Fred: Assuming the it worked like I had originally thought, the insurance would cover the life of the notes in the portfolio, however long that may be. In my calculations I assumed that all the notes were brand new and you had an equal split of 36 and 60 duration notes. From what I see the 36 month notes do better than the 60 month notes, at least in the A grade. So yes, A grade 36 month notes would be less to insure. If you wanted to insure your portfolio for an entire year so that when you bought new notes they were automatically insured, I think I could swing that too, although you would have to tell us what kind of notes you were going to buy. For example, you could tell the algorithm that for a term of one year you would have a portfolio of A and B notes, no more than say, 50% B notes, and only notes with zero credit inquiries. The more information you gave us the better a rate we could give you, obviously, but the more restricted you’d be in your future investing. If you just said you were going to buy A and B notes, but weren’t willing to limit yourself to specific percentage cap on the B notes, then we would have to give you a policy that assumed you would create a portfolio of 100% B grade loans. Same goes for the filters.
HOWEVER, if we were simply ensuring you against a portfolio loss, like rawraw brought up, not reimbursing you for every loan you had that defaulted, it would be completely different(see rawraw below). In this form, we would be looking at your likely profit, and so D and E grade loans, which yield the best returns after defaults, would be the least expensive, and A loans would be the most expensive. Insuring against defaults for D, E and F notes would be many times more expensive. Conversely, as I said, insuring against a portfolio loss made up of D, E and F notes would be less expensive.
I’ll get you some better numbers soon - I enlisted my uncle who’s a quant, and I’m asking around to try to find someone in actuarial science who’s willing to help.
Fee: I hear yu. I think that limiting note contributions to $25 or $50 like I said would make it less likely that a few giant notes defaulting would make us insolvent. In terms of weathering a an economic downturn, we just have to be large enough that the government considers us to big to fail and can bail us out
. If we couldn’t get a bank to underwrite us I guess we would have to keep a large enough cash reserve that we wouldn’t get burned. In terms of simply refusing to pay, I hadn’t considered that - I’m sure the regulatory agency we registered with would force us to, and it would be the same process you’d go through if the fire insurance company didn’t pay out when your house burned down.
rawraw: I’m imagining that it would simply cover all defaulted notes, even if those defaulted notes didn’t push your entire portfolio into a negative ROI. That’s what I was assuming when I got my very rough 1.5% calculation to cover A grade notes. I suppose we could offer to cover you only if the defaults you experienced gave you a negative portfolio ROI as well. It would cost less to insure it that way. I’m not sure which way would be more attractive. Mentioned above.
Bobubanks: so closer to the second kind of insurance I mentioned above?
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