ILS FOR LENDERS

WEALTH GUARANTEES FOR LENDERS

If you offer mortgages on hundreds of houses and in the process you deploy 1,000 average incomes’ worth of mortgages, an ILS Mortgage will repay more than 1,000 average incomes in repayments. That is not money. That is wealth. You get back more wealth than you lent.

The only way that would not happen, apart from conditions where the market is flooded with money to lend and interest rates are too low, is if you are lending to high risk people without enough collateral to back it, or some natural catastrophe or war, or an invasion of earth by aliens, or of there is so much money around that interest rates are below the level normally needed to stem inflation, and they stay that way.

With the fixed / defined cost mortgage, when you sign the contract with the borrower, you know exactly how fast that additional wealth is going to be repaid. It is spelt out right there in the contract.

WHAT IS WEALTH?

Put it this way: if you get less than 1,000 average incomes back from your borrowers then the borrowers end up having the use of less income than what they have borrowed and spent. They might borrow four years’ income and repay three. Then they have an extra years’ income to spend, and they can spend it however they wish. Spendable income for our purposes is wealth. It does not vanish. It just gets passed around.

When you write your contract, you must specify how much wealth you want to be repaid and how quickly. After that, it is up to you to collect the payments. You will have regulations to comply with in writing your quotations of course and you will need to know how to calculate the quotation. For a Defined Cost ILS Mortgage, that can be done with Bill Waghorn's Equations.

MANAGING CASH FLOWS AND LIABILITIES

When you are administering a variable rate ILS Mortgage, your principle task is to raise as much money as you need to meet your lending requirements at all times. What happens when you raise interest rates in order to do that, is that the borrower’s repayments will not fall as fast as they might otherwise fall compared to the ‘standard rental’. Payments Depreciation reduces. Instead of easing by 4% p.a. this rate may fall. Because you are free to raise new deposits and savings by raising the interest rate, you have an extra degree of freedom to balance your cash flows which you did not have using the traditional methods, and you will not find any 'payments shock' to worry your borrowers, creating thousands of arrears cases and hundreds of repossessions.

The fact that your borrowers took on more debt with their credit cards and more family commitments as they sent their children to school will not be a problem for you, unless incomes start falling. But at least if incomes start to fall then you will still be able to help them quite a lot. It is essential that lenders become familiar with the mathematics of lending and the various back-testing and other tests that have been done on the ILS models and the traditional LP models.

People that cannot keep pace with the payments will have time to move house in an orderly and planned way, just as they usually do when they cannot afford their rentals. That is why you will not normally get lots of arrears with the usual LP Model when the economy is doing well and interest rates are not jumping up and down. But with the ILS Model you can have this same experience (low arrears rates) in all kinds of economic conditions. People quietly move house when they have to. Your residual risk is small and is insurable. If you are still short of money to lend, stop lending for a while. Around 20% of what you lent last year will come back in redemption in the current year. If that does not work, for you it means that your competitors are more efficient or managing their business better than you are. Go for a merger.

If you would like more information, contact me at IngramSure. As a hired consultant, I have many   interactive spreadsheets and other data, one of which shows how your business accounts may perform in all kinds of environments. It gives projected profits, reserves, various tax regimes, cash flows, and so forth. In almost all situations (all that have been thought of), the ILS System is more sustainable and more competitive than the current mortgage models are.

With ILS you can lend the same amount as a competitor and do so more safely, you can lend a little more, more safely, and you can raise interest rates more safely when necessary, so as to take deposits away from your competitors or from the money markets. And your administration costs are lower: when others are repossessing - you may not need to. You may be making a takeover bid or two.