Investment Attributes Reviewed for Lending Products
Investors use fairly common systematic reviews to compare “like” products. In that way, packages of credit card loans or Fannie Mae securitized mortgages offered to an investor can easily be compared to other transactions involving credit cards or mortgages of a precisely similar nature. An investor’s review of similarities typically covers the following investment attributes:
Conforming nature of the loan product: This means that loan product delivered from California looks exactly like and contains all the same treatments and approaches that loans from Maine, Colorado, New York, Iowa, and every other state possess or will possess.
Rate to the consumer: The interest rate that the borrower (homeowner) is paying or will pay and whether it is fixed or adjustable.
Rate to the investor: The interest rate the investor will receive during the term of the investment.
Tenor of the underlying, primary loans: The length of the payback period.
Term of the security that holds the loans for sale to the investors: In essence, the point at which the secondary investor gets back all of its principal and interest.
Loan default terms and collection options: The systems in place in the clean energy lending program to ensure loan payments are received and to deal with borrowers who get behind on or stop payments.
Experience of the financial institution servicing the primary loans: History of collecting payments and enforcing the terms of similar loans.
Senior/subordinate tranches: A secondary investment can be split. One investor can purchase the whole investment, or several investors can divide the purchase of the loans held by the primary financial institution. If the purchase is split, and one investor is more “important” (senior) to the others, all of them will need to know the benefits to each and the terms of the differences.
Loan loss reserves and/or additional collateral that accompanies the loans sold to an investor (or set of investors): The reserve or collateral can be cash; it can be a “subordinate tranche (participation)” held by an investor who only receives payment if the senior investor is paid first; or it can be insurance of any kind on the loans, on the security, or on the performance of the loans (i.e., mortgage insurance that covers the top 25% of the loan if it defaults, or an insurance policy on the performance of the security containing the loans, such as a Fannie Mae “wrap” that uses the Fannie Mae balance sheet (the United States government) to guarantee performance, etc.)
Liquidity: If the investor needs to sell the loans quickly to another investor so as to use the money for another purpose, the next set of investors must understand the energy efficiency loan product and/or the loan security that holds those loans. Otherwise, the investors will hold up the deal and the investment will not be considered to have the right liquidity level.
Pipeline: This refers to whether the proposed investment is a “one off” (one of a kind) or will generate an ongoing pipeline of similar investments. To satisfy investors, grantees must demonstrate that the clean energy lending activity associated with the investment will continue to produce loans of exactly the type that is for sale.
Loan performance of a large number of similar loan products over an extended period of time: The investor needs to see how differences in geography affect the energy efficiency loans and how the loans have performed through different economic situations.
Among the characteristics listed above, the loan performance of very similar loans or loan products is the most important attribute that investors consider. This tells them how similar products were priced and how they performed. It also allows them to make faster and more data-driven decisions on how to “price” their risk (i.e., the interest rate they will require for the investment being purchased).