May 1, 1991 Turbo-Finance version 1.0 Click to jump to my newsletter article By Edward B. Rockower, Ph.D. Rockower Enterprises P.O. Box 1109 Monterey, CA. 93942 Welcome to Turbo-Finance! This is the first version of a unique and powerful software package designed by and for mortgage and trust deed buyers and brokers. With your help we can make this software better and better with each succeeding version. After thoroughly familiarizing yourself with its many features, please take a moment to write down any suggestions for further improvement that may occur to you. As with any new product there will inevitably be some bugs, especially as many investors and brokers add their creative ways of trying to use this product, perhaps in ways not anticipated by us! The best approach is to work through a few examples, as presented in the documentation that accompanies this distribution disk. Before starting, be sure that all necessary files on the disk are copied to the subdirectory you intend to use for Turbo- Finance. There are three main parts to Turbo-Finance. 'RECAST' will take you through the steps of inserting the relevant data for a note you wish to restructure (or 'recast') in a new, more profitable, form. Having done that, it will calculate the profit if you were to sell the note to an investor who requires a specified yield. It will also calculate the total interest paid by the note payor, and the yield at which you purchased the note. The data you input must be self-consistent, which brings us to the second part of Turbo-Finance, the Financial Calculator. This calculator will enable you to calculate pv, fv, n, i, pmt for any note with constant payments. All quantities are normally positive for the usual conditions of a note, e.g. payments and balloons received by the note investor are positive. Each quantity, except n, can become negative for the most general cases. Once you have input the baseline data for the note, you may save it to a disk file to be reloaded later for further analysis. By pressing Alt-L you may load any of the files displayed. Similarly Alt-S will allow you to save the data. Each file has a default secondary file name of REC (cf. RECast ). You will see a number of example files on the distribution disk, such as EXAMPLE1.REC, which you may load and modify. By clicking on the OK button with your mouse, or pressing Alt-O, you can move the data out of the way. Alternatively, you can click on the top border of the data window, holding the mouse button down, you can slide the data window anywhere you wish to organize and arrange on the 'desktop'. The window that appears when the data has been moved can be made the active window by clicking on it with your mouse button, or by pressing F2. This is the 'RECAST' window. You should now double click on the input line for either the new yield you want per month or per year. To obtain this new yield the payor will need to increase their monthly payment. You enter the maximum new monthly payment you
might hope for, and the program will present five equally spaced new monthly payments up to that maximum, along with the new interest rate charged to the payor that will give you your desired yield. Note that in some cases the new interest rate for the payor will actually be higher than the original face interest rate of the note. This is telling you that they are not too likely to accept that particular offer! You will quickly be able to identify those options that might appeal to the payor. Another interesting thing that will sometimes occur as you go through the calculations is that a negative interest rate for the payor may arise. This is telling us that for a large enough increase in monthly payments, you should be willing to pay THEM interest, rather than charging interest. Another way of looking at this is that if they will pay a large enough fraction of the remaining balance to us, we should be willing to write off a small portion of the remaining balance. The third main part is a 'Discounted Cash Flow' calculator. The pairs of cash flows and the number of occurrences of each is denoted by CF(i) and N(i), respectively, as is standard. Here cash inflows and outflows are represented by positive and negative quantities (or vice-versa, if you prefer). The pairs of numbers are separated by semicolons, with a comma between the cashflow and the number of occurrences, e.g. 500,3;200,6; etc. Here's a little background that may be helpful. It's the article I wrote for our newsletter this past March. The response I received was helpful in selecting features to include in Turbo-Finance. Reprinted from March, 1991 issue of Jon Richards Note-Worthy Newsletter (for which I was Managing Editor ) RESTRUCTURING NOTES: Part 1 Edward B. Rockower, Ph.D. One of the nicer aspects of owning mortgages is that there are continual opportunities to improve them, to increase their safety, yield or both. The main source of this is that we buy them at significant discounts to face value. By sharing this discount with the note payor we can generate a truly win-win situation where we both profit. As they say on Wall Street, 'bulls make money and bears make money, but pigs get slaughtered'. Far better to make money by helping others to also make money. The particular aspect we'll discuss today is the process of offering to lower the face interest rate on a mortgage if the payor will agree to increase the monthly payment. The benefits of this are the following: TO THE PAYOR.. on a fully amortized mortgage the total amount of interest paid out is reduced and the mortgage will pay off more quickly. Also, on a mortgage with a balloon payment, the balloon can be substantially reduced, making it easier to pay off or refinance.
