Formerly the child of Amresco Inc., Finance America officially becomes its own entity this week.
Though perhaps of more significance, the company will augment its independence with a brand new product line that is, at core, the most aggressive approach to statistical origination the liquidity market has seen to date, said Chief Executive Officer Brian Libman.
Committed to whole loans for the first quarter, the public market can expect to see Finance America's first term issuance hit the second quarter, with a deal worth between $250 million and $350 million, Libman said.
Between now and then, the new processes will be tested.
"What's happened is we've completely redesigned how we underwrite loans," Libman said. "We've come up with a revolutionary pricing and grading methodology. Instead of coming back with a conditional approval within 24-48 hours like our competitors do, we're going to be able to price and grade and come up with a conditional approval within a minute."
Sounds a lot like PeopleFirst.com, or Nextcard; however, this has nothing to do with the Internet, at least not initially.
"It's a model that we developed based on enormous amounts of data, and performance of different types of loans, so that it's the equivalent of risk-based pricing," Libman said. "You give us five or six characteristics of the loan, and we tell you the price and the grade of that loan. It's basically modeled after the rating agency models, and the historical data on the markets."
The system allows loan brokers, and Finance America's underwriters, to come up with the same pricing in minutes, he said.
"From the rating agencies' perspective, the reason why this is so wonderful is that we no longer allow any exceptions, unlike all of our competitors who consistently get plagued by exceptions."
Different from the other statistical approaches to origination the industry has seen (GMAC-RFC, as one example, started a similar program a few months back), Finance America covers the whole credit spectrum, down to D-class loans. The competitive models currently out there will only look at borrowers at or above the high-end of subprime, Libman said.
"Based on all the data that's available, we basically crunch it all, put it into an enormous model, and run all sorts of statistical analysis, and figure out which loans perform well and which perform badly," said Libman. "So we price ones that perform well aggressively, and price the ones that perform poorly less competitively."
The collateral is expected to perform so predictably that Finance America is already in commitment for its first quarter sales, even though they've only been originating through this system for the past three weeks.
Similar to FICO scores, which can predict the performance of a portfolio, Finance America has developed FAAST scores (Finance America Automated Scoring Technology).
With the FAAST system in place, Finance America will offer brokers a much higher conversion rate (or the number of loans submitted versus the number funded) than what is generally seen. According to Libman, the industry average conversion rate is approximately 30% to 40%, while Finance America is expecting to exceed 75%.
That's three out of four loans approved, and each within a minute.
"The irony is that with a program like this, you can't really predict volume, because volume won't have some nice stair-step, like $50 million to $100 million to $150 million - you run the risk that you'll get $50 million to $450 million," said Libman. "This is completely geometric, because you don't know how something like this will [perform], because there's no benchmark."