical calculations
reference historical average table-drive data in a loan experience
database. The logical cross-checks employ policy parameters coded
directly into the software. These policy parameters are, in a broad
sense, based on loan experience, but not explicitly on historical
averages.
The first step is for the system to obtain information on the specific
parameters of a loan and the borrower's financials (step 210). This
may be done by importing into the system a file with the borrower's
financial information, or using a graphical user interface to receive
the same information. The input includes property information (e.g.,
address), personal information on the borrower (e.g., number of
dependents), personal financial information on a monthly basis (e.g.,
income and expenses), assets (e.g., stocks, bonds, and cars). The
input information also includes general data on the current loan
and current loan data (e.g., current interest rate, principal, and
remaining loan term, and proposed modifications to one or more of
these) as well as data on the borrower's arrears (e.g., the number
of unpaid loan payments).
With this input information, the system generates the loan models
for the REO, short payoff, deed-in-lieu of loan, and charge-off
options (step 220). The system also generates the model for a loan
modification option. This aspect of the model generation step involves
the described comparison along scale 110.
Next, the system analyzes the generated loan models with predetermined
rules of a loan experience database (step 230). This step involves
considering a lender's criteria for selecting the options represented
by the loan models. For example, the system may generate relevant
preconditions that may make a loan modification acceptable under
the circumstances of a particular loan. In one scenario, the lender
may
require signature authority of a high-ranking company official
to accept the risks involved or the lower investment yield involved
with a particular deal.
After a user reviews the analyze sheet with loan model information
(step 240), the system generates a business plan consistent with
the lender's selection (step 250). For example, the lender may select
a loan modification option for a loan, in which case the system
generates the necessary documentation specifying the conditions
of the modification consistent with the lender's anticipated rate
of return in making the selection.
System Architecture
Systems consistent with the present invention may be implemented
using a conventional personal computer, such as an IBM compatible
personal computer. FIG. 3 shows an architecture 305 of one such
computer for applying selection criteria in a consistent manner
to better inform lenders considering the options for dealing with
nonperforming loans. As shown, architecture 305 uses system bus
340 to connect RAM 310, ROM 320, CPU 330, storage device 350, monitor
360, keyboard 370, and mouse 380. These are all standard components
of a personal computer. For example, CPU 330 may be a Pentium.RTM.
processor manufactured by Intel Corp. Likewise, the other components
are generally standard on most personal computers with one exception,
storage device 350. It preferably includes three components, in
addition to information relevant to the lender's consideration of
the options for a nonperforming loan. They are loan experience database
352, model generators 354, and analyzer 356.
Database 352 includes a variety of information, including rules
related to the lender's consideration of options for nonperforming
loans and information on experience with previous nonperforming
loans. The rules of database 352 are typically criteria used in
favoring one option over another and criteria for alerting the lender
as to issues associated with loans based on historical experiences.
Database 352 also includes information on, for example, expected
costs associated with foreclosures based on historical average values,
normalized for time in process, for each state or territory of the
United States. This includes factors that are used in determining
foreclosure costs and formulas associated with the application of
those factors to a particular property in light of conditions associated
with the property such as its location, number of property units,
or stage of delinquency.
Model generators 354 are program code used in conjunction with
information from database 352 to generate loan models, and analyzer
356 is also program code that uses information from database 352
to make determinations concerning the generated loan models, e.g.,
determining the optimal option based on models. The program code
of model generators 354 and analyzer 356 is executed by CPU 330.
Process
FIG. 4 is a flow chart of the steps performed by model generator
354 consistent with the present invention for generating loan models
for the REO, short payoff, deed-in-lieu, and charge-off options.
In general, each model involves the same basic steps, although the
models differ with regard to the information considered. As shown,
the system first calculates projected default expense and projections
(step 410). Referencing both information in the loan experience
database and certain input information, the system generates values
for projected expenses under the conditions associated with each
option. For the REO model this includes the projected expenses for
foreclosure, whereas the short payoff model does not include the
anticipated foreclosure expenses, unless the foreclosure process
has already commenced.
To estimate the foreclosure fees and costs, the system examines
a table in loan experience database 352 for historical average foreclosure
fees and costs for the state in which the subject property is located.
