tickertapes

Users can search for any word or phrase and opt for news of common financial market indexes

Originally implemented as "Twickertapes" and utilizing the original Twitter API (v2.0), this app is merely a demonstration of what can be done with a little text input, and API (the Google News API) and scrolling text and ASCII art.

You can find it on the web here: https://tickertapes.net

 

How does ACH work?

ACH is a very common American intrabank account payment system

ACH is an acronym for Automated Clearinghouse. ACH is essentially an electronic way of performing increments (credits) and decrements (debits) to financial accounts. 

ACH can process any transaction so long as the bank or financial institutions in the transaction are ACH compliant. There exists a nationwide ACH network for the settlement of transactions betwen financial institutions. Beginning in the early 70's ACH emerged as the preffered payment method for transfering money- especially routine, scheduled payments- between banks without the need to be physically present,

During the 1970's in America, ACH organizations were created such as the long-standing NACHA, or National Clearinghouse Association. ACH files have standard "entry class codes" and "transaction codes" with standarized formatting for ACH transaction messaging. ACH files contain information to describe the ACH transaction such as:

• Debit or credit type of transaction type (+/-)

• Whether transaction is posting to deposit account, loan account or a corporate GL

• Customer Name

• Account

• Routing

• Customer ID

• Next day or same day settlement

• Settlement date

The details of an ACH file.

"Prenotifications" are test ACH transactions using zero dollar transactions to validate source or destination account numbers.

ACH operators are a centralized clearninghouses that settle the transaactions for paritipating financial institutions. The two ACH operators are the federal reserve bank and the electronic payment system.

Transaction types that do NOT use ACH and why:

Wire transfer - due to differing regulations, higher dollar amounts

Debit card - requires proprietary rules and a network

Credit card - because they are a line of credit only

ATM - card based with pin (differing rules)

ACH's relationship with cryptocurrency transfers is interesting (apparently wire transfers of monies in/out is far more expensive than ACH). See this recent NACHA article: https://www.nacha.org/news/crypto-and-ach-and-coming-pair

ACH is a vital component in the payments ecosystem, and though it is uniquely American, other countries have similiar clearinghouses with different transaction file/message formats. Knowing the ACH background and basic file structure is useful as you may need to understand how it works some day at some job.

Regardless of what happens with cryptocurrencies and the inevitable USD coin which will be backed by the full faith and credit of the US government, ACH technology- and technology built on top of it- is here to stay for a long, long time.

NPV, IRR and Project Viability Evaluation

Net Present Value (NPV) and Internal Rate of Rerturn (IRR) are quite similar financial expressions.

In fact the two share the same formula (same variables being measured), but use it to describe the present value of something from 2 different perspectives - (1) what is this project's expected future cashflow currently worth is today's dollars? vs. (2) how profitable (%-wise) will the return on project investment be based on (1)?

NPV = Net present value is today’s value of the expected future cash flows.

If NPV is positive, the project is estimated to be profitable

IRR = The expected rate of return from the proejct.

If the IRR of a project is higher than the WACC, the project is estimated to be profitable

The below simple spreadsheet area explains both concepts nicely. This project would generate a $3.7k profit (NPV) over 5yrs and have a significantly profitable 15.64% IRR, higher than the 8% WACC of the 20k invested.

 The project's estimated cash inflows over 5 years would add value, on paper at least

References:

https://www.investopedia.com/ask/answers/032615/what-formula-calculating-net-present-value-npv.asp 

https://www.youtube.com/watch?v=Fw5-wccViOM

https://www.youtube.com/watch?v=cSAfp6D28RM

Compound Interest

Ultimately the two most important factors in growing money is the size (%) of growth (rate of return or ROR) and the rate of growth (or the number of times the investment earns interest on a certain balance total, that interest is added to the balance, and then the investor begins earning interest on this new, higher amount).

This is why investing in something that will return 5% in 1 year is much worse than an investment that will return 5% quarterly or 4 times a year as illustrated below:

Year 1: $1,000 (5%) == $1,050

-vs- 

Quarter 1: $1,000 (5%) == $1,050.00

Quarter 2: $1,050 (5%) == 1,103

Quarter 3: 1,103 (5%) == $1,158

Quarter 4: $1,158 (5%) == $1,216

Would you rather receive $1,050 or $1,216 dollars after one year of making a $1,000 dollar loan? 🤔

The power of compound interest is even better illustrated in a chart of growth over a period of several years. The below chart illustrates earning 10% per year on a $1,000 investment for 10 consecutive years.

