For those of you pushing back on this issue:
Also personally, I think you just watched The Big Short and got creative with this post.
That's a really weird assumption to make, false, and a strawman. I posted my info based on the video in my post, which you probably didn't bother to watch.
But since you and a few others here seem to have had a different experience (and you all seem to think you know what you are talking about), I did a little more digging.
I think the full picture was not presented by the man in the video nor by you.
Here were the results of some digging:
- How does Affirm work?
At the checkout point, under payment options, you are offered the option to spread out your payments for whatever you’re purchasing. You apply and are usually approved in seconds for what’s basically a short-term loan. You make a small down payment, then agree to pay off the rest in installments over a few weeks or months.
The way that BNPL programs like Affirm work, the merchant is not offering you this credit. Instead, a third-party lender that has partnered with the merchant is providing the credit. Affirm is one of these third-party lenders.
Affirm says it takes current economic conditions into account. Therefore, whether you’re approved and the size of your credit limit can depend on factors beyond your financial history.
https://www.investopedia.com/how-does-affirm-work-5183684
- Does Affirm require a credit check?
Yes and no. It seems that in some cases, it does, and in other cases it does not. Here is a website claiming to have researched several types of lenders, and in the table down the page, it says there is no credit check (at least for some types of loans, I assume):
https://www.elitepersonalfinance.com/buy-now-pay-later-no-credit-check/
- Does Affirm report to credit bureaus?
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, but not for all their loans ... if you default on your Affirm loan or make late payments then a report will be filed
https://finance.yahoo.com/news/buy-now-pay-later-loans-131358423.html
- How does Affirm make money?
You don't think they just lend money, and then sit back and collect 0% interest for their effort, do you?
Affirm makes money through four revenue streams: network revenue, interest income, gains on sales of loans, and servicing income.
Gains on sales of loans: Affirm sells a portion of the loans it originates or purchases from the originating bank partners to third-party investors.
Servicing income: Affirm also makes money by providing professional services to manage loan portfolios on behalf of its third-party loan owners.
BTW, this means that if YOU have a loan through Affirm, you make your payments to Affirm and you THINK that Affirm owns the loan. But they do not. They only service it for the investors who bought the loan. This is how most mortgages work today, too.
https://thestrategystory.com/2022/02/26/how-does-affirm-make-money-business-model/
- Which bank is the actual funder of Affirm loans?
Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.
Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.
The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike.
Clearly, Affirm has more than one business model for making money.
- Is it true that Affirm sells its loans as securities?
Yes, and no.
Affirm recently had to delay the sale of one of its asset-backed securities.
The delayed sale had to do with one of Affirm's asset-backed securities (ABS), which is a pool of Affirm loans the company had packaged together through a trust or special purpose vehicle to sell to investors, which it has done several times before. Investors buy the securities, removing them from Affirm's balance sheet. The investors then collect principal and interest from the borrowers' payments on their individual loans.
https://www.fool.com/investing/2022/03/18/should-investors-be-concerned-about-affirms-delaye/
In an interesting twist, an appeals court has ruled that these types of vehicles are legally considered to be "syndicated loans" rather than "securities," and therefore are not subject to securities laws.
The United States Court of Appeals for the Second Circuit upheld on August 24, 2023, a decision from the District Court to dismiss a securities fraud case brought by a Chapter 11 bankruptcy trustee, on the grounds that a $1.8 billion syndicated loan was not a security.
The analysis of the Kirschner opinion is helpful to syndicated loan structurers and lawyers who want to characterize their transactions as loans and avoid potential liability under federal securities laws for nondisclosure of material information.
- Are these loans packaged up and sold to investors?
Yes.
CDO's vs. CLO's.
I wrote "Collateralized Debt Obligations" (CDO's) in my OP, because that is what it looked like to me.
But I did not know about the court decision or how they are marketed to investors.
Turns out, they are actually called "Collateralized Loan Obligations" (CLO's).
CLO ETFs are popping up on investors' radar, offering high yield, diluted risk and diversification.
CLOs tend to have higher yields than most stocks and corporate bonds, due to the underlying loans' credit risk, and they've traditionally been the purview of big institutional investors. Over the long term, CLO tranches (groups of interest-paying bonds) have performed well overall compared with some other corporate debt categories.
Fledgling collateralized loan obligation exchange-traded funds, or ETFs, have been taking off in recent years, making these sophisticated investments more accessible. The Janus Henderson AAA CLO ETF (ticker: JAAA), one of the "veteran" ETFs at nearly 3 years old, has $3.7 billion in assets under management, or AUM.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have a combined $160 million in AUM and feature high yields.
CLOs carry some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
https://money.usnews.com/investing/articles/collateralized-loan-obligations-etfs-to-consider
That article is not specific, the the video in my OP stated that the average credit of these borrowers is sub-prime ("C" or "D" type of credit), but the CLO's are packaged and rated as "A."
This is the exact same scenario as what happened in the mortgage melt-down, which ended up with a lot of loan fraud and crazy approvals of loans that should never have been done, even where fraud did not occur. These were also "C" and "D" type of credit but the collateralization gave the ratings agencies cover to grade the investments as "A." But they were never worthy of those ratings.
So, in summary, I see the info in the video as more or less accurate. It did not include a deep dive, but rather gave a summary.
The only question is: What is the real risk?
More and more people will be using these loans because a recession is coming, due to all the reckless spending by the fed gov't and fed reserve. As more and more people use these loans to pay for food and basic things, and as Wall Street sees this as a great way to make money and push off the risk to an unsuspecting public as a "good investment," this will become a bigger issue over time.
The mortgages were not a problem ... until they were.
Since Affirm and similar companies say they use "modernized risk models" and do not disclose what that means, we have no idea what the real risk is.
Just like taking a vaccine with a mystery drug cocktail.
Good luck with that!
LOL
For those of you pushing back on this issue:
Also personally, I think you just watched The Big Short and got creative with this post.
That's a really weird assumption to make, false, and a strawman. I posted my info based on the video in my post, which you probably didn't bother to watch.
But since you and a few others here seem to have had a different experience (and you all seem to think you know what you are talking about), I did a little more digging.
I think the full picture was not presented by the man in the video nor by you.
Here were the results of some digging:
- How does Affirm work?
