UNSECURED LENDING
For years the financial community has been aware that secured real estate lending is perilous.
Most bank failures have historically been caused by illiquid or otherwise flawed real estate secured loans, or even worse lending to lenders secured by such loans.
The sad reality is that non income producing collateral is often worth nothing, either because of the inherent bad quality of the collateral, or more often just temporary adverse marketing conditions which the aggregate of borrowers is not able to survive.
Solid debt coverage has always been the primary requirement to making a solid loan. If the debt coverage is solid the chances of having to proceed against the collateral are near zero. A good lender almost never has to foreclose or even to worry about the value of his collateral.
Wall Street has figured this out and is now relying on informational analysis of the borrower's credit worthiness instead of perfecting security interests in essentially worthless collateral.
The first unsecured products were purely FICO driven: a 730 credit score got a borrower a loan, generally limited to $300K except for very high net worth borrowers, and limited to apparent ability to repay.
Wall Street has crunched the numbers now and regression analysis has demonstrated that FICO scores don't tell the true story. The 730 FICO borrower is still a safe bet of course, but in fact not that better than a lot of 600 borrowers with certain financial profiles not sufficiently weighted by FICO. FICO in fact overweights the failure to pay very small amounts of money precisely on time. The truth is that people of solid means tend not to pay too much attention to paying their Target card, that in fact small credit card obligations are nearly irrelevant. Credit card issues of less than a certain size should in fact be completely disregarded for loan underwriting purposes (unless of course you are underwriting the issuance of a credit card).
In fact all that matters in credit card use for major loan underwriting is the extent to which large credit lines are under used or over used. Bottom line is that only American Express Platinum or other large lines matter at all. A borrower who pays his mortgage and his Amex platinum card is almost always a good borrower.
Thus, up to $300K can sometimes be obtained for FICOs even below 600 after these are rescored by sophisticated unsecured lenders.
Of course predictable income (business or W-2) is the most important thing of all since that is how the loan will be repaid. Compared to debt coverage NOTHING else matters at all, including mortgage or Amex credit histories.
Of course, there are a lot of other informational sources that need to be reviewed for a large unsecured loan, some of which are fairly esoteric and easily explained, even if not proprietary (which most of them are).
Bottom line is that there is an infinite amount of money available for unsecured lending, that the commission structure is much better than for secured lending, that the loans are essentially much better than secured lending, that the interest rate of the obligation is much higher, that since interest tends to be front end loaded by high origination fees prepayment risk is near zero, that the loans are relatively short term compared to long term mortgages and that thus there is greatly reduced interest risk.
Most interestingly the default rates are about the same and bad debt recovery is about the same.
Send me good pdf's of two years tax returns and all three credit reports and see how quickly a borrower (often even with a fairly low FICO score!!) can get up to $300K for any purpose. NO HARD COPIES OF CREDIT ARE GENERALLY REQUIRED.
pl goduti