An example with more money and more growth shows more clearly the power of compound interest

The below graphic shows clearly how important it is to save early. In it, Amy is able to earn enough in 10 years of savings, to earn more over the course of 34 years by simply earning interest off the savings of her initial 10 years of investing. No more contributions- just by earning interest she will have earned more than someone else who skipped those first 10 years and began investing later in their career.

In fact, Ethan contributes $100/month for 24 years and is not able to earn as much as Amy did contributing $100/month for just 10 years because Amy began putting her money to work much earlier than Ethan.

So 10 years go by, Amy consistently saving, Ethan consistently not saving anything. Now(?) Ethan, deciding he needs to begin saving for retirement is starting out with a much lower investment ($1,239.72) than Amy is already at by year 10 ($17,485.70).

The true power of compound interest is in the utilization of time and the time value of money. Because money that is invested wisely (presumably) always has a positive return, if you forgo savings (as I and many of my generation have) earlier on in your career you are incurring a huge opportunity cost; that opportunity being 10 years of 10% growth on $100/month investment with compounding interest.

Ethan chose to decline that opportunity and paid for it by losing out on all of that investment + compounded interest he could have received in the first 10 years of his career ($17,485.70), like Amy did.

Simply put, if you plan to invest (in safe, sound investments), the earlier you start the better off you will be. You cannot buy back time and time is a key ingredient to the growth of money.

Amy (wisely) began investing much earlier than Ethan and because of it, she is able to invest far less and still earn more.

Securitization

Securitization is the creation and sale of pieces of debt from a pool of similar debt assets. It is a way for banks to take a group of home mortgage loans for instance, and cut the asset group into pieces or "tranches" that can be sold as MBSs (mortgage backed securities) on the open market.

Lots of touch points in this interesting "value abstraction" process

While many investment banks who used this financial implement in the run-up to the Great Recession have been strongly criticized for not vetting assets thoroughly enough in the origination process, the process of securitization will always be a method for asset holders to convert an illiquid asset like a group of home mortgages or consumer credit card debt into something (or rather "some things") that can be more easily packaged, bought and sold on the open market.


Reference: https://blog.bankex.org/paving-the-way-from-securitization-to-tokenization-ac0187ba6d48

Options, Calls and Puts

In finance, an option is a contract which gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price prior to or on a specified date, known as the "expiry date". An option contract typically requires an upfront payment for the option, called the premium.

A call option, also referred to as a "call" in finance jargon, gives the buyer the right to buy the underlying asset at an agreed-upon price on a specific date or within a specified period of time.

A put option, also referred to as a "put", gives the buyer the right to sell the underlying asset at an agreed-upon price on a specific date or within a specified period of time.

Calls give the right to buy, puts give the right to sell

The important characteristic of options contracts is that they give the right- not the obligation- to buy or sell an asset at some agreed upon price on or before the option's contract expiration date. The option holder can simply walk away from the option to buy or sell if she or he decides it is no longer in their best interest.

Options are another asset class, and when used correctly, they offer many advantages that trading stocks and ETFs alone cannot (namely the ability to decide not to exercise the option if the value of the underlying asset being bought or sold changes significantly (in the wrong direction) for the option holder before the expiry date, for instance).

Options are different from futures contracts in that option contracts give the right to buy or sell on or before some date, while futures contracts represent an obligation to buy or sell on some date.

With options, financial traders can lock in future gains if an asset value is expected to (and does) rise in value above their call price, and conversely can stem future losses if an asset value is expected to (and does) drop in value below their put price.


References:

https://investinganswers.com/financial-dictionary/optionsderivatives/option-2049

https://www.fool.com/investing/options/options-the-basics.aspx

The Infamous Story of ENRON

The story of Enron is a story of greed and how a Houston-based energy company rocketed to the top echelon of Corporate America before losing everything.

From stodgy Oil & Gas merger, to high-flying corporate giant, to an astonishing demise

Formed from the merger of Houston Natural Gas and InterNorth in 1985, Enron began with humble roots. Kenneth Lay was an enterprising economics graduate from Missouri who learned the ropes of the oil and gas business early while obtaining his PhD in economics in 1970 and working his way up to management at InterNorth before it was purchased by HNG.

For years the company had solid (if not spectacular) results and even overcame a couple near-fatal financial disasters that resulted from oil futures and origination guarantees deals gone bad. An almost overly-proud Harvard MBA from Illinois, Jeff Skilling joined Enron's ranks after several years of consulting for the energy giant as part of Enron's cozy relationship with McKinsey and Company.