At the checkout point, under payment options, you are offered the option to spread out your payments for whatever you’re purchasing. You apply and are usually approved in seconds for what’s basically a short-term loan. You make a small down payment, then agree to pay off the rest in installments over a few weeks or months.
The way that BNPL programs like Affirm work, the merchant is not offering you this credit. Instead, a third-party lender that has partnered with the merchant is providing the credit. Affirm is one of these third-party lenders.
Affirm says it takes current economic conditions into account. Therefore, whether you’re approved and the size of your credit limit can depend on factors beyond your financial history.
https://www.investopedia.com/how-does-affirm-work-5183684
- Does Affirm require a credit check?
Yes and no. It seems that in some cases, it does, and in other cases it does not. Here is a website claiming to have researched several types of lenders, and in the table down the page, it says there is no credit check (at least for some types of loans, I assume):
https://www.elitepersonalfinance.com/buy-now-pay-later-no-credit-check/
- Does Affirm report to credit bureaus?
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, but not for all their loans ... if you default on your Affirm loan or make late payments then a report will be filed
https://finance.yahoo.com/news/buy-now-pay-later-loans-131358423.html
- How does Affirm make money?
You don't think they just lend money, and then sit back and collect 0% interest for their effort, do you?
Affirm makes money through four revenue streams: network revenue, interest income, gains on sales of loans, and servicing income.
Gains on sales of loans: Affirm sells a portion of the loans it originates or purchases from the originating bank partners to third-party investors.
Servicing income: Affirm also makes money by providing professional services to manage loan portfolios on behalf of its third-party loan owners.
BTW, this means that if YOU have a loan through Affirm, you make your payments to Affirm and you THINK that Affirm owns the loan. But they do not. They only service it for the investors who bought the loan. This is how most mortgages work today, too.
https://thestrategystory.com/2022/02/26/how-does-affirm-make-money-business-model/
- Which bank is the actual funder of Affirm loans?
Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.
Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.
The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike.
Clearly, Affirm has more than one business model for making money.
- Is it true that Affirm sells its loans as securities?
Yes, and no.
Affirm recently had to delay the sale of one of its asset-backed securities.
The delayed sale had to do with one of Affirm's asset-backed securities (ABS), which is a pool of Affirm loans the company had packaged together through a trust or special purpose vehicle to sell to investors, which it has done several times before. Investors buy the securities, removing them from Affirm's balance sheet. The investors then collect principal and interest from the borrowers' payments on their individual loans.
https://www.fool.com/investing/2022/03/18/should-investors-be-concerned-about-affirms-delaye/
In an interesting twist, an appeals court has ruled that these types of vehicles are legally considered to be "syndicated loans" rather than "securities," and therefore are not subject to securities laws.
The United States Court of Appeals for the Second Circuit upheld on August 24, 2023, a decision from the District Court to dismiss a securities fraud case brought by a Chapter 11 bankruptcy trustee, on the grounds that a $1.8 billion syndicated loan was not a security.
The analysis of the Kirschner opinion is helpful to syndicated loan structurers and lawyers who want to characterize their transactions as loans and avoid potential liability under federal securities laws for nondisclosure of material information.
- Are these loans packaged up and sold to investors?
Yes.
CDO's vs. CLO's.
I wrote "Collateralized Debt Obligations" (CDO's) in my OP, because that is what it looked like to me.
But I did not know about the court decision or how they are marketed to investors.
Turns out, they are actually called "Collateralized Loan Obligations" (CLO's).
CLO ETFs are popping up on investors' radar, offering high yield, diluted risk and diversification.
CLOs tend to have higher yields than most stocks and corporate bonds, due to the underlying loans' credit risk, and they've traditionally been the purview of big institutional investors. Over the long term, CLO tranches (groups of interest-paying bonds) have performed well overall compared with some other corporate debt categories.
Fledgling collateralized loan obligation exchange-traded funds, or ETFs, have been taking off in recent years, making these sophisticated investments more accessible. The Janus Henderson AAA CLO ETF (ticker: JAAA), one of the "veteran" ETFs at nearly 3 years old, has $3.7 billion in assets under management, or AUM.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have a combined $160 million in AUM and feature high yields.
CLOs carry some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
https://money.usnews.com/investing/articles/collateralized-loan-obligations-etfs-to-consider
That article is not specific, the the video in my OP stated that the average credit of these borrowers is sub-prime ("C" or "D" type of credit), but the CLO's are packaged and rated as "A."
This is the exact same scenario as what happened in the mortgage melt-down, which ended up with a lot of loan fraud and crazy approvals of loans that should never have been done, even where fraud did not occur. These were also "C" and "D" type of credit but the collateralization gave the ratings agencies cover to grade the investments as "A." But they were never worthy of those ratings.
So, in summary, I see the info in the video as more or less accurate. It did not include a deep dive, but rather gave a summary.
The only question is what is the real risk?
More and more people will be using these loans, because a recession is coming, due to all the reckless spending by the fed gov't and fed reserve. And as more and more people use these loans to pay for food and basic things, and as Wall Street sees this is a great way to make money and push off the risk to the unsuspecting public, this will become a bigger issue over time.
The mortgage CDO's were not a problem ... until they were.
Since Affirm and similar companies say they use "modernized risk models" and do not disclose what that means, we have no idea what the real risk is.
Just like taking a vaccine with a mystery drug cocktail.
Good luck with that!
LOL
For those of you pushing back on this issue:
Also personally, I think you just watched The Big Short and got creative with this post.
That's a really weird assumption to make, false, and a strawman. I posted my info based on the video in my post, which you probably didn't bother to watch.
But since you and a few others here seem to have had a different experience (and you all seem to think you know what you are talking about), I did a little more digging.
I think the full picture was not presented by the man in the video nor by you.
Here were the results of some digging:
- How does Affirm work?
At the checkout point, under payment options, you are offered the option to spread out your payments for whatever you’re purchasing. You apply and are usually approved in seconds for what’s basically a short-term loan. You make a small down payment, then agree to pay off the rest in installments over a few weeks or months.
The way that BNPL programs like Affirm work, the merchant is not offering you this credit. Instead, a third-party lender that has partnered with the merchant is providing the credit. Affirm is one of these third-party lenders.
