Derivex - interest free loans?

[michaelg]

Hi,

Hmm, a thought just a occurred to me regarding their operating structure - don't quote me as this is only a theory, however...

Banking here and elsewhere is based on fractional banking. I.e. when a bank wishes to lend money they are required to place a certain amount in trust with the reserve bank.

Depending on the size of the institution, they are allowed to lend against this reserve, for example a first tier bank may only be required to place 5% of the cash deposits in reserve.

For every dollar they have in reserve they are allowed to lend out x number of dollars, lets say the ratio for 1st teir banks is 1:20.

This means for every $5k in reserve they are allowed to lend out $100k.

This ratio is controlled by the reserve bank and is a mechanism which they use to control the amount of cash currently in circulation. If inflation is too low they reduce rates and up the ratio, thereby encouraging people to borrow more and allowing banks to lend more.

When inflation is too high and they want to absorb the excess cash, they increase rates and reduce the ratio.

Anyway - from the comments in this thread, I though that this company was in some way working the local (or international) money markets and somehow leveraging this cash in some fractional lending system to maximise their return. In other words they are "wrapping" this 5% fee somehow.

Again, like I said, just a theory.

Regards
Michael

 

[D.T.]

Hi MG,

Sounds like a decent theory. If true, is it actually illegal for such an insitution not to have their 'fraction' banked with the RBA?

 

[NormH]

I suspect they are not a bank, but some other sort of financial instrument as they don't appear to be touting for deposits, credit cards etc, so that would mean they don't have a "deposit" with the RBA. Probably just need some sort of financial licence to trade.

Hopefully more will come over the days, they actually start to lend money itself in the middle of December, according to info I requested and I am expecting to hear from them today as I sent in the quiry yesterday.

Norman

 

[keithj]

Infinite Free Money

Phase 1 – Core Capital Issue
Ongoing Cost of Core Capital = Zero
Core capital held on deposit securing risk free floating rate margin spread
The residual income stream is capitalised over a match funded loan term
Phase 2 – Tiered Capital Reset Issue
Core capital held on deposit securing risk free floating rate margin spread
T1 capital is held on deposit securing risk free floating rate margin spread
T1 residual income stream is capitalised over the match funded loan term
Phase 3 - Stepped Capital Raising Target
Core capital held on deposit securing risk free floating rate margin spread
T1 capital is held on deposit securing risk free floating rate margin spread
T2 capital is held on deposit securing risk free floating rate margin spread
T2 residual income stream is capitalised over the match funded loan term
$500,000 used for property loan. T3 capital balance is held in the reserve
account securing risk free floating rate margin spread at zero capital cost

NormH, michealg, I think you're right about using derivitives to achieve this scheme. 'risk free floating rate margin spread' is a derivitive term. There's 3 tiers, and each tier appears to be using money from the previous tier, so it appears to be v. highly leveraged. However, I presume they've done the maths & risk analysis.

BTW. I know almost nothing about fixed rate derivitives.

KJ

 

[Bill.L]

Hi all,

This looks and smells fishy to me.

I do not know of any methodology of how to generate 0% interest money on any derivative market without risk. To insure against the risk(by buying options over instruments) the price of the insurance usually equals the interest rate of the currency you are dealing in.

If you could have the ongoing cost of capital = 0, then why would you lend it out to people at 0%, when you could make money with it??

Lets see if they ask NormH for the 5% up front to "qualify", that will tell us a lot about the organisation .

bye

 

[moneybags]

I too will be most interested to read how NormH goes in his enquiries with this group.

I think the adage "If it looks too good to be true, it probably is" will probably hold here, but I'd be delighted to be wrong.

Some more research into this outfit is definitely warranted. I note their "Executive Summary Funding" has versions for Asia Pacific, Europe, and Americas, so it may help to see if anything can be found on them in the US or Europe.

There's another possibility re this scheme - they might be involved in money laundering, &/or illegal fund transfers from country to country (often done for tax evasion, and circumvention of currency restrictions).

Anyway, I will also try to ferret out some more info, and if we all post what we turn up, we may get a clearer idea of whether this is a scam.

 

[NormH]

Hi,
I have just spent 30min talking to Derivex about the loan and how it works and I a getting the proforma for the lawyer and account to read before putting in the loan application.

