Why Repayment Velocity Matters to Securitization Investors

When Marketplace lenders establish new loans, the question of how repayment is going to work matters to investors, particularly those that invest in their securitization trusts.

What happens if a payment is accelerated, or doubled, or missed? One big benefit of fixed-rate amortizing term loans is the clear structure of the scheduled payments. Think about your own mortgage for a second (and recall that you gave your lender collateral, your house, typically marketplace loans are unsecured).

From an investor perspective, a portfolio of loans may have different repayment characteristics. This in turn impacts their future cash flows and return models.

Models such as OnDeck, Funding Circle, Dealstruck, Prosper, and Lending Club offer term loans that have a scheduled monthly payment of principal and interest based on a fixed interest rate and duration. If payment goes to plan, the return is what the investor expects. But any faster or slower payment of the overall portfolio due to changing market conditions can impact returns. We know repayment does not always follow a scheduled plan, as borrowers sometimes have cash flow shortages (surpluses) which they need to prioritize.

Payment velocity, or the actual payments versus the schedule, may differ across the spectrum of loans.

A typical repayment graph looks like your mortgage repayment (ie, the principal declines at an accelerating rate if all equal payments are made on time).

chart for velocity

In an example taken from OnDeck’s Form S-1 registration for a Line of Credit, if a borrower has the following criteria:

  • Credit Limit $15,000
  • Balance Drawn $ 8,000
  • Annual Interest Rate 36%
  • Monthly Fee $ 20
  • Total Interest + Principal $ 8,769
  • Total Monthly Fees $ 120
  • Total Payback $ 8,889
  • Repayment Period (months) 6
  • # of Weekly Payments 26
  • Weekly Payment $337.28

If at any time, weekly payments are missed, doubled, accelerated, etc. that changes the whole dimension of returns. Now multiply that by thousands of investments in some Asset Securitization Trust.  As these loan structures become more common, investors and their asset managers will increasingly have better information to model.

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