Affirm says it takes current economic conditions into account. Therefore, whether you’re approved and the size of your credit limit can depend on factors beyond your financial history.
https://www.investopedia.com/how-does-affirm-work-5183684
- Does Affirm require a credit check?
Yes and no. It seems that in some cases, it does, and in other cases it does not. Here is a website claiming to have researched several types of lenders, and in the table down the page, it says there is no credit check (at least for some types of loans, I assume):
https://www.elitepersonalfinance.com/buy-now-pay-later-no-credit-check/
- Does Affirm report to credit bureaus?
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, but not for all their loans ... if you default on your Affirm loan or make late payments then a report will be filed
https://finance.yahoo.com/news/buy-now-pay-later-loans-131358423.html
- How does Affirm make money?
You don't think they just lend money, and then sit back and collect 0% interest for their effort, do you?
Affirm makes money through four revenue streams: network revenue, interest income, gains on sales of loans, and servicing income.
Gains on sales of loans: Affirm sells a portion of the loans it originates or purchases from the originating bank partners to third-party investors.
Servicing income: Affirm also makes money by providing professional services to manage loan portfolios on behalf of its third-party loan owners.
BTW, this means that if YOU have a loan through Affirm, you make your payments to Affirm and you THINK that Affirm owns the loan. But they do not. They only service it for the investors who bought the loan. This is how most mortgages work today, too.
https://thestrategystory.com/2022/02/26/how-does-affirm-make-money-business-model/
- Which bank is the actual funder of Affirm loans?
Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.
Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.
The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike.
Clearly, Affirm has more than one business model for making money.
- Is it true that Affirm sells its loans as securities?
Yes, and no.
Affirm recently had to delay the sale of one of its asset-backed securities.
The delayed sale had to do with one of Affirm's asset-backed securities (ABS), which is a pool of Affirm loans the company had packaged together through a trust or special purpose vehicle to sell to investors, which it has done several times before. Investors buy the securities, removing them from Affirm's balance sheet. The investors then collect principal and interest from the borrowers' payments on their individual loans.
https://www.fool.com/investing/2022/03/18/should-investors-be-concerned-about-affirms-delaye/
In an interesting twist, an appeals court has ruled that these types of vehicles are legally considered to be "syndicated loans" rather than "securities," and therefore are not subject to securities laws.
The United States Court of Appeals for the Second Circuit upheld on August 24, 2023, a decision from the District Court to dismiss a securities fraud case brought by a Chapter 11 bankruptcy trustee, on the grounds that a $1.8 billion syndicated loan was not a security.
The analysis of the Kirschner opinion is helpful to syndicated loan structurers and lawyers who want to characterize their transactions as loans and avoid potential liability under federal securities laws for nondisclosure of material information.
- Are these loans packaged up and sold to investors?
Yes.
CDO's vs. CLO's.
I wrote "Collateralized Debt Obligations" (CDO's) in my OP, because that is what it looked like to me, but the video did not explicitly state this.
But I did not know about the court decision or the marketing of these things.
Turns out, the are actually called "Collateralized Loan Obligations" (CLO's).
CLO ETFs are popping up on investors' radar, offering high yield, diluted risk and diversification.
CLOs tend to have higher yields than most stocks and corporate bonds, due to the underlying loans' credit risk, and they've traditionally been the purview of big institutional investors. Over the long term, CLO tranches (groups of interest-paying bonds) have performed well overall compared with some other corporate debt categories.
Fledgling collateralized loan obligation exchange-traded funds, or ETFs, have been taking off in recent years, making these sophisticated investments more accessible. The Janus Henderson AAA CLO ETF (ticker: JAAA), one of the "veteran" ETFs at nearly 3 years old, has $3.7 billion in assets under management, or AUM.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have a combined $160 million in AUM and feature high yields.
CLOs carry some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
https://money.usnews.com/investing/articles/collateralized-loan-obligations-etfs-to-consider
That article is not specific, the the video in my OP stated that the average credit of these borrowers is sub-prime ("C" or "D" type of credit), but the CLO's are packaged and rated as "A."
This is the exact same scenario as what happened in the mortgage melt-down, which ended up with a lot of loan fraud and crazy approvals of loans that should never have been done, even where fraud did not occur. These were also "C" and "D" type of credit but the collateralization gave the ratings agencies cover to grade the investments as "A." But they were never worthy of those ratings.
So, in summary, I see the info in the video as more or less accurate. It did not include a deep dive, but rather gave a summary.
The only question is what is the real risk?
More and more people will be using these loans, because a recession is coming, due to all the reckless spending by the fed gov't and fed reserve. And as more and more people use these loans to pay for food and basic things, and as Wall Street sees this is a great way to make money and push off the risk to the unsuspecting public, this will become a bigger issue over time.
The mortgage CDO's were not a problem ... until they were.
Since Affirm and similar companies say they use "modernized risk models" and do not disclose what that means, we have no idea what the real risk is.
Just like taking a vaccine with a mystery drug cocktail.
Good luck with that!
LOL
For those of you pushing back on this issue:
Also personally, I think you just watched The Big Short and got creative with this post.
That's a really weird assumption to make, false, and a strawman. I posted my info based on the video in my post, which you probably didn't bother to watch.
But since you and a few others here seem to have had a different experience (and you all seem to think you know what you are talking about), I did a little more digging.
I think the full picture was not presented by the man in the video nor by you.
Here were the results of some digging:
- How does Affirm work?
At the checkout point, under payment options, you are offered the option to spread out your payments for whatever you’re purchasing. You apply and are usually approved in seconds for what’s basically a short-term loan. You make a small down payment, then agree to pay off the rest in installments over a few weeks or months.
The way that BNPL programs like Affirm work, the merchant is not offering you this credit. Instead, a third-party lender that has partnered with the merchant is providing the credit. Affirm is one of these third-party lenders.
Affirm says it takes current economic conditions into account. Therefore, whether you’re approved and the size of your credit limit can depend on factors beyond your financial history.
https://www.investopedia.com/how-does-affirm-work-5183684
- Does Affirm require a credit check?
Yes and no. It seems that in some cases, it does, and in other cases it does not. Here is a website claiming to have researched several types of lenders, and in the table down the page, it says there is no credit check (at least for some types of loans, I assume):
https://www.elitepersonalfinance.com/buy-now-pay-later-no-credit-check/
- Does Affirm report to credit bureaus?