The loan application fee will not be cashed until the "loan has been approved" subject to valuation. If the loan do not get to that stage and fails then the check is returned. The 5% conduit, in my case I am talking to them about a "portfolio loan" is in the Equity of the property and so it is not taken out until settlement.

in very laymans terms there are 3 steps to the process and lets us say $500,000.

Step1 (year1) your repayments are sold to bondholders for $x and let us say that it was able to purchase $250,000

The financing is all done on the 90 bankbill rate but then the money is in the overnight bankbill area getting a different rate (usually more) and guaranteed by the RBA. (the rate that is)
Your 5% is used to "buy insurance for the balance of the monies from the bond holders.

Step2 (year2) The 5% is now moved into the reserve fund as the monies are now close to or greater than the funded money ($500,000)

Step3 (year3) The monies from the overnight markets are again higher and it is here that their profits start to cut in.

It seems it all comes down to efficencies in the processing of the monies and they will only go to the markets once a week for the funding. Also as the variations is settlements can cause delays etc they will give you approval for your loan +- 90days from settlement if you fall outside that window then you have done your application fee.

I know I have not explained things very well here, as some of the language was "high market/bond" stuff but I was happy enough to get a proforma and will be applying for a "portfolio loan" this means I can test the water with the property I am buying in the next 6 weeks and then move other properties into the system later and the 5% would be in the equity.

I spoke of loan in my name, me buying income units in family trust, trust offering property as security and they did not bat an eyelid, fully understood and had no issues in their words "as property is securitising the loan" now that in it self was a revelation as I am tired of trying to explain to "retail financiers" read banks, how the money flow works.

Will keep you posted on Lawyer and Accountant commments once I have forms and they have had a chance to look at them.

Norman

 

[Rolf Latham]

Hiya

Looking better all the time.

I hope they have lots of processing staff :O)

At this stage I dont think mainstream lenders would see them as a threat, but whos to know what will be in a couple of years

Ta

rolf

 

[Nobleone]

... And now we wait with baited breath... I hope that this is an above board way of financing... If it is then it should shake up the market... Cheers, Nobleone

 

[qaz]

I've showed this to a guy at work, hes had a quick glance at it and says that maybe the loan requires a lump sum payments additional to regular principle repayments during or at the end of the loan (aka, balloon payments). I know these "balloon payments" as their called are fairly commonplace in the U.S.

 

[Simon]

I've showed this to a guy at work, hes had a quick glance at it and says that maybe the loan requires a lump sum payments additional to regular principle repayments during or at the end of the loan (aka, balloon payments). I know these "balloon payments" as their called are fairly commonplace in the U.S.

That isn't the case here Qaz. I hope to have more info next week or so.

Cheers,

 

[NormH]

I've showed this to a guy at work, hes had a quick glance at it and says that maybe the loan requires a lump sum payments additional to regular principle repayments during or at the end of the loan (aka, balloon payments). I know these "balloon payments" as their called are fairly commonplace in the U.S.

No that is not the case, the "outline" on their webpage, as it was explained to me is really for people within the bonds type markets who would understand the mechanisms. They are hopeful of having a "retail" description up on the site within some weeks.

There are no balloon payments, from the perspective of the borrow, apart from the 5% you have in the conduit, it is a normal homeloan but with no interest.

ie borrow 125,000 over 20 years, payments = 125,000/240 end of story. if you borrow the 5% then you will have interest commitments on that of course. The loan is the same as with a bank ie they can't call it in with out justifiable reason, so if you don't default you are OK, the 5% covers them if you do default as they are able to meet the payments to the bond holders. (as the bondholders are purchasing an income steam, supplied by your regular monthly payments - apparently a regular income stream has a "value" on the market) I also need to ensure if I get the "conduit" monies from them it will be at a "market" rate ie big 4 variable home loan rate or some undertaking like that, otherwise I would go else where to borrow the 5% conduit. I suspect this is going to be very basic money so there will be no features etc just money or in my case with the portfolio product a pool of money that I can use for a number of properties. But I am happy with that if I can reduce my business costs (interest) to almost zero. Means I can borrow more

Norman

 

[NormH]

... And now we wait with baited breath... I hope that this is an above board way of financing... If it is then it should shake up the market... Cheers, Nobleone

They have told me that they have spent over 12mths developing the Software that enables them to easily and quickly determine what will and won't work within their requirements of "no risk" thus assess if they can lend you the money or not. I understand it is quite complex.