TO THE MORTGAGE OWNER.. the increase in payments means that the discount is received more quickly, hence increasing the yield. At the same time the more rapidly declining unpaid balance improves your LTV more quickly, making your investment safer than it would otherwise be. On an interest-only note there would be no reduction in the balance without this technique. However, the reduction in face interest rate acts in the opposite direction' tending to reduce the yield to the investor. If you offer too great a reduction in interest rate for too small an increase in monthly payment you can actually reduce your yield. The main determining factor is the amount of discount at which you managed to buy the note. With a large enough purchase discount you can actually reduce the interest rate to zero in exchange for a modest increase in monthly payments and still increase your yield. The crucial question is: 'what offer or offers should I make to the note payor to make it sufficiently attractive to them to induce them to come up with more money to send me each month, while at the same time not giving away too much of my profits in the incentive?' To answer that question, until recently I've been going through the following iterative steps. I'll assume we're dealing with a mortgage with a balloon payment due at maturity: 1) select (out of the air) an increased monthly payment we think we'd like to receive, along with a reduced face interest rate that we feel we can tolerate but that we hope will motivate the payor, 2) using the new interest rate and monthly payment, use our financial calculator or computer software to determine the new balloon payment due at maturity, 3) with the new monthly payments, balloon, and what we paid for the note, calculate our new yield, 4) If the yield is not sufficiently increased (or if it decreased) try again starting at 1) with a larger increased payment or smaller reduction in interest, 5) Finally, compute the reduction in total interest payments and in the final balloon payment to be included in a letter to the payor. For instance, here is a paragraph from a letter I have used: This letter extends my offer to you for the following: you have been paying Dr. and Mrs. Smith $247.04 per month. If you will increase the monthly payments to $510.00 per month for the remaining 17 months of the note, I will decrease the interest rate, starting at your first payment of $510.00, from the current 11% down to 10%. In addition to saving you some interest, the combination of increased payments and decreased interest would have the effect of lowering the balloon payment from nearly $27,000 down to a little over $21,000. If this is agreeable to you please so indicate by signing below and returning the original of this letter to me. This offer may be accepted by you at any time during the next month. Upon acceptance I will send you a new amortization schedule showing the exact principle reduction and balloon amount. Accepted: Date:
The above procedure works, but it has three serious drawbacks. First, it is error-prone, second, it is tedious, and finally, it allows only a small number out of the infinite combinations of interest rate and monthly payments to be considered. All three factors are due to the repetitive, multi-step nature of the calculation. Additionally, the yield to the investor is an output from this procedure, not something we can set from the beginning. Wouldn't it be nice if there were a computer program into which we INPUT the desired yield along with the pertinent mortgage information? Such a program would then compute all possible combinations of monthly payment and reduced face interest rate. Additional outputs would include total savings in interest payments to the payor and the new balloon for each combination. From this output we could select one or two possibilities based on our judgment of what might be most appealing to the payor and our own criteria as to whether we want to maximize safety (faster payback and quicker reduction in LTV, i.e. smallest face interest rate and highest monthly payment) or maximize income received (lesser reduction in face interest rate and modest increase in monthly payment). Even better, wouldn't it be convenient if you could select one or two possibilities from the range of possibilities and the program would then print out a standard letter offering the note modification to the payor, detailing all the benefits to them? I asked myself these questions and answered yes to each. Hence, I decided to develop such a computer program. I'm in the process of adding the necessary bells and whistles to make it user friendly, easy to learn, and forgiving. If you'd be interested in purchasing a copy when it's available, drop me a line and I'll send you a notice and order form when it's available. Write me at: P.O. Box 1109, Monterey, CA. 93942 VERSIONS: A standalone version for PCs can be purchased. An online version may be developed in order to be available via Subscription. DISCLAIMERS: Turbo-Finance does not warrant that the functions contained in the software will meet your requirements or that the operation of the software will be uninterrupted or error free. This warranty does not cover any media or documentation which has been subjected to damage or abuse by you. The software warranty does not cover any copy of the software which has been altered or changed in any way by you or others. Turbo-Finance is not responsible for problems caused by changes in the operating characteristics of the computer hardware or operating system which are made after the delivery of the software. TURBO-FINANCE MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. This may vary according to the laws of your State. TURBO-FINANCE does not warrant the mathematical or legal correctness of any functions in the program. TURBO-FINANCE SHALL NOT IN ANY CASE BE LIABLE FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, INDIRECT OR OTHER SIMILAR DAMAGES ARISING FROM ANY BREACH OF THESE WARRANTIES EVEN IF TURBO-FINANCE OR ITS AGENTS HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. Some States do not allow the exclusion or limitation of incidental or consequential damages, so the above limitations may not apply to you. LIMITATION OF LIABILITY In no case shall TURBO-FINANCE's liability exceed the license fee paid for the right to use the Licensed software or two hundred Dollars ($200.00), WHICHEVER is greater. Copyright Edward B. Rockower 1991, all rights reserved. Additional copies are available from your dealer or from Turbo-Finance P.O. Box 1109, Monterey, CA 93942. When you purchase a copy of Turbo-Finance finance, you are authorized to use that copy on a single machine at a time. If you will be using Turbo-Finance finance on more than one machine simultaneously, please contact us regarding multiple -copy or site license arrangements. Caution: Turbo-Finance finance is a specific use tool. It can produce results at variance with legal, or trade practice requirements. It's up to you to use it appropriately.