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, but not for all their loans ... if you default on your Affirm loan or make late payments then a report will be filed
https://finance.yahoo.com/news/buy-now-pay-later-loans-131358423.html
- How does Affirm make money?
You don't think they just lend money, and then sit back and collect 0% interest for their effort, do you?
Affirm makes money through four revenue streams: network revenue, interest income, gains on sales of loans, and servicing income.
Gains on sales of loans: Affirm sells a portion of the loans it originates or purchases from the originating bank partners to third-party investors.
Servicing income: Affirm also makes money by providing professional services to manage loan portfolios on behalf of its third-party loan owners.
BTW, this means that if YOU have a loan through Affirm, you make your payments to Affirm and you THINK that Affirm owns the loan. But they do not. They only service it for the investors who bought the loan. This is how most mortgages work today, too.
https://thestrategystory.com/2022/02/26/how-does-affirm-make-money-business-model/
- Which bank is the actual funder of Affirm loans?
Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.
Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.
The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike.
Clearly, Affirm has more than one business model for making money.
- Is it true that Affirm sells its loans as securities?
Yes, and no.
Affirm recently had to delay the sale of one of its asset-backed securities.
The delayed sale had to do with one of Affirm's asset-backed securities (ABS), which is a pool of Affirm loans the company had packaged together through a trust or special purpose vehicle to sell to investors, which it has done several times before. Investors buy the securities, removing them from Affirm's balance sheet. The investors then collect principal and interest from the borrowers' payments on their individual loans.
https://www.fool.com/investing/2022/03/18/should-investors-be-concerned-about-affirms-delaye/
In an interesting twist, an appeals court has ruled that these types of vehicles are legally considered to be "syndicated loans" rather than "securities," and therefore are not subject to securities laws.
The United States Court of Appeals for the Second Circuit upheld on August 24, 2023, a decision from the District Court to dismiss a securities fraud case brought by a Chapter 11 bankruptcy trustee, on the grounds that a $1.8 billion syndicated loan was not a security.
The analysis of the Kirschner opinion is helpful to syndicated loan structurers and lawyers who want to characterize their transactions as loans and avoid potential liability under federal securities laws for nondisclosure of material information.
- Are these loans packaged up and sold to investors?
Yes.
CDO's vs. CLO's.
I wrote "Collateralized Debt Obligations" (CDO's) in my OP, because that is what it looked like to me, but the video did not explicitly state this.
But I did not know about the court decision or the marketing of these things.
Turns out, the are actually called "Collateralized Loan Obligations" (CLO's).
CLO ETFs are popping up on investors' radar, offering high yield, diluted risk and diversification.
CLOs tend to have higher yields than most stocks and corporate bonds, due to the underlying loans' credit risk, and they've traditionally been the purview of big institutional investors. Over the long term, CLO tranches (groups of interest-paying bonds) have performed well overall compared with some other corporate debt categories.
Fledgling collateralized loan obligation exchange-traded funds, or ETFs, have been taking off in recent years, making these sophisticated investments more accessible. The Janus Henderson AAA CLO ETF (ticker: JAAA), one of the "veteran" ETFs at nearly 3 years old, has $3.7 billion in assets under management, or AUM.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have a combined $160 million in AUM and feature high yields.
CLOs carry some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
https://money.usnews.com/investing/articles/collateralized-loan-obligations-etfs-to-consider
That article is not specific, the the video in my OP stated that the average credit of these borrowers is sub-prime ("C" or "D" type of credit), but the CLO's are packaged and rated as "A."
This is the exact same scenario as what happened in the mortgage melt-down, which ended up with a lot of loan fraud and crazy approvals of loans that should never have been done, even where fraud did not occur. These were also "C" and "D" type of credit but the collateralization gave the ratings agencies cover to grade the investments as "A." But they were never worthy of those ratings.
So, in summary, I see the info in the video as more or less accurate. It did not include a deep dive, but rather gave a summary.
The only question is what is the real risk?
Since Affirm and similar companies say they use "modernized risk models" and do not disclose what that means, we have no idea what the real risk is.
Just like taking a vaccine with a mystery drug cocktail.
Good luck!
LOL
For those of you pushing back on this issue:
Also personally, I think you just watched The Big Short and got creative with this post.
That's a really weird assumption to make, false, and a strawman. I posted my info based on the video in my post, which you probably didn't bother to watch.
But since you and a few others here seem to have had a different experience (and you all seem to think you know what you are talking about), I did a little more digging.
I think the full picture was not presented by the man in the video nor by you.
Here were the results of some digging:
- How does Affirm work?
At the checkout point, under payment options, you are offered the option to spread out your payments for whatever you’re purchasing. You apply and are usually approved in seconds for what’s basically a short-term loan. You make a small down payment, then agree to pay off the rest in installments over a few weeks or months.
The way that BNPL programs like Affirm work, the merchant is not offering you this credit. Instead, a third-party lender that has partnered with the merchant is providing the credit. Affirm is one of these third-party lenders.
Affirm says it takes current economic conditions into account. Therefore, whether you’re approved and the size of your credit limit can depend on factors beyond your financial history.
https://www.investopedia.com/how-does-affirm-work-5183684
- Does Affirm require a credit check?
Yes and no. It seems that in some cases, it does, and in other cases it does not. Here is a website claiming to have researched several types of lenders, and in the table down the page, it says there is no credit check (at least for some types of loans, I assume):
https://www.elitepersonalfinance.com/buy-now-pay-later-no-credit-check/
- Does Affirm report to credit bureaus?
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, but not for all their loans ... if you default on your Affirm loan or make late payments then a report will be filed
https://finance.yahoo.com/news/buy-now-pay-later-loans-131358423.html
- How does Affirm make money?
You don't think they just lend money, and then sit back and collect 0% interest for their effort, do you?
Affirm makes money through four revenue streams: network revenue, interest income, gains on sales of loans, and servicing income.
Gains on sales of loans: Affirm sells a portion of the loans it originates or purchases from the originating bank partners to third-party investors.
Servicing income: Affirm also makes money by providing professional services to manage loan portfolios on behalf of its third-party loan owners.
