Loans and Mortgage Tips

Margin is particularly troublesome for optimistic investors. For every dollar of stock you own, your broker will “let” you borrow up to 50 cents to buy more shares. While 100 shares of a company sounds good to you, 150 shares, putting down the same amount of your savings, sounds like a bargain. Of course, there is interest to pay on the loan, but the optimist reasons that the inevitable rise in the stock price will more than compensate for the interest and will accommodate an easy repayment of the loan when necessary.

In practice, though, things often go quite differently. Should the company temporarily swoon, you will get a call from your broker advising you that the loan is now due and you need to either come up with more cash or he will sell out your shares, at a loss, and cover the margin. Now a particularly optimistic type will find more cash, buy more shares, and set himself up for an even bigger fall. Many optimists have lost their life savings from a series of these episodes. Lawsuits inevitably follow.

In particularly bad markets, you are more likely get a call stating that the matter has already been taken care of and you now own only 50 shares of this company, but you no longer owe the broker a dime. This may be fortunate as it avoids the opportunity for you to put up more of your cash. However, should the company immediately recover and soar, lawyers will argue for you in court that you were not given proper notice and an opportunity to cover the deficit, which you certainly would have done.

Brokers know that you want researched stocks recommended by experts. That is why you came to them to begin with. Each brokerage house, therefore, has its own experts rating stocks just for you. When brokers rate stocks, on average more than 65 percent are rated buy, less than 35 percent are hold, and less than 1 percent are rated sell. Every broker, therefore, has a long list of buys to show you, several of which are certain to piqué your interest.

Unfortunately, buy ratings have a dual purpose. Buy ratings sell stock to you and they sell services to companies issuing stock and bonds. In 2000, brokers made more than $30 billion dollars helping companies issue stocks and bonds. These stocks and bonds are always given buy ratings. That keeps the client coming back; it may or may not keep you coming back.

Studies show that buy-rated stocks have random returns on average no better than the market. Frequently they serve to prop up stock prices temporarily so insiders can cash out their stock options at a profit before the collapse. Insiders have to act quickly, though. According to a 2001 study by Investors.com, buy ratings on IPOs by the analysts of the underwriting firm lead to losses six months later of greater than 50 percent.

Investors also go to their broker for comfort and support during the markets down periods. Unfortunately, a full-service broker is not a financial counselor or a psychologist, but a salesperson looking for a commission. He will always have a product to sell you in an attempt to ease your discomfort.

While there are a few differences, the structures for conventional small business loan transactions are similar to those of the unguaranteed portions of SBA 7(a) loans. One distinction is the excess spread available. Note, for 7(a) transactions, excess spread from the entire loan is available with only the unguaranteed portion being securitized, where for conventional business loans the entire loan is in the transaction.

Conventional small business loans are also made to “qualifying borrowers,” whereas the eligibility requirement of SBA loans is for borrowers that cannot obtain this financing. Therefore, the quality of conventional small business loans is generally better than SBA loans.

The average loan balance for conventional business loans for the most part will be higher than the SBA due to a lack of SBA limits on loan size. Also recall that SBA loans are typically floaters indexed to the prime rate. Conventional loans tend to be indexed to three-month LIBOR because the investment community prefers LIBOR floating rate bonds. Indexing the underlying collateral to the same index mitigates basis risk. SBA transactions have basis risk; however, the rating agencies take this into consideration when specifying levels of credit enhancement for deals.

Large portions of conventional loans are secured by first liens on real commercial property. Transactions will often consist of pools of loans backed almost completely by real estate collateral. When the loan is not backed by real estate, losses on defaulted loans will typically be higher due to the lack of real estate collateral, which is generally an appreciating asset, versus collateral such as equipment, which is a depreciating asset.

Prepayment penalties for conventional loans tend to be more severe than the SBA. Penalties are set by the lender and will likely start at 5% and step down one percentage point per year for the first five years following disbursements.

SBA transactions are generally more geographically diverse than conventional transactions. Forty-eight states could be represented in an SBA transaction where conventional transactions may contain only eight with around 70% of loan concentration in one state. Small business performance is negatively affected by downturns in economic cycles; the geographic diversity of SBA transactions lessens some of this risk.

Grace

Following graduation or withdrawal from school, Stafford, and Perkins borrowers are granted a period before the repayment of their loan begins. During the grace period, the government continues to pay the interest for subsidized and Perkins loans. For unsubsidized Stafford loans, the interest is still the responsibility of the student, who may request a shorter grace period to avoid additional accrual of interest. Grace periods for Stafford and Perkins loans are typically six and nine months, respectively.

Deferral

A deferral is a postponement of the loan repayment and acts similarly to the grace period. Interest accrues and the government pays it for subsidized and Perkins loans. However, for unsubsidized loans, the borrower is required to pay the interest or have it capitalized. Following are some circumstances in which students may receive deferment:

• Enrollment in postsecondary school at least half time.
• Economic hardship.
• Inability to find full-time employment.

The loan size varies from $1 million to, more recently, greater than $1.5 billion. Smaller loans allow for greater diversification and less credit risk, yet they are more difficult to analyze. Large-loan deals are typically purchased by buy-and-hold accounts, such as insurance companies and pension funds with real estate expertise, and often are preferred by these “real estate-savvy investors” as it is economical to spend the time analyzing the property.

Smaller loan deals (conduit) are more liquid and are typically purchased by total-return, mark-to-market investors that, lacking real estate experience, are more apt to rely on diversification and the rating agencies’ analysis and judgment.

Fusion deals, presently the most common type of CMBS deal, are “lumpy” conduit deals. Generally, a fusion deal has a few large loans that are typically shadow-rated investment-grade loans that are combined with a diverse pool of conduit loans. They grew in popularity after 9/11, which shut down the single-asset and large-loan type CMBS deals due to concerns that the risk of a terrorist act against one large property was too great. As a result, these large loans were split up and portions placed into various CMBS, thereby creating fusion deals. Much focus is placed on the top 10 and top 20 loans in any given deal as these can have a substantial influence on performance.

Concentration is important because it is sometimes difficult for the rating agencies to predict commercial loan defaults. The rating agencies use measures to score loan concentration and, accordingly, require more or less credit enhancement. For example, Moody’s uses the Herfindahl index to determine the effective number of loans within a pool. A pool of 100 loans that had a Herfindahl index of 65 indicates that the pool has an effective diversity of 65 loans.

The U.S. real estate crisis attracts more circles. Even at the beginning of January, experts expected that between 50 to 100 billion U.S. dollars by banks concerned must be depreciated. In addition to the 50 billion U.S. dollars, which has already been written off.

Now reports that the U.S. credit rating agency S & P with the message word that further loans with a volume of over 500 billion should be examined. In the worst case, this loan volume fully depreciated. The experts from S & P, however, assume that this sum of “only” nearly 265 billion U.S. dollars must be depreciated.

Through this message is likely many investors have become clear that the U.S. real estate crisis, which led to a worldwide credit crunch seems to mutate, long ausgestanden is not. Only when all the banks its portfolio of securities and loans examined, re-assessed and thus endangered by a failure of papers have depreciated, this crisis can be ended. Until the true size of the necessary write-offs are not known, the credit crisis persist. Yet, not all value losses in the books of the banks has been updated.

German investors have therefore been the coming weeks to further adjust fluctuating stock exchanges.

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