The system uses these average fees and costs to compute the REO
option. For the other cases (i.e., short payoff, deed-in-lieu, charge-off,
loan modification options), the system estimates the date on which
these fees and costs will stop accruing. For a short payoff, for
example, the system projects, using information in loan experience
database 352, that it will typically take 45 days from approval
for the deal to close. The system then prorates the fees and costs
using the number of days the loan will actually have been in foreclosure
relative to the historical average time a loan in that state would
spend in foreclosure. The system then adds the foreclosure fees
projection to the foreclosure costs projection to arrive at the
projected expense.
For example, assume experience teaches that attorney fees for completed
foreclosures in New Jersey are typically $750, and the average time
a loan takes to foreclose in New Jersey is about 500 days. If the
system is evaluating a short payoff, and if the loan will have been
in foreclosure for 250 days, the system projects that approximately
250/500, or 50%, of the fee will have accrued. Thus, the projected
foreclosure fee expense calculated in the short payoff case for
this deal would be $375.
The REO model considers the projected sales price of the property
as well as the carry costs associated with holding the property
until it is sold. The short payoff involves selling the property
sooner than the foreclosure option, and this difference is reflected
in the short payoff model. The deed-in-lieu of foreclosure model,
on the other hand, also has costs associated with holding the property
until it is sold, but this model involves selling the property sooner
than in the case of a foreclosure. This is reflected in the deed-in-lieu
of foreclosure model. Finally, the charge-off model is the simplest
in that it concerns only the lender's total loss. This includes
the total amount of the loan, interest on the unpaid loan balance,
and projected expenses incurred to date.
If the borrower had insurance against the a default on the loan,
then the lender may be able to recoup a certain amount of its losses
out of a payment by the mortgage insurer. This is accounted for
in step 420. Lastly, the system allows the user to review projected
expense and income values and override these values if exact information
is available in place of the projections (step 430).
In contrast, the system performs a completely different set of
steps to generate a loan modification model. First, the system calculates
an ability-to-pay rate, default rate, and minimum rate associated
with a loan in the manner described above (step 440).
The lender may not consider a loan modification in all cases, but
when it is under consideration as an option, the lender may dynamically
adjust information for a proposed loan modification. In other words,
the lender receives information for a proposed modification, but
that information may specify terms that are not entirely acceptable
to the lender. In this case, the lender may choose to propose a
different modification. This requires a restructuring of the proposed
loan modification (step 450). Since step 450 is not performed in
all cases, a dotted line connects it between step 440 and 460.
Step 460 involves a re-amortization of the loan in accordance with
a proposed loan modification and consideration of the result with
regard to the borrower's financial information. Thus, the system
determines the borrower's monthly payment under the loan modification
and determines whether the borrower's financials indicate that the
borrower can afford the new monthly payment. The loan modification
is also checked against stored information on investment qualities
to determine whether the loan modification meets the lender's criteria
for investments. This includes considerations of risk and return
associated with the deal.
After the loan models are generated, the analyzer 356 considers
the various models to select the optimal plan. The steps of this
process are shown in the flow chart of FIG. 5. First, the loan models
are compared (step 520).
Next, analyzer 356 calculates the lender's savings as compared
to selection of the foreclosure option (i.e., REO model) (step 530).
This is straight-forward calculation comparing the foreclosure scenario
with the other models. For example, it is determined that the economic
proceeds of a sale of the property in the short payoff scenario
are $100,000 and the proceeds for the sale of the property after
foreclosure are $70,000. The difference, or so-called "savings
over REO," is $30,000. This "savings" is calculated
for each of the short payoff, deed-in-lieu, charge-off, and loan
modification models.
As shown in FIG. 5, analyzer 356 accesses stored rules on the acceptability
of the various alternatives to generate warnings, errors, and policy
messages (step 540). These include notifications that, for example,
the borrower's financials appear to be incomplete or a loan modification
requires certain signature authority. Next, analyzer 356 generates
an "analyze sheet" for side-by-side comparison of the
model's (step 550). An example of an analyze sheet is shown in FIG.
6.
The system also prints a business plan based on the calculated
savings over REO. The business plan includes detailed information
on the selected option and the signature authority required to implement
the option. The plan may also include a written proposal, developed
by the user, as to how it is best to implement the option.
Analyze Sheet
The example analyze sheet shown in FIG. 6, specifies the models
and the results of a comparison of the models. It shows that the
system considered foreclosure costs associate with the REO model
that were not considered by the other models. Since the short payoff
permits the lender to receive the proceeds of a sale of the property
sooner than foreclosure and sale, the short payoff model reflects
this time difference. For example, the amount of expenses for taxes
and insurance are less for the short payoff than for the REO.