BTW, this means that if YOU have a loan through Affirm, you make your payments to Affirm and you THINK that Affirm owns the loan. But they do not. They only service it for the investors who bought the loan. This is how most mortgages work today, too.
https://thestrategystory.com/2022/02/26/how-does-affirm-make-money-business-model/
- Which bank is the actual funder of Affirm loans?
Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.
Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.
The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike.
Clearly, Affirm has more than one business model for making money.
- Is it true that Affirm sells its loans as securities?
Yes, and no.
Affirm recently had to delay the sale of one of its asset-backed securities.
The delayed sale had to do with one of Affirm's asset-backed securities (ABS), which is a pool of Affirm loans the company had packaged together through a trust or special purpose vehicle to sell to investors, which it has done several times before. Investors buy the securities, removing them from Affirm's balance sheet. The investors then collect principal and interest from the borrowers' payments on their individual loans.
https://www.fool.com/investing/2022/03/18/should-investors-be-concerned-about-affirms-delaye/
In an interesting twist, an appeals court has ruled that these types of vehicles are legally considered to be "syndicated loans" rather than "securities," and therefore are not subject to securities laws.
The United States Court of Appeals for the Second Circuit upheld on August 24, 2023, a decision from the District Court to dismiss a securities fraud case brought by a Chapter 11 bankruptcy trustee, on the grounds that a $1.8 billion syndicated loan was not a security.
The analysis of the Kirschner opinion is helpful to syndicated loan structurers and lawyers who want to characterize their transactions as loans and avoid potential liability under federal securities laws for nondisclosure of material information.
- Are these loans packaged up and sold to investors?
Yes.
CDO's vs. CLO's.
I wrote "Collateralized Debt Obligations" (CDO's) in my OP, because that is what it looked like to me, but the video did not explicitly state this.
But I did not know about the court decision or the marketing of these things.
Turns out, the are actually called "Collateralized Loan Obligations" (CLO's).
CLO ETFs are popping up on investors' radar, offering high yield, diluted risk and diversification.
CLOs tend to have higher yields than most stocks and corporate bonds, due to the underlying loans' credit risk, and they've traditionally been the purview of big institutional investors. Over the long term, CLO tranches (groups of interest-paying bonds) have performed well overall compared with some other corporate debt categories.
Fledgling collateralized loan obligation exchange-traded funds, or ETFs, have been taking off in recent years, making these sophisticated investments more accessible. The Janus Henderson AAA CLO ETF (ticker: JAAA), one of the "veteran" ETFs at nearly 3 years old, has $3.7 billion in assets under management, or AUM.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have a combined $160 million in AUM and feature high yields.
CLOs carry some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
https://money.usnews.com/investing/articles/collateralized-loan-obligations-etfs-to-consider
That article is not specific, the the video in my OP stated that the average credit of these borrowers is sub-prime ("C" or "D" type of credit), but the CLO's are packaged and rated as "A."
This is the exact same scenario as what happened in the mortgage melt-down, which ended up with a lot of loan fraud and crazy approvals of loans that should never have been done, even where fraud did not occur. These were also "C" and "D" type of credit but the collateralization gave the ratings agencies cover to grade the investments as "A." But they were never worthy of those ratings.
So, in summary, I see the info in the video as more or less accurate. It did not include a deep dive, but rather gave a summary.
The only question is what is the real risk?
Since Affirm and similar companies say they use "modernized risk models" and do not disclose what that means, we have no idea what the real risk is.
Just like taking a vaccine with a mystery drug cocktail.
Good luck!
LOL
For those of you pushing back on this issue:
Also personally, I think you just watched The Big Short and got creative with this post.
That's a really weird assumption to make, false, and a strawman. I posted my info based on the video in my post, which you probably didn't bother to watch.
But since you and a few others here seem to have had a different experience (and you all seem to think you know what you are talking about), I did a little more digging.
I think the full picture was not presented by the man in the video nor by you.
Here were the results of some digging:
- How does Affirm work?
At the checkout point, under payment options, you are offered the option to spread out your payments for whatever you’re purchasing. You apply and are usually approved in seconds for what’s basically a short-term loan. You make a small down payment, then agree to pay off the rest in installments over a few weeks or months.
The way that BNPL programs like Affirm work, the merchant is not offering you this credit. Instead, a third-party lender that has partnered with the merchant is providing the credit. Affirm is one of these third-party lenders.
Affirm says it takes current economic conditions into account. Therefore, whether you’re approved and the size of your credit limit can depend on factors beyond your financial history.
https://www.investopedia.com/how-does-affirm-work-5183684
- Does Affirm require a credit check?
Yes and no. It seems that in some cases, it does, and in other cases it does not. Here is a website claiming to have researched several types of lenders, and in the table down the page, it says there is no credit check (at least for some types of loans, I assume):
https://www.elitepersonalfinance.com/buy-now-pay-later-no-credit-check/
- Does Affirm report to credit bureaus?
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, but not for all their loans ... if you default on your Affirm loan or make late payments then a report will be filed
https://finance.yahoo.com/news/buy-now-pay-later-loans-131358423.html
- How does Affirm make money?
You don't think they just lend money, and then sit back and collect 0% interest for their effort, do you?
Affirm makes money through four revenue streams: network revenue, interest income, gains on sales of loans, and servicing income.
Gains on sales of loans: Affirm sells a portion of the loans it originates or purchases from the originating bank partners to third-party investors.
Servicing income: Affirm also makes money by providing professional services to manage loan portfolios on behalf of its third-party loan owners.
BTW, this means that if YOU have a loan through Affirm, you make your payments to Affirm and you THINK that Affirm owns the loan. But they do not. They only service it for the investors who bought the loan. This is how most mortgages work today, too.
https://thestrategystory.com/2022/02/26/how-does-affirm-make-money-business-model/
- Which bank is the actual funder of Affirm loans?
Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.
Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.
The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike.
Clearly, Affirm has more than one business model for making money.
- Is it true that Affirm sells its loans as securities?
Yes, and no.
Affirm recently had to delay the sale of one of its asset-backed securities.
The delayed sale had to do with one of Affirm's asset-backed securities (ABS), which is a pool of Affirm loans the company had packaged together through a trust or special purpose vehicle to sell to investors, which it has done several times before. Investors buy the securities, removing them from Affirm's balance sheet. The investors then collect principal and interest from the borrowers' payments on their individual loans.
https://www.fool.com/investing/2022/03/18/should-investors-be-concerned-about-affirms-delaye/
In an interesting twist, an appeals court has ruled that these types of vehicles are legally considered to be "syndicated loans" rather than "securities," and therefore are not subject to securities laws.
