“An educated consumer is our best customer.” — Sy Syms
This guide pulls together LoanStreet’s best practices into a quantitative, step-by-step approach for evaluating a loan pool.
Step 1: Read the offering sheet
The offering sheet (summary term sheet) is most buyers’ first view of a pool. Key fields:
- Offering price: a percent of principal, excluding accrued interest. At 103, a buyer pays 1.03 per dollar of principal plus pro-rata accrued interest, less any servicing spread.
- Assumed closing date: drives accrued interest and first-period cash flows.
- Prepayment sensitivity table: yield, WAL and modified duration at base, faster and slower speeds.
- Gross BRTWAC: a better measure than WAC of the rate the pool will actually earn.
- Participation payment date: when distributions reach buyers. Delay days are always included in LoanStreet’s yield.
The headline yield is a semi-annual bond-equivalent yield, comparable to Treasurys, agency debentures and ABS/MBS, and assumes no losses. Detail pages break the collateral down by characteristic, flagging layered risks such as low FICO with high LTV.
Step 2: Develop accurate loss estimates
Static pool data is preferred. If you only have non-static data and origination has been growing, raise your loss estimate. Adjust for the pool’s credit quality, and look at the distribution, not just the average: a pool of all 720 scores behaves very differently from one split 50/50 between 800 and 640. Finally, adjust for the macroeconomic environment the history came from.
Step 3: Run an after-loss yield analysis
A loan-level cash flow model is best, but a back-of-the-envelope estimate often suffices. Example: half 3-year 6% loans, half 7-year 8% loans, offered at 102 with a 20 CPR. The sheet shows a 5.90% yield and 1.82 modified duration. A 1.09 CDR (2% cumulative loss) equals 111 bps a year. Subtracting it gives 4.80%; scaling the loss by the 102 price gives 4.78%, almost exactly the 4.76% from a full cash flow model.
Step 4: Compare to permissible alternatives
Compare after-loss yield to a benchmark such as a Treasury of similar WAL. The spread compensates you for prepayment risk, default risk and lower liquidity. It should almost always be positive, but demanding far wider spreads than the market means few, if any, purchases.
Step 5: Run a scenario analysis
Even well-researched assumptions are uncertain. For par-priced or super-prime pools the impact is small; for subprime auto or unsecured loans it can be substantial. Knowing how bad or good yield can get tells you whether a pool fits your risk appetite.
Putting it all together
Run the same analysis on your own originations, including their full cost (credit reports, marketing, legal, staff, dealer reserves). You may find more diverse, better-yielding opportunities than what you originate today. Then complete seller due diligence and a review of underwriting and servicing guidelines before investing.