They have protected the idea and methods, but did say that is not so say banks/competitors/mortgage orginators won't find a way around that but there were fairly open about it and said that they at least have a 12mth development headstart.

The first move to the markets for money will be in about the 4th week of January and then once a week after that. USA,Canada, UK, Aussie/NZ and some other country that they mentioned but I forget are the first. Everything is standardised for each country and it has all been "flow tested" to ensure as much hands off as possible and automated. Different forms needed developing for different countries due to vagaries of the regulations in each.

I will say, I am impressed with the easy of contact, flow of information, especially as they are not ready to launch yet and proformas are still with legal people. I am quitely confident about this and now starting to worry about how this impacts my current strategies as there is no interest costs so is the loan better in my name now? or just directly into the trust ? and maybe just the "conduit" in my name with the associated interest costs.

Norman

 

[DavidPleydell]

So basically they just divide the loan amount by the number of years and you just pay that back? ie we would just pay back the principle

They would still need to check service ability on the amount you take out regardless of interest?

Can you pay it back faster? They may require you keep it going so that have their regular income stream. A wrap deal, you build in extra equity on the price so you make money there if you do get refinanced and lose the income stream.

David

 

[Rolf Latham]

Hi Norman

To a large extent, the Governments monetary policy, driven through the RBA will be side lined through this methodology on the surface.

Looks very very interesting, wonder how long it will take for APRA to rear its head ?

ta

rolf

 

[Simon]

So basically they just divide the loan amount by the number of years and you just pay that back? ie we would just pay back the principle

They would still need to check service ability on the amount you take out regardless of interest?

Can you pay it back faster? They may require you keep it going so that have their regular income stream. A wrap deal, you build in extra equity on the price so you make money there if you do get refinanced and lose the income stream.

David

I believe it has full redraw facility - offset will obviously not apply

Repayment will be just be the amount borrowed divided by the term of the loan in months.

They advise me that the funds will not be able to be used for vendor financing - but perhaps people needing vendor finance may well qualify for this loan from the start.

Cheers,

 

[kissfan]

Hi NormH and others.
Norm, you mentioned that you are talking to Derivex about a "portfolio loan", does this mean your loan with them will be cross-collateralised with different I/P's in your loan or can you have 1 portfolio loan with sub accounts for each property. Also, you mentioned that the 5% conduit fee could be taken out at settlement, so do you just add it on to the loan amount or do you have to cough it up from your own pocket (or other sources)?? By the way, thank you for sharing your findings with us all. This new product could be something fantastic for all property buyers and may well revolutionise the way people go about borrowing funds.
Regards
Marty

 

[toony]

So let me try and understand this better.....

You take out a $500k loan. Derivex pays you $500k in todays dollars for the loan.

You agree to pay back over 20 yrs - so its $500,000/ (12*20 ie240) = $2083.

Now Derivex has just created an income stream. Derivex then sells that income stream on the bond market or something like that.

So what is that income stream worth in todays dollars. I would have thought considerably less that $500k.

So how can derivex sell that income stream at less than $500k and still find the money to give me for my loan.

At this point in time - I still have my doubts.

 

[keithj]

So let me try and understand this better.....

You take out a $500k loan. Derivex pays you $500k in todays dollars for the loan.

You agree to pay back over 20 yrs - so its $500,000/ (12*20 ie240) = $2083.

Now Derivex has just created an income stream. Derivex then sells that income stream on the bond market or something like that.

So what is that income stream worth in todays dollars. I would have thought considerably less that $500k.

So how can derivex sell that income stream at less than $500k and still find the money to give me for my loan.

At this point in time - I still have my doubts.

Remember they still have the $25K (5% refundable deposit) to play with too.

KJ

 

[qaz]

That 5% conduit fee goes towards "loan mortage insurance" for the "lonaer". This part of the deal has to be loss making for DeriveX on a financial level (if you claim more money back in insurance claims than you are paying out in insurance premiums then premiums will rise to compensate). It seems to me the way they are making their money is by paying money out in 30day bank bills rates and taking money in on overnight bank bill rates. The law of averages says that the overnight bank bill rates over the course of a month will be less and therefore DeriveX make money on the transaction over the long term. The question is, do DeriveX make enough of a "trading profit" and whether if they make a "trading loss" whether the loanees (us) are at all liable.

I know it's very complex. I made myself a basic flow chart so I could understand it better. It helped a fair bit and I will post it up subject to Norm vouching for its accuracy.