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MFAA Prosper : Mortgage and Finance Brief 13
Revenue is the water that sustains any mortgage broking business. Brokers generally receive two streams of income: upfront commissions, which will vary depending on economic and housing market conditions; and monthly trailing commissions, which flow more predictably, but evaporate over time and must be replenished with new business. Brokers must always find fresh sources to stay alive, but what happens when these dry up? The current Australian broking market is as harsh and barren as it’s been in memory. One solution is to purchase, or sell, a trail book. Every week, people contact me looking for information about that very subject. While every situation is unique, everyone, no matter the circumstances, wants to know how a trail book is valued. So here are four brief lessons on what goes into valuing a trail book. Jeff Zulman explains what brokers should consider when valuing a mortgage trail book. Lesson one: a ‘statIc’ obJect wILL aLways Lose vaLUe when you buy a trail book, you are essentially buying a ‘static’ or ‘wasting’ asset – a stream of cash flows that will diminish or evaporate with time. despite the vendor’s assurances to the contrary, the trail will reduce. to determine the value of a trail book, you must estimate the likely rate of this run-off. there are four possible factors to consider: loans discharge; they are partially pre-repaid; clawbacks occur, and borrowers go into arrears. Lesson thRee: FULL dIscLosURe Is cRUcIaL an analysis of the historical performance of the trail book is critical; the best indicator of future performance is past behaviour. look beneath the surface of the portfolio’s credit performance and its composition – that is, how many loans are in arrears, how many are being repaid early or possibly ‘churned’, and the mix of prime versus non-conforming and major lender versus low- or no-doc loans. the vendor should give representations and warranties on the sale – without this the book is worthless, as the risk is greater. Lesson two: consIdeR cpR the Constant prepayment rate (Cpr) is a coefficient that can be applied to a trail book to estimate how long the cash flows that exist today will remain in place. in other words, the Cpr is the average speed at which a mortgage is repaid. it is expressed as an annualised percentage of the principal prepaid in excess of scheduled repayments. Lesson FoUR: It Is onLy woRth what someone wILL pay FoR It Supply and demand has a far greater impact on short-term pricing than any other single item of analysis. this is the most important lesson of all. today, in australia, there are more prospective buyers of trail books than there are sellers. when water is scarce, thirsty people will pay to drink. with any discussions on valuation, the price will be mostly determined by the highest bidder – regardless of fundamental value. Jeff Zulman is the former CEO of Vow Financial. He has also previously worked at Goldman Sachs in New York and London. He now runs Book Buyers Brokerage, a mergers and acquisitions advisory firm focused on brokers. knowledge centre Mortgage trail books what do I need to know aboUt..? 46 Mortgage & Finance brief 6 * Want to know more about buying and selling trail books? Log-on to the MFAA webinar on 14 February. Turn to page 64 for more details.
Mortgage and Finance Brief 12
Mortgage and Finance Brief 14