## Valuing a Mortgage Portfolio With Cash Flow Analysis

This Excel spreadsheet could help small to medium size banks, credit unions, and mortgage investors, to evaluate their mortgage portfolio. It could also be used for commercial and consumer loans as long as the user understands that the model uses a 30/360 mortgage day count.

The difference between valuing a portfolio of mortgages and mortgage backed securities (MBS) is that MBS contain a pool of mortgages with the same or close to the same interest rates and maturities.  That way the average weighted coupon and maturity can be entered into an internal rate of return calculator (or Market Yield given price) with  a high degree of assurance. In the case of a portfolio however, some of the loans can have rates and maturities spread over a wide range. A simple average weighted two factor rate

=SUMPRODUCT(Rate ,Balance)/SUM(Balance)

doesn’t take into consideration that some of the shortest maturities might have the highest rates, or the lower balances might have lower rates, or some combination that reduces the reliability of the average rate. This can be overcome somewhat with the use of a three factor average weighted rate, using the additional factor of term:

=SUMPRODUCT(Rate,Balance,Term)/SUMPRODUCT(Balance,Term)

This increases the accuracy of the rate somewhat, however I personally prefer having the internal rate of return of the actual cash flows of the entire portfolio.  In addition, the three factor formula does not consider different Constant Prepayments (CPR), defaults (CDR), loss severity, balloon payments, and periods of interest only.

The inputs to the spreadsheet are in yellow cells and look like this:

I included 800 loans using the randbetween() function for rate (APR), term, and amount. Theoretically, over a million loans could be entered using Excel 2007 – 2016, but the VBA subroutine will get slower the more loans you use. The 800 loans, with terms as long as 360 months, takes about 10 seconds to calculate the total cash flow for all loans, using my computer. That includes having other programs running. A portfolio of 800 shorter term loans (less than 84 months) took about two to three seconds. Your results will vary.

Remember that neither a balloon or interest only month can be longer or equal to the term. If you enter a longer or equal month for either one, conditional formatting will change the row to a dark red fill.

To the right of the input data are the cash flow results, with the internal rate of return. In this example 3.3826%. This translates to a dollar price of \$100.  The green cells with cash flow will be filled until the last payment of the longest maturity. In this case, 360 rows.

After changes are made to the yellow input cells, click the “Clear” button to clear the cash flows and then “Run” button to calculate the cash flow.

The 3.3826% internal rate of return in this example, is based on the total current balance of the portfolio and, as I mentioned before, would be expressed as a price of par (\$100). Even though you might have entered risk factors (defaults and loss severity) for each loan, market rates may have change. You can enter the days delayed (default is 30) and the current market yield, to get a market price. This would be particularly helpful if you were looking to purchase or sell this portfolio.

Don Pistulka

Retired Credit Union CFO - Finance
Background: over 40 years in investments, asset/Liability management, banking, securities trader.
Worked for: California Credit Union, WesCorp, CalFed S&L, Crocker Bank, Carroll McEntee, Federal Home Loan Bank Board (D.C.), Western Asset Management, Security Pacific National Bank.

1. Don,
I am with the NY State Energy Office and looking at this spreadsheet. Can you share the VBA password?

2. Hi Don, i love your work and its really helping me improve my own modelling.

Would you be able to send me the password for the VBA on this one?

Many thanks, JP

1. Hi Don,

I am really enjoying your mortgage modeling. Would it be possible to see how the VBA calcs work with the password?

3. Thank you for this helpful resource. Would you also be able to send me the password please?

4. Don, good afternoon could you please send me the spreadsheet for the mortgage loanValuing a Mortgage Portfolio With Cash Flow Analysis and the password.
Congratulations for all the information that you created!! It is very helpful and amazing job.
Thanks and regards
Luis

5. Hi Don,

Thank you so much for the model! Could you please send me the password for the vba code?

Thanks,
Kristina

6. Hey Don this is incredibly helpful!

Thanks a lot

7. Dear Don,

This is really helpful. I seem to remember that you have a later version using sliders etc.

Kind regards,

Dries

8. Hi Don! I have been using your website and content a lot in the last couple of weeks, since I’m interning in Sec Products. I was wondering if I could get the password for the VBA code? That would be incredibly helpful! Thank you very much for all the great insights.

9. Hello could you share the pwd! thank you

Thank you,
Paul

11. Dear Don – many thanks for this and sharing it with everyone.
Would it be possible to have the password of the VBA ? Trying to follow / understand the calculations behind it
Best

12. Hi Don,

Very helpful post. Is there any way to see the VBA for this? Trying to build it into my skillset.

Thanks

13. Hi Don,
Very useful post. Is there anyway I can have the VBA password for it?? Regards, Sanjeev

14. Hi Don,

Can you please share the VBA password ? I want to check the pricing algo you are using.
Thanks
Sam

15. Hi Don.

Thanks for sharing your insights. Can i get de VBA Password please. It will be very useful for us.