Enron's fatal flaw was the belief that accounting "creativity" can permanently hide fraud 

In time, Skilling became COO and began to call for the mass hiring of elite MBA types and math gurus which he transformed into his "complex deal making" army. He became particularly close with Enron's oddball finance and accounting veteran Andrew Fastow who paired the brains of Jeff's army with the creativity of accounting fraud to make Enron appear, at least to investors and banks, as an extravagant capital-generating machine.

Fastow and his crack team of corporate fraudsters developed a network of shell companies known as SPEs or "special purpose entities" and used these as vehicles for hiding losses and booking fictitious deals- to the tune of several billion dollars of imaginary capital and unreported losses. Quarter after quarter, when Enron divisions were struggling to "hit the numbers" that Wall Street analysts expected- Andy would step in to save the day with his SPE magic that- at least temporarily- made bad news go away.

Another favorite method of Fastow and Skilling was to use "mark to market" accounting treatment of their energy deals. Meaning that they reported- as current income- all estimated future income of the life of the deal- for virtually all the deals they did. This is great when things are going good but it is an obviously untenable situation. While Enron was flashing the gaudy mark to market income figures to the Street, the future required them to actually service those deals- and never book another accounting profit as the entire deal's income has already been reported.

Enron's pursuit of Wall Street's favor made a mockery of their Code of Ethics

Enron, which had once been a company with deep roots in Oil & Gas and was hands-on in developing pipelines and sourcing fossil fuels for delivery contracts, was now in the business of trading on energy futures that bore little to no resemblance to true tangible "present values". Everything was speculation. Everything was reduced to hedges and bets. Nothing was real anymore. And it all collapsed under the weight of its own obfuscation.

Sure there were other reasons Enron collapsed. There was the comical Enron Broadband Services which tried to take on the early internet giants like AOL, and went..... nowhere. There were notorious global deals in places like India and England that became financial albatrosses which only Fastow's shell games could attempt to mask- for a time. But it was really just simple greed and criminal accounting.

Jeff Skilling Harvard MBA abstract mastermind, avoider of details and implementation

Even the once-proud accounting firm Arthur Anderson would be brought down by the fall of Enron and eventually file for bankruptcy. They had some protestations early on about the use of SPEs and the anachronistic manner of applying profits and losses, but ultimately they went along with and signed off on the grossly improper financial reporting.

The Justice Department, the SEC and FBI had long been looking at the company by the time Enron's offices were raided on January 22nd, 2002. What followed was the trial and conviction of several Enron executives including Fastow, Skilling and Lay who were sentenced for an assortment of fraud and conspiracy charges related to the heart of the scandal.

Andy Fastow was given a reduced 6 year sentence after agreeing to cooperate and testify against his former bosses. He was released from prison in 2011 and is now a popular speaker at business ethics and accounting fraud conferences.

Skilling received 24 years in federal prison for his role. He was released to a Texas half-way house on August 30th of 2018.

Ken Lay died of a heart attack while awaiting sentencing.

The biggest losers of Enron's demise were Enron employees and common stockholders who bet big on Enron's future

The timeline, web of deceit and cast of characters in this tragedy is truly fascinating. Rebecca Mark, Ken Rice, Lou Pai, and so many more interesting personalities are woven into this spectacular story that is told best by the people who (literally) wrote the book. For a comprehensive look into this business debacle, the award-winning book and documentary can be found here:

The Smartest Guys in the Room book by Bethany McLean and Peter Elkind

ENRON: The Smartest Guys in the Room

In the end, this was a tragedy of obscene hubris and ultimate humility. The ironic thing is that they had a solid business model and were it not for the lies that enabled inflated financial reporting, Enron- albeit a smaller and less glamorous Enron- would likely still be in business today.

Capital Gains (Losses) and Capital Gains Tax

Capital gains are often thought of in the context of profiting from the sale of some stock or other security-based financial product. Capital losses on the other hand, are the opposite (the loss incurred from the sale of stock). It is important to remember however, that capital gains and capital losses can also include other sales such as the sale of a vehicle, the sale of a home, the sale of an antique, etc.

Capital gains tax is paid by sellers (both businesses and consumers) who have profited from the sale of some asset (bonds, stocks in other businesses, company equipment that was sold for profit). 

Capital loss occurs when an asset is sold for less than was purchased. The amount of this sale is usually exempt (deductible) from taxes up to a certain amount.

