We just released the first version of our loan pricing calculator and it is now available for free to financial institutions. If you say your bank is all about service, then you need your lenders to have this model because allows your lenders to move the conversation away from the price on the loan to what structure best matches your client’s profile. The calculator produces a matrix of prices for different amortizations and maturities and takes into account interest rate and a large part of liquidity risk. Feed in a fixed rate and the calculator returns a floating rate equivalent. Feed in a floating rate and the calculator returns a fixed rate equivalent. Using this methodology, banks can better understand their “point of indifference” between booking a loan with different maturities, amortizations, floating rate or fixed rate.
Different from other pricing calculators, our also allows you to price loans in the future, so banks can better understand the difference between booking a loan today, a month from today or even 18 months from today. This feature comes in handy when trying to quote a single close loan where there is a construction period and then a term loan. By using this calculator, for example, banks can accurately price what an equivalent fixed or floating rate is today compared to a rate, in the future.
For example, let’s say you want to make a loan at a 2.35% spread (that is about an 11% risk-adjusted ROE) and your borrower can decide between a 5Y fixed with a 20Y amortization or a 7Y fixed with a 25Y amortization. Using the calculator, you can determine that a floating structure at Libor + 2.35%, a 4.29% fixed rate for the 5Y/20Y and a 4.77% fixed rate for the 7Y/25Y is all the same to you. In fact, if you wanted to offer a 20Y fixed rate with a 30Y final, you could do that at 5.66%.
As proof of the model’s accuracy, CenterState, utilizing our Assumable Rate Conversion Program (“ARC”), is prepared to take the fixed rate shown in the model and provide the floating rate for banks that don’t want to manage that interest rate exposure. This allows your bank to make a fixed rate loan and receive floating without any swap accounting, regulatory burden or compliance. Better, the borrower does not have to worry about utilizing swap documents, as CenterState can show you how to basically modify your current lending documents.
If you are already registered for our Resource Center, you can find the calculator here. If you do not yet have access to the Resource Center and you are a financial institution, go here to request access.
This is the same calculator that our lenders are using, so check it out and be sure to get each of your lenders to sign up as well. Having this calculator will allow you to work with a variety of loan structures accurately and move the conversation away from price and back to where it belongs – finding the structure that best suits your customer’s needs, which is a higher level of service.
Submitted by Chris Nichols on April 29, 2014