Best regards.

16. Hi Don,
Thanks for the great post!
Would you mind sharing the VBA pass?
Cheers!

17. Hi Don,

Thank you very much!

18. Hi Don – could you please share the VBA for this?

Thank you very much!

19. Don, any chance I could get the password to edit?

20. Hi Don. Thank you for the post, it has been very helpful for me. Could I have the password for the vba please?

21. Hi Don,

I just found your website and subscribed; very interesting material and analysis.

For this spreadsheet, could you possibly send me the password to the VBA?

Thank you!

22. Hi Don,

Just came across your website, really enjoying the quality posts

Could I have the password for the vba?

Thank you

23. Great content Don,

Could I have the password for the vba code? Thanks!

24. Great content Don,

Could I have the password for the vba code? Thanks!

25. Hi Dan!

Amazing to find your resources. I am working with a non-profit to analyze their CECL on their loan fund portfolio to CDFIs. I’d love to ask you a few questions about if this model can be tweaked for loans using different interest methods. Would appreciate any advice.

Best,
Ranjani

1. Ranjani,
I have been retired for several years, so I am not familiar with CECL accounting methods. I am sure ajustments could be made to the VBA. If you are comfortable with VBA, I will send you the password.

Don

26. Hi,

Thanks very much.

27. Hi Don,

This is great and very helpful – highly appreciated! Please would you share the VBA password ? – I will like to understand how the cash-flow is computed.

Many thanks
Ihedi

28. Hello Don – not sure how I haven’t discovered your website before. Would you share the password? You put intex out of work 🙂

29. Hi,

Great work! Can you share the password for the VBA?

Thank you,
John

30. Hi Don,

I wanted to pick your brain on smth. I have a portfolio of residential and commercial loans and I want to see if I have to liquidate this portfolio within the next 30 months, how I would go about that.

For arm loans, I amortized the portfolio in excel using given margins and projected index values from bloomberg (some use 3 mo libor, some 1 month libor and several other indices) Then, I looked at the weighted average age of the portfolio for different asset categories, e.g. jumbo arm loans, helocs, gse conforming loans, etc. The age was over 30 months for each category, so I used 6% cpr and calculated monthly single month mortality based on that. I projected out principal interest and prepayments for 30 months. Then, for each asset category level, I aggregated P&I and prepayments and principal balances. After that, I calculated each, principal, interest and prepayment as a percentage of the beginning principal balance, for each asset category. Then, I came up with a liquidation schedule and decreased the principal balances of asset buckets based on this schedule. At that time, I used the percentages I had calculated previously, to roughly calculate updated p&I and prepayments. Since they were calculated as a % of principal balance, all the numbers were automatically updated when I change the liquidation amounts.

My first question is around what I have done so far: Does it make sense the way I did this in terms of using the projected indices from bloomberg, assumptions for prepayments and using the percentages to calculate post liquidation P&I and prepayment?

Second one is about default rates and loss severities. What kind of assumptions would you recommend using or would it be simpler to ignore defaults considering this liquidation exercise is only projected for 30 months?

I am looking forward to your insights on this and thank you very much for sharing your knowledge and experience with us.

Ian

1. Hello Don, interested in the same question/comment above. Maybe there are more ppl with the same questions. Would you share your thoughts on this theme. Thank you!

1. Thanks for the quick response… I was very happy to see your reply but I could not find an email from you… checked on the spam folder and did not see it there would you mind replying or sending it again? thank you

31. Hey Don,

I downloaded the vba_many_loans file in excel but wasn’t prompted for a password like the others comments reference. Am I not looking at the same file?

32. Hi Don,
Thanks for sharing! Could you please share the VBA password to be able to see/understand the calculations more in detail?

Thanks!

33. Hello Don, Thank you for the sheet. May you please share the VBA content?

Michelle

34. Hi Don,

Would it be possible to share the password for this file with me? Many thanks

35. Hi Don Thanks for the awesome post and blog. This is helping a lot. Will you please share the VBA content just so I understand what is exactly behind the calculations please? Or the formulas behind it, whatever you prefer. I appreciate it.

best Regards,
Joao Freire

36. Hey Don,

Great model, thank you so much for building it.

Kind Regards

Josh

37. Hi, great model! I am curious if you could provide the password to me so I can check out the underlying code. I am trying to improve my VBA skills. Thanks so much!

38. Hi Don,
Could you also share the password with me? I’d appreciate that. Once again, thank you for sharing your knowledge.
Kind Regards,
Michael

39. Hi Don

interesting model – can i get the password for the VBA, be appreciated

thanks

r

40. Would you mind sharing the password to the VBA?

41. Hi Don,
is it possible if you could share the VBA? I really appreciate it.

Many Thanks

42. Hi Don, I’d love to try and use this spreadsheet to value my company’s commercial loan portfolio. Could you email me the password? Thanks for what you do!