Reference: https://www.fool.com/retirement/2017/02/15/what-is-the-capital-loss-tax-deduction.aspx

Commodities and Securities Futures

"A futures contract is an agreement to buy or sell an asset at a future date at an agreed-upon price"

Futures markets such as the New York Board of Trade and the Chicago Mercantile Exchange facilitate the trading of futures contracts. Futures trading is often thought of only as raw materials (commodities), however financial products or "securities" are also traded in futures markets:

Commodities: A commodity is a raw material that has value and is more or less in constant demand (think- milk, eggs, pork, beef, chicken, lumber, iron, salt, crude oil, coal, etc.).

Securities (Financial): A security is a financial product such as an interest rate, the price of a stock, the value of some kind of debt like CDOs.

A recent history of returns on commodities futures by year and type

Futures trading is simply buyers betting on the future value of some product from the sellers. In commodities this could be a day trader speculating that the price of oil is about to skyrocket and buying contracts for purchases of oil at a lower price (he/she hopes).

Remember that futures trading is not limited to commodities

In securities futures, an example would be a buyer entering a contractual agreement to purchase some amount of stock for an agreed upon price at some future date. This would be to the buyer's advantage only if the price of the stock price on the future date is higher than the price agreed to in the futures contract.

At the heart of this kind of trading (and one could argue all trading) is the idea of betting for (+) or hedging against (-) the inevitable fluctuation of future value.


Reference: https://finance.zacks.com/futures-vs-commodities-5663.html

Dividends

Dividends are a company's optional distribution of (typically) cash to stockholders and provide another way to earn money from investing beyond growing the value of one's portfolio.

A dividend is defined as "a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves)".

A dividend yield is an expression of the dividend amount relative to the company's current share price. You can calculate the current dividend yield for a given year by dividing the total dividend paid for that year or the following year (or any 12 month period) by the current stock price.

Some companies regularly pay out a cash dividend and can make their stock more attractive by doing so. Johnson Controls (JCI) for instance, has managed to pay a quarterly dividend every year since 1887. They paid a total dividend of $1.04 in 2018 and the stock price as of today is $31.21.

There are two ways to calculate a company's current dividend yield: (1) by using what are called "forward dividends" or (2) by using "trailing dividends". Trailing uses the preceeding 12 months while forward uses the expected payouts in the proceeding 12 months. As of today (1/2/2019) using trailing dividends, or to be more clear- in relation to their 2018 total dividend payout"- JCI's dividend yield was:

$1.04 / $31.21

...or 3.3%.

As you can see from the charts above, General Electric and Honeywell have paid out cash dividends consistently for years. But GE has recently clawed back these payouts dramatically. This is probably due to GE's ongoing restructuring and spin-off efforts.

Reference:

https://www.nasdaq.com/symbol/jci/dividend-history

Collateralized Debt Obligations (CDOs)

Collateralized Debt Obligations are units of packaged debt, sometimes referred to as "Frankenstein debt" which consists of various kinds of debt obligations (auto, home, credit card, student loans, corporate debt, etc.) of various credit ratings (AAA, AA, A, BBB, BB, B, CCC, CC, etc.).

"Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities." -Wikipedia

The idea behind this type of investment is that although it contains lots of high-risk debt (that may well default), that risk is offset by the better rated debt in the CDO package.

There are also CDOs known as "CDOs squared". These are also simply packages of variously rated debt, but with an additional layer of abstraction (obfuscation). Instead of various cash-backed assets and other kinds of direct claims on debt in the bundle, CDO^2 consist of pieces or "tranches" of other CDOs.

Additionally, there are Synthetic CDOs and CDSs. A Synthetic CDO is not backed by debt assets but rather derivatives of debt assets known as "Credit Default Swaps" (CDSs), which are basically CDO insurance. The buyer of a CDS makes periodic premium payments in much the same way as premiums for home and auto insurance.

CDSs provide a way for investors to hedge CDO investments. If a credit event (default on a CDO's underlying debt asset) occurs, the buyer of a credit default swap is protected from losses. If no credit event occurs, the seller of the CDS continues to collect the premium payments for the duration of the term of the CDS.

Crazy stuff, huh? Be careful, Wall Street.. Lehman Brothers never saw it coming... 😶

2008 was obviously the wake-up call, trillions in wealth vanished as values crashed to Earth

Short Selling

Broker borrows a share, sells the share high, repurchases share at lower price ($) and returns it.