Aside from the differences, a key aspect of the analyze sheet is
that it provides an objective comparison of the models using the
"savings over REO." In the example sheet, the loan modification
appears to be the optimal approach as it has the highest figure
(i.e., $61,655) for savings over REO.
Because of their associated rates of return, the various options
for approaching nonperforming loans are ranked as follows: (1) pay
the loan off (including past due payments); (2) repayment plan;
(3) loan modification; (4) short payoff; (5) deed-in-lieu; (6) foreclose
(i.e., REO); and (6) charge-off. Lenders prefer the first option
over the remaining because it has the best overall rate of return.
In contrast, the charge-off option typically has the worst rate
of return. Historically;, lenders considered each approach according
to this order without regard to a quantitative valuation of the
options.
The comparison aspect of analyzer 356, i.e., comparing the various
options, uses an iterative process based on a hierarchy of the options
that permits lenders to make a more quantitative evaluation of the
options. When all the necessary data is input or imported, and the
data accurately reflects a given situation, and the borrower has
plenty of income, analyzer 356 actually supports the hierarchy of
choices. The top two options are not reflected by analyzer 356,
although there acceptability for a given nonperforming loan will
become apparent from the information input into the system.
On the other hand, if the borrower does not have any income, the
third option, i.e., the loan modification option, may not be acceptable
because the borrower cannot pay the lender anything back, and the
economic valuation of that option is poor. Typically, a borrower
wishes a loan modification because it seems to be the best option.
The borrower often asks the lender either to forgive the overdue
debt and start again now the borrower's income is re-established,
or the borrower asks the lender to lower the loan balance to the
current fair market value of the property. In other words, the system's
starting point for assessing a given loan option is with a borrower
requesting one of the specific options. For example, if the borrower
knows that he or she simply wants to get out of a house, the short
sale option would be preferred.
Thus, a loan counselor using the system would first look at the
output from analyzer 356 and typically see that if a loan modification
is a viable option. If it appears that a loan modification is viable,
the counselor accesses data for the loan modification model, and
verifies the accuracy of the data. The counselor often discovers
inaccurate financial information for the borrower, such as unreasonable
expenses, and tries to construct an accurate view of the borrower's
income and expenses. Once this is done, the loan modification model
makes the rate of return comparison and the counselor picks the
lowest viable rate that the system's policy and signature authority
rules allow.
The counselor then checks analyzer 356. If the selected interest
rate for the loan modification is very low, the savings over REO
for the loan modification option may be very low or even negative.
If the loan modification savings over REO are lower than other options,
the counselor has two options: (1) have the borrower restructure
other debit payments to create more room available income to make
higher payments (which in turn provides a higher rate of return
for the lender), or (2) counsel the borrower to pursue a higher
economic value option.
The savings over REO calculation for a loan modification is calculated
as follows: (1) Calculate the projected loss to the investor if
the loan were to go to REO in accordance with previously described
calculations. (2) Calculate the net present value of the amount
by which the borrower payments will be lower than what could be
achieved at market interest rates (the TDR loss--Troubled Debt Restructuring),
for a period specified by the Financial Accounting Standards Board
(FASB). Subtract (2) from (1) to produce the savings over REO for
a loan modification.
For example, if the model projects the lender would lose $40,000
if the loan goes to foreclosure (i.e., REO) and the TDR figure is
$27,000 then the savings over REO is $17,000. This signals the lender
to examine the short payoff option because more money may be saved
using that approach. Alternatively, the lender may be able to get
the borrower to pay more than 3% to reduce the TDR loss, making
the loan modification option viable again.
Conclusion
Systems consistent with the present invention thus provide lenders
with a scheme for applying selection criteria in a consistent manner
to better inform lenders considering the options for dealing with
nonperforming loans. They also help lenders select the best option
for each case, considering the borrower's financial condition and
any hardships that caused the lender to categorize the loan as a
nonperforming one. It will be apparent to those skilled in the art
that various modifications and variations can be made in the system
and processes of the present invention without departing from the
spirit or scope of the invention. The present invention covers the
modifications and variations of this invention that come within
the scope of the appended claims and their equivalents. In this
context, equivalents means each and every implementation for carrying
out the functions recited in the claims, even if not explicitly
described herein.
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