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I was a former ABS banker and I personally think there is an opportunity to automate the structured finance ratings process. Here is how it works today. An ori

I was a former ABS banker and I personally think there is an opportunity to automate the structured finance ratings process. Here is how it works today. An originator finds people to lend to, aggregates them, works with a bank to structure them into a security that gets rated and then institutional investors buy the securities. Rating agencies get paid to apply their ratings criteria which they publish, allowing you to reverse engineer the model. The opportunity, in my opinion, is a point of sale system where you hand iPads out to car dealerships, clinics whatever. Someone wants to make the big purchase, puts their social in and gets funded by the institutional investors on the spot. An institutional investor at the moment won’t get a say on funding, the platform will. They will simply set their high level criteria and the system will continue funding to get to some average that fits it. For example, I could be an investor that says I want $10mm of subprime auto loans per month with average FICO if 615 and min/max loan sizes of XYZ. That gets entered into the system and then the dealerships continue handing iPads at the point of sale. The cash flow of the loans can move through the waterfall and ratings can be real-time in the flow as opposed to the security. Anyway not sure if this makes sense as it is nuanced and I am being high level.

thoughtstheseus 7y ago
Real time cash flow seems like overkill,props if you can do it though. You see some lenders in the merchant cash advance market doing similar POS flow analysis. Lots of structured products have liquidity facilities to bridge short term issues so credit quality throughout the cycle tends to matter more than ST flow imo.
jfengel 7y ago
The problem is that this doesn't track correlations between people. The implication is that each user has an independent risk, but that's not always true. In particular it was the problem with CDOs during the last crisis: people assumed that one person's default would not cause another's, and what seemed like a collection of moderate-risk loans was actually very high risk in aggregate. If you're aware of that fact then you know what you're getting and can deal it. But it's the tacit assumptions, magnified by aggregation and automation, that caused a disaster.
rtkwe 7y ago
I think the big issue with that is those institutions don't want to be acting as loan servicers. Someone needs to do all the work of processing payments, working to define alternate payment plans in some cases and doing foreclosures/reposessions when someone defaults. Who does that in your model?

thoughtstheseus 7y ago

Real time cash flow seems like overkill,props if you can do it though. You see some lenders in the merchant cash advance market doing similar POS flow analysis. Lots of structured products have liquidity facilities to bridge short term issues so credit quality throughout the cycle tends to matter more than ST flow imo.

jfengel 7y ago

The problem is that this doesn't track correlations between people. The implication is that each user has an independent risk, but that's not always true. In particular it was the problem with CDOs during the last crisis: people assumed that one person's default would not cause another's, and what seemed like a collection of moderate-risk loans was actually very high risk in aggregate. If you're aware of that fact then you know what you're getting and can deal it. But it's the tacit assumptions, magnified by aggregation and automation, that caused a disaster.

rtkwe 7y ago

I think the big issue with that is those institutions don't want to be acting as loan servicers. Someone needs to do all the work of processing payments, working to define alternate payment plans in some cases and doing foreclosures/reposessions when someone defaults. Who does that in your model?