43. This is great. Can you please share the password for the VBA code?

44. Hi Don,

Interesting post. Could I get a look at the VBA?

Thanks

45. Hi Don,
Interesting post. Could I get a look at the VBA code? Thanks, D

46. Hi Don,

Fantastic website! Helped me a lot to understand cash flow. Can you share the VB macro password please.
Cheers!

Amitabh

1. Don, Thank you for your excellent post. May I also get the password for the VBA code?

47. Hi Don – could you please share the VBA for this?

Thank you!

48. Please may I have the vba code and password for the model.
Thank you

49. Hi Don,

Great model – would love to see the vba, thanks for sharing!

50. Brilliant post Don.
Would you be so kind to share the VBA code with me? Thanks!

51. Hi Don,
Looks like a pretty good excel model, thanks for sharing. Would you mind sharing the password to the VBA as well?
Thank you

52. Don, very interested post. Would you please share me the VBA code? I appreciate it.

1. Hi Don,

Nice model! Could you share with me the password for the VBA file? I am trying to improve my VBA skills.

Many thanks!

54. This is awesome! However, I do need to value portfolios that have weekly payments. Do you have a model that can help me do that? I also have a pool of loans that require daily payments (5 days/week), but accrues interest on sat and sun as well.

Thanks!

1. Nilza,
I am not familiar with this type of loan. Does it pay down principal with each payment? What is the base year, 360 or 365 or actual days? How many weeks are assumed in each year? When you say “daily payments” you mean weekly payments, correct? Are these short-term loans or longer-term loans? Can they prepay? Is there a penalty for prepayments? Are these flat loans and if not, is there a name for these types of loans that I can Google to find out more about them?

Don

1. Yes, it pays down principal with each daily payment. A 360 days loan has 249 payments (a payment each day except sat and sun), and 360 days of interest accrued. Most of the loans are 360 days loans, some are 540 days and 270 days. They are technically payday loans. They accept pre-payments. This link might help understanding it better https://www.merchantmaverick.com/reviews/ondeck-review/

1. Nilza,
The site was not that much help. On a spreadsheet, please take a 36-month loan at an interest rate of 5%. Calculate the factor rate and construct a simple amortization schedule (P&I) for each day until maturity and send it to me. As you can see in my workbook, an amortization schedule is required on each loan in order to get the total cash flows of the portfolio.
Don

55. Hi Don

thanks
Nan

56. Hi Don Would you please share the password? Thanks a lot!

57. Hi Don Thanks for the great job Will you please share the VBA content? I appreciate it.

58. Hi Don, great site. Could I get the password for the VBA code?

59. Hi Don – Thanks for the great posts. It helps me a lot in learning the concept and VBA code. Can you share the VBA password as well? Thanks again.

60. Hi Don,

I am interested in the password for the VBA.

Thank you,

Kelly

61. Hello there, I am interested in learning how to do this using VBA. Can you email me the password? Thank you in advance.

1. Connie,

It is on its way. Let me know if you do not receive it.

Don

62. Hi Don,

Looks great! Would it be possible to be provided the password as well?

Thanks!

63. Hello, I am interested in learning how to do this using VBA. Can you email me the password? Thank you in advance.

1. Don, I apologize if you have received multiple emails from me but I didn’t see my comment so I wanted to follow up.

I was hoping to get a look at the VBA code behind the calculation. Would you email it to me ?

64. Hi Don please could I have the vba password too as would be a great help for my AMCT treasury studies here in U.K. Great website! Many thanks, kind regards Brian

65. Hi Don please could I have the vba password too as would be a huge help for AMCT treasury studies here in U.K. Great website by the way! Many thanks, kind regards Brian

66. Hi
Thank you for an interesting post and Website.
I would really appreciate if you would let me see the vba code.

67. Hi Don,

Looks great! Could you please share the VBA code for this? Very interested…thank you very much!

68. Hi Don,
Looks great, thank you. Could you share the VBA code as well? Will appreciate this.

69. Hello Don,

Great post, can I please see your VBA code as well? Also, how would you model the cash flows if your pool was a mixture of fixed and floating loans?

70. Hello Don,

Great post, can I also see the VBA code used in the spreadsheet? How would you model the cash flows if your pool was a mixture of fixed and floating loans?

1. I will e-mail you the password. You will see how I modeled the cash flows of mixed loans when you see the VBA. The reason I only give the password out to those that asked for it, is that I want to get an idea of how many people are actually interested in it.

Don

71. […] Valuing a Mortgage Portfolio With Cash Flow Analysis September 2, 2016 […]

72. Hi Don Thanks for the great post, very informative. Will you please share the VBA content? I appreciate it.

73. Hi Don – great post, this is very helpful. Is there any way to see the vba for this? Would greatly appreciate it.