The United States Court of Appeals for the Second Circuit upheld on August 24, 2023, a decision from the District Court to dismiss a securities fraud case brought by a Chapter 11 bankruptcy trustee, on the grounds that a $1.8 billion syndicated loan was not a security.
The analysis of the Kirschner opinion is helpful to syndicated loan structurers and lawyers who want to characterize their transactions as loans and avoid potential liability under federal securities laws for nondisclosure of material information.
- Are these loans packaged up and sold to investors?
Yes.
CDO's vs. CLO's.
I wrote "Collateralized Debt Obligations" (CDO's) in my OP, because that is what it looked like to me, but the video did not explicitly state this.
But I did not know about the court decision or the marketing of these things.
Turns out, the are actually called "Collateralized Loan Obligations" (CLO's).
CLO ETFs are popping up on investors' radar, offering high yield, diluted risk and diversification.
CLOs tend to have higher yields than most stocks and corporate bonds, due to the underlying loans' credit risk, and they've traditionally been the purview of big institutional investors. Over the long term, CLO tranches (groups of interest-paying bonds) have performed well overall compared with some other corporate debt categories.
Fledgling collateralized loan obligation exchange-traded funds, or ETFs, have been taking off in recent years, making these sophisticated investments more accessible. The Janus Henderson AAA CLO ETF (ticker: JAAA), one of the "veteran" ETFs at nearly 3 years old, has $3.7 billion in assets under management, or AUM.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have a combined $160 million in AUM and feature high yields.
CLOs carry some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
https://money.usnews.com/investing/articles/collateralized-loan-obligations-etfs-to-consider
That article is not specific, the the video in my OP stated that the average credit of these borrowers is sub-prime ("C" or "D" type of credit), but the CLO's are packaged and rated as "A."
This is the exact same scenario as what happened in the mortgage melt-down, which ended up with a lot of loan fraud and crazy approvals of loans that should never have been done, even where fraud did not occur. These were also "C" and "D" type of credit but the collateralization gave the ratings agencies cover to grade the investments as "A." But they were never worthy of those ratings.
So, in summary, I see the info in the video as more or less accurate. It did not include a deep dive, but rather gave a summary.
The only question is what is the real risk?
Since Affirm and similar companies say they use "modernized risk models" and do not disclose what that means, we have no idea what the real risk is.
Just like taking a vaccine with a mystery drug cocktail.
Good luck!
LOL
For those of you pushing back on this issue:
Also personally, I think you just watched The Big Short and got creative with this post.
That's a really weird assumption to make, false, and a strawman. I posted my info based on the video in my post, which you probably didn't bother to watch.
But since you and a few others here seem to have had a different experience (and you all seem to think you know what you are talking about), I did a little more digging.
I think the full picture was not presented by the man in the video nor by you.
Here were the results of some digging:
- How does Affirm work?
At the checkout point, under payment options, you are offered the option to spread out your payments for whatever you’re purchasing. You apply and are usually approved in seconds for what’s basically a short-term loan. You make a small down payment, then agree to pay off the rest in installments over a few weeks or months.
The way that BNPL programs like Affirm work, the merchant is not offering you this credit. Instead, a third-party lender that has partnered with the merchant is providing the credit. Affirm is one of these third-party lenders.
Affirm says it takes current economic conditions into account. Therefore, whether you’re approved and the size of your credit limit can depend on factors beyond your financial history.
https://www.investopedia.com/how-does-affirm-work-5183684
- Does Affirm require a credit check?
Yes and no. It seems that in some cases, it does, and in other cases it does not. Here is a website claiming to have researched several types of lenders, and in the table down the page, it says there is no credit check (at least for some types of loans, I assume):
https://www.elitepersonalfinance.com/buy-now-pay-later-no-credit-check/
- Does Affirm report to credit bureaus?
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, but not for all their loans ... if you default on your Affirm loan or make late payments then a report will be filed
https://finance.yahoo.com/news/buy-now-pay-later-loans-131358423.html
- How does Affirm make money?
You don't think they just lend money, and then sit back and collect 0% interest for their effort, do you?
Affirm makes money through four revenue streams: network revenue, interest income, gains on sales of loans, and servicing income.
Gains on sales of loans: Affirm sells a portion of the loans it originates or purchases from the originating bank partners to third-party investors.
Servicing income: Affirm also makes money by providing professional services to manage loan portfolios on behalf of its third-party loan owners.
https://thestrategystory.com/2022/02/26/how-does-affirm-make-money-business-model/
- Which bank is the actual funder of Affirm loans?
Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.
Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.
The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike.
Clearly, Affirm has more than one business model for making money.
- Is it true that Affirm sells its loans as securities?
Yes, and no.
Affirm recently had to delay the sale of one of its asset-backed securities.
The delayed sale had to do with one of Affirm's asset-backed securities (ABS), which is a pool of Affirm loans the company had packaged together through a trust or special purpose vehicle to sell to investors, which it has done several times before. Investors buy the securities, removing them from Affirm's balance sheet. The investors then collect principal and interest from the borrowers' payments on their individual loans.
https://www.fool.com/investing/2022/03/18/should-investors-be-concerned-about-affirms-delaye/
In an interesting twist, an appeals court has ruled that these types of vehicles are legally considered to be "syndicated loans" rather than "securities," and therefore are not subject to securities laws.
The United States Court of Appeals for the Second Circuit upheld on August 24, 2023, a decision from the District Court to dismiss a securities fraud case brought by a Chapter 11 bankruptcy trustee, on the grounds that a $1.8 billion syndicated loan was not a security.
The analysis of the Kirschner opinion is helpful to syndicated loan structurers and lawyers who want to characterize their transactions as loans and avoid potential liability under federal securities laws for nondisclosure of material information.
- Are these loans packaged up and sold to investors?
Yes.
CDO's vs. CLO's.
I wrote "Collateralized Debt Obligations" (CDO's) in my OP, because that is what it looked like to me, but the video did not explicitly state this.
But I did not know about the court decision or the marketing of these things.
