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Novation Companies, Inc. Message Board

  • dumb_as_a_post dumb_as_a_post Aug 18, 2003 3:52 PM Flag


    Psst...hey.....cheesehead......and I mean that affectionately...Packers!

    You raise some equity take out a big line of lend out money to folks who want to consolidate there higher interest loans into lower interest loans backed by their house, or want to buy a buy some mortgage insurance after you underwrite the pool the the loans togethre, reconstitute'em, hedge them against interest rate fluctuations...and then....

    you stick em in a trust, the hedges go with em in the trust, you attach em to bonds, you sell the bonds to investors. The bonds entitle the investors to the cash flows coming in from the mortgages....You sell off most of them except for a small piece which you keep. You make money on the sale.

    You take the small piece that you got, a reconstituted mortgage loan called a mortgage security, you borrow money by issuing a bond backed by the cash flow coming in from that reconstituted loan, you pay down the bond and pay down the value of the reconsituted loan fragment which is already market down low so their ain't surprises later. You pay off that bond. You own your loan fragment free and clear, and that spits out cash. You take it and put it in a big pile.

    Rinse, cycle, repeat.

    Cash comes in from the securitizations, cash comes in off the spread between the mortgages (pools, fragments) and the cost of money borrowed to hold them, cash comes in from servicing the loans.

    The pile doesn't go poof. The pile of owned mortgage fragments or slices grows, so the pile can grow even if originations drop.

    Proof of no funny business? The dividend, plus when was the last time they did a secondary? If they don't get it from the market, where's the cash coming from?

    Borrowed? Financing is either very short term or one to two years. Not long enough.

    Draining the cash till? Check the balance sheet.

    80% of the divvy comes from that big pile of mortgage slices.

    How did I do drty?

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