Short selling stock is the practice by which a broker borrows stock with the hope that the price of that stock will fall so that he or she can sell at a high price, (re)purchase at a lower price, and pocket the difference.

Hypothetically, let's say a trader named Joe firmly believed that Apple, Inc. was about to experience a large drop in share price. To short a single share of Apple stock, Joe would do the following:

1). Borrow a share of APPL from his portfolio, a client portfolio, or a fellow broker

2). Sell the share at the highest a price they can find before a drop (say 1 share of AAPL at current $157.76)

3). Wait for the price to fall (say APPL falls to $102.76), then purchase one share at this lower price

4). Subtract the higher price from the lower price (less fees) and return the borrowed share. 

Joe earns a cool $53 bucks from this scheme as he sold at $157.76 and bought back for just $102.76. After fees of $2.00 this is $157.76 - $102.76 -$2.00 == $53.00.

While the idea of selling something short of true value is often associated with the nefarious case of a stock "short" like this, oftentimes it is a necessity. The market always needs people on both the long end (owners/buyers) and the short end (renters/sellers) for it to work properly.

This is why banks who are on the hook with a property that they cannot sell will ultimately agree to a "short sale" (selling the home for below its fair market value) to recoup at least some of their losses.

A combination of consumer preferences and financial factors determine whether to go long or short on any kind of investment or large financial transaction.

Short selling doesn't always work in the sellers favor

Corporate Common Stock, Corporate Notes (Bonds), Treasury Bonds, Municipal Bonds and other Securities

All of these financial instruments are essentially different templates for an agreement on the terms of financing deals.

There is a tendency for bonds and stocks to have an inverse yield (earned interest) relationship

A bond purchase/sale is an agreement between the bondholder (creditor) and the bond issuer (debtor) for the distribution of capital to the debtor which will then be repaid (with interest normally) to the creditor in a certain increment of time (2-yr, 10yr, 30-yr, etc.).

A Treasury bond is issued by the U.S. Treasury and backed by the "U.S. Government's full faith and credit". The same holds for foreign state bonds. Municipal bonds are for state, city and other localities. Government agencies issue bonds as well and these are generally regarded as very safe investments because of the high degree of regulation of the creation and sale of these bonds.

There is more to bond markets than just T-bills

A stock purchase/sale is an agreement to own a portion of a company. So companies with outstanding stock or who decide to offer stock for the first time (IPO or "Initial Public Offering") are turning to John Q. Public for needed financing.

Keep in mind corporate stock is not the same as corporate bonds/notes*

In return for the financing, the stockholder receives dividend payments and the ability to earn a profit by selling the stock if its price rises above the original purchase price. Stocks split the company up into “shares”. As a corporation has no individual owner (by design), corporations make natural stock issuers.

Corporate or Private Common Stock is riskier than government-backed bonds due to higher corporate default rates and being less liquid (less quickly convertible to cash). Unlike bonds which expire, stockholders may choose to hold onto stock indefinitely.

Treasury bonds are safer and tend to offer less return; but over time in the U.S., they have been reliable (no defaults)

Key distinction: Stocks offer an ownership stake in a company, while bonds are akin to loans made to a company.

As seen here patience and a successful company can lead to total returns of over 1500%: https://www.cnbc.com/2017/11/28/if-you-put-1000-in-amazon-10-years-ago-heres-what-youd-have-now.html

And imagine if you would have just invested that nest egg money in Netflix back in 2008? 😉

Corporate Note ($5) for The Johnson Company

*Corporate notes are simply corporate bonds; some financial sources assert an ambiguous and inconsistent distinction (that corp bonds have a shorter maturity, that they are issued differently) but essentially, they are the same thing.

Free Cash Flow

Measure of how much extra cash the business will have after it pays for all of its operations and fixed asset purchases.

A realistic example:

Reference: https://www.myaccountingcourse.com/financial-ratios/free-cash-flow

WACC (Weighted Average Cost of Capital)

Weighted average cost of capital (WACC) is the average after-tax cost of a company’s various capital sources, including common stock, preferred stock, bonds, and any other long-term debt. A company has two primary sources of financing - debt and equity - and, in simple terms, WACC is the average cost of raising that capital.

In other words, it is the average rate of return (ROR) that is expected by lenders and shareholders who provide capital to a business.

WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight, and then adding the products together to determine the WACC value as seen in the WACC calculation formula:

For example, a firm's financial data shows the following:

(E) Equity = $8,000
(D) Debt = $2,000
(Re) Equity profit sharing/stockholder payment rate = 12.5%
(Rd) Interest rate on the debt = 6%
(t) Tax rate = 30%

To find WACC, enter the values into the equation and solve:

WACC = [[(8000/10000)  x 0.125] + [(2000/10000) * 0.06 * (1 - 0.3)]]

WACC = [0.1 + .0084] = 0.1084 or 10.84%

And so the weighted average cost of capital for this firm is 10.84%.

Reference: https://www.investopedia.com/ask/answers/063014/what-formula-calculating-weighted-average-cost-capital-wacc.asp

Securities Valuation and RFR

Securities Valuation: "The process of determining how much a security is worth. Security valuation is highly subjective, but it is easiest when one is considering the value of tangible assets, level of debt, and other quantifiable data of the company issuing a security."

RFR: "the "Risk-Free Rate" is the rate of return of a hypothetical investment with no risk of financial loss, over a given period of time. Since the risk-free rate can be obtained with no risk, any other investment having some risk will have to have a higher rate of return in order to induce any investors to hold it."

Unlike a typical bond loan that has a set period of payments, stock valuation is difficult to calculate because some of the components that are used to calculate the intrinsic value (or "net present value") are unknown.

The challenges of stock valuation, the NPV formula, and a very basic example:

The general formula for NPV (net present value based on future expected cash flows) is:

...where r is the expected rate of return, Div is the expected dividend and P is stock price.

We can find an accurate valuation if we have sufficient information to project into the future:

You can do the calculations longhand but it is much more efficient to use a calculator to do the math for you. Using a Financial Calculator, you can solve for any of the variables in the NPV equation (find the future value (FV), find the number of payment periods (N), find the expected return (INT), etc.). Here is a link to finding these values with a Texas Instruments TI-84 calculator: http://www.tvmcalcs.com/calculators/ti84/ti84_page3

Reference: https://www.investopedia.com/terms/d/dividendgrowthrate.asp

Time Value of Money

"Time value of money is one of the most basic fundamentals in all of finance. The underlying principle is that a dollar in your hand today is worth more than a dollar you will receive in the future because a dollar in hand today can be invested to turn into more money in the future."

The basic formula for the time value of money is as follows:

PV = FV ÷ (1+I)^N, where:

PV is the present value
FV is the future value
I is the required return

N is the number of time periods before receiving the money

Reference: https://www.fool.com/knowledge-center/time-value-of-money.aspx

Loan Origination

If you want a loan you should expect to wait for the origination process before approval

"Origination is the multi-step process every individual must go through when obtaining a mortgage or home loan, as well as other types of personal loans. During this process, borrowers must submit various types of financial information and documentation to a mortgage lender, including tax returns, payment history, credit card information and bank balances. Mortgage lenders use this information to determine the type of loan and the interest rate for which the borrower is eligible."-Investopedia

The loan process known as "origination" is a way for lenders to prove- to regulators and to other financial institutions (selling debt is a still a highly profitable and popular trade)- that their claim on the future interest revenue streams of a home loan or a business loan has been properly vetted and the risk has been documented and deemed acceptable and legal.

Below are the origination steps for a typical transaction. Each step must be completed before moving on to the subsequent step.

1). Pre-qualification - The first step in the loan origination process is pre-qualification. During this stage the potential borrower will receive a list of items they need to pull together to submit to the lender. This may include:

• Employment information
• Household income
• Payment history
• Bank statements
• Tax returns

2). Loan Application - Submit an electronic or written application with loan request specifics such as amount, rate, payment schedule, etc. to the lender.

3). Application Processing - Lender reviews application and pre-screens to ensure no time is wasted on obviously unacceptable parameters.

4). Underwriting Process - Lender or a 3rd party perform rigorous manual and/or automatic review of the loan application looking such items as credit score, risk scores and other proprietary scoring criteria to ensure the loan is not only serviceable but profitable- "worth the risk" so to speak.

5). Credit Decision - Lender approves, denies or sends the application back to the potential borrower for adjustment of loan terms (a higher rate concession for instance) before reappraisal.

6). Quality Control - Last and important final check before funding goes through. This addresses the time gap between the beginning and end of loan origination which present new risks that were not known at the beginning of processing. Some lenders skip this step, unfortunately.

7). Loan Funding - Most consumer loans get their funding disbursed shortly after the loan documents are signed while second mortgage loans and business lines of credit are typically scrutinized a bit more before the borrower is issued funds.


Reference: https://www.decisivedge.com/blog/7-stages-in-loan-origination/