Turns out, the are actually called "Collateralized Loan Obligations" (CLO's).
CLO ETFs are popping up on investors' radar, offering high yield, diluted risk and diversification.
CLOs tend to have higher yields than most stocks and corporate bonds, due to the underlying loans' credit risk, and they've traditionally been the purview of big institutional investors. Over the long term, CLO tranches (groups of interest-paying bonds) have performed well overall compared with some other corporate debt categories.
Fledgling collateralized loan obligation exchange-traded funds, or ETFs, have been taking off in recent years, making these sophisticated investments more accessible. The Janus Henderson AAA CLO ETF (ticker: JAAA), one of the "veteran" ETFs at nearly 3 years old, has $3.7 billion in assets under management, or AUM.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have a combined $160 million in AUM and feature high yields.
CLOs carry some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
https://money.usnews.com/investing/articles/collateralized-loan-obligations-etfs-to-consider
That article is not specific, the the video in my OP stated that the average credit of these borrowers is sub-prime ("C" or "D" type of credit), but the CLO's are packaged and rated as "A."
This is the exact same scenario as what happened in the mortgage melt-down, which ended up with a lot of loan fraud and crazy approvals of loans that should never have been done, even where fraud did not occur. These were also "C" and "D" type of credit but the collateralization gave the ratings agencies cover to grade the investments as "A." But they were never worthy of those ratings.
So, in summary, I see the info in the video as more or less accurate. It did not include a deep dive, but rather gave a summary.
The only question is what is the real risk?
Since Affirm and similar companies say they use "modernized risk models" and do not disclose what that means, we have no idea what the real risk is.
Just like taking a vaccine with a mystery drug cocktail.
Good luck!
LOL
For those of you pushing back on this issue:
Also personally, I think you just watched The Big Short and got creative with this post.
That's a really weird assumption to make, false, and a strawman. I posted my info based on the video in my post, which you probably didn't bother to watch.
But since you and a few others here seem to have had a different experience (and you all seem to think you know what you are talking about), I did a little more digging.
I think the full picture was not presented by the man in the video nor by you.
Here were the results of some digging:
- How does Affirm work?
At the checkout point, under payment options, you are offered the option to spread out your payments for whatever you’re purchasing. You apply and are usually approved in seconds for what’s basically a short-term loan. You make a small down payment, then agree to pay off the rest in installments over a few weeks or months.
The way that BNPL programs like Affirm work, the merchant is not offering you this credit. Instead, a third-party lender that has partnered with the merchant is providing the credit. Affirm is one of these third-party lenders.
Affirm says it takes current economic conditions into account. Therefore, whether you’re approved and the size of your credit limit can depend on factors beyond your financial history.
https://www.investopedia.com/how-does-affirm-work-5183684
- Does Affirm require a credit check?
Yes and no. It seems that in some cases, it does, and in other cases it does not. Here is a website claiming to have researched several types of lenders, and in the table down the page, it says there is no credit check (at least for some types of loans, I assume):
https://www.elitepersonalfinance.com/buy-now-pay-later-no-credit-check/
- Does Affirm report to credit bureaus?
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, but not for all their loans ... if you default on your Affirm loan or make late payments then a report will be filed
https://finance.yahoo.com/news/buy-now-pay-later-loans-131358423.html
- How does Affirm make money?
You don't think they just lend money, and then sit back and collect 0% interest for their effort, do you?
Affirm makes money through four revenue streams: network revenue, interest income, gains on sales of loans, and servicing income.
Gains on sales of loans: Affirm sells a portion of the loans it originates or purchases from the originating bank partners to third-party investors.
Servicing income: Affirm also makes money by providing professional services to manage loan portfolios on behalf of its third-party loan owners.
https://thestrategystory.com/2022/02/26/how-does-affirm-make-money-business-model/
- Which bank is the actual funder of Affirm loans?
Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.
Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.
The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike.
Clearly, Affirm has more than one business model for making money.
- Is it true that Affirm sells its loans as securities?
Yes, and no.
Affirm recently had to delay the sale of one of its asset-backed securities.
The delayed sale had to do with one of Affirm's asset-backed securities (ABS), which is a pool of Affirm loans the company had packaged together through a trust or special purpose vehicle to sell to investors, which it has done several times before. Investors buy the securities, removing them from Affirm's balance sheet. The investors then collect principal and interest from the borrowers' payments on their individual loans.
https://www.fool.com/investing/2022/03/18/should-investors-be-concerned-about-affirms-delaye/
In an interesting twist, an appeals court has ruled that these types of vehicles are legally considered to be "syndicated loans" rather than "securities," and therefore are not subject to securities laws.
The United States Court of Appeals for the Second Circuit upheld on August 24, 2023, a decision from the District Court to dismiss a securities fraud case brought by a Chapter 11 bankruptcy trustee, on the grounds that a $1.8 billion syndicated loan was not a security.
The analysis of the Kirschner opinion is helpful to syndicated loan structurers and lawyers who want to characterize their transactions as loans and avoid potential liability under federal securities laws for nondisclosure of material information.
- Are these loans packaged up and sold to investors?
Yes.
CDO's vs. CLO's.
I wrote "Collateralized Debt Obligations" (CDO's) in my OP, because that is what it looked like to me, but the video did not explicitly state this.
But I did not know about the court decision or the marketing of these things.
Turns out, the are actually called "Collateralized Loan Obligations" (CLO's).
CLO ETFs are popping up on investors' radar, offering high yield, diluted risk and diversification.
CLOs tend to have higher yields than most stocks and corporate bonds, due to the underlying loans' credit risk, and they've traditionally been the purview of big institutional investors. Over the long term, CLO tranches (groups of interest-paying bonds) have performed well overall compared with some other corporate debt categories.
Fledgling collateralized loan obligation exchange-traded funds, or ETFs, have been taking off in recent years, making these sophisticated investments more accessible. The Janus Henderson AAA CLO ETF (ticker: JAAA), one of the "veteran" ETFs at nearly 3 years old, has $3.7 billion in assets under management, or AUM.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have a combined $160 million in AUM and feature high yields.
CLOs carry some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
https://money.usnews.com/investing/articles/collateralized-loan-obligations-etfs-to-consider
That article is not specific, the the video in my OP stated that the average credit of these borrowers is sub-prime ("C" or "D" type of credit), but the CLO's are packaged and rated as "A."
This is the exact same scenario as what happened in the mortgage melt-down, which ended up with a lot of loan fraud and crazy approvals of loans that should never have been done, even where fraud did not occur. These were also "C" and "D" type of credit but the collateralization gave the ratings agencies cover to grade the investments as "A." But they were never worthy of those ratings.
So, in summary, I see the info in the video as more or less accurate. It did not include a deep dive, but rather gave a summary.
The only question is what is the real risk?
Since Affirm and similar companies say they use "modernized risk models" and do not disclose what that means, we have no idea what the real risk is.
Just like taking a vaccine with a mystery drug cocktail.
Good luck!
LOL
For those of you pushing back on this issue:
Also personally, I think you just watched The Big Short and got creative with this post.
That's a really weird assumption to make, false, and a strawman. I posted my info based on the video in my post, which you probably didn't bother to watch.
But since you and a few others here seem to have had a different experience (and you all seem to think you know what you are talking about), I did a little more digging.
I think the full picture was not presented by the man in the video nor by you.
Here were the results of some digging:
- How does Affirm work?
At the checkout point, under payment options, you are offered the option to spread out your payments for whatever you’re purchasing. You apply and are usually approved in seconds for what’s basically a short-term loan. You make a small down payment, then agree to pay off the rest in installments over a few weeks or months.
The way that BNPL programs like Affirm work, the merchant is not offering you this credit. Instead, a third-party lender that has partnered with the merchant is providing the credit. Affirm is one of these third-party lenders.
Affirm says it takes current economic conditions into account. Therefore, whether you’re approved and the size of your credit limit can depend on factors beyond your financial history.
https://www.investopedia.com/how-does-affirm-work-5183684
- Does Affirm require a credit check?
Yes and no. It seems that in some cases, it does, and in other cases it does not. Here is a website claiming to have researched several types of lenders, and in the table down the page, it says there is no credit check (at least for some types of loans, I assume):
https://www.elitepersonalfinance.com/buy-now-pay-later-no-credit-check/
- Does Affirm report to credit bureaus?
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, but not for all their loans ... if you default on your Affirm loan or make late payments then a report will be filed
https://finance.yahoo.com/news/buy-now-pay-later-loans-131358423.html
- How does Affirm make money?
You don't think they just lend money, and then sit back and collect 0% interest for their effort, do you?
Affirm makes money through four revenue streams: network revenue, interest income, gains on sales of loans, and servicing income.
Gains on sales of loans: Affirm sells a portion of the loans it originates or purchases from the originating bank partners to third-party investors.
Servicing income: Affirm also makes money by providing professional services to manage loan portfolios on behalf of its third-party loan owners.
https://thestrategystory.com/2022/02/26/how-does-affirm-make-money-business-model/
- Which bank is the actual funder of Affirm loans?
Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.
Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.
The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike.
Clearly, Affirm has more than one business model for making money.
- Is it true that Affirm sells its loans as securities?
Yes, and no.
Affirm recently had to delay the sale of one of its asset-backed securities.
The delayed sale had to do with one of Affirm's asset-backed securities (ABS), which is a pool of Affirm loans the company had packaged together through a trust or special purpose vehicle to sell to investors, which it has done several times before. Investors buy the securities, removing them from Affirm's balance sheet. The investors then collect principal and interest from the borrowers' payments on their individual loans.
https://www.fool.com/investing/2022/03/18/should-investors-be-concerned-about-affirms-delaye/
In an interesting twist, an appeals court has ruled that these types of vehicles are legally considered to be "syndicated loans" rather than "securities," and therefore are not subject to securities laws.
The United States Court of Appeals for the Second Circuit upheld on August 24, 2023, a decision from the District Court to dismiss a securities fraud case brought by a Chapter 11 bankruptcy trustee, on the grounds that a $1.8 billion syndicated loan was not a security.
The analysis of the Kirschner opinion is helpful to syndicated loan structurers and lawyers who want to characterize their transactions as loans and avoid potential liability under federal securities laws for nondisclosure of material information.
- Are these loans packaged up and sold to investors?
Yes.
CDO's vs. CLO's.
I wrote "Collateralized Debt Obligations" (CDO's) in my OP, because that is what it looked like to me, but the video did not explicitly state this.
But I did not know about the court decision or the marketing of these things.
Turns out, the are actually called "Collateralized Loan Obligations" (CLO's).
CLO ETFs are popping up on investors' radar, offering high yield, diluted risk and diversification.
CLOs tend to have higher yields than most stocks and corporate bonds, due to the underlying loans' credit risk, and they've traditionally been the purview of big institutional investors. Over the long term, CLO tranches (groups of interest-paying bonds) have performed well overall compared with some other corporate debt categories.
Fledgling collateralized loan obligation exchange-traded funds, or ETFs, have been taking off in recent years, making these sophisticated investments more accessible. The Janus Henderson AAA CLO ETF (ticker: JAAA), one of the "veteran" ETFs at nearly 3 years old, has $3.7 billion in assets under management, or AUM.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have a combined $160 million in AUM and feature high yields.
CLOs carry some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
https://money.usnews.com/investing/articles/collateralized-loan-obligations-etfs-to-consider
That article is not specific, the the video in my OP stated that the average credit of these borrowers is sub-prime ("C" or "D" type of credit), but the CLO's are packaged and rated as "A."
This is the exact same scenario as what happened in the mortgage melt-down, which ended up with a lot of loan fraud and crazy approvals of loans that should never have been done, even where fraud did not occur. These were also "C" and "D" type of credit but the collateralization gave the ratings agencies cover to grade the investments as "A." But they were never worthy of those ratings.
So, in summary, I see the info in the video as more or less accurate. It did not include a deep dive, but rather gave a summary.
The only question is what is the real risk?
Since Affirm and similar companies say they use "modernized risk models" and do not disclose what that means, we have no idea what the real risk is.
Just like taking a vaccine with a mystery drug cocktail.
Good luck!
LOL
For those of you pushing back on this issue:
Also personally, I think you just watched The Big Short and got creative with this post.
That's a really weird assumption to make, false, and a strawman. I posted my info based on the video in my post, which you probably didn't bother to watch.
But since you and a few others here seem to have had a different experience (and you all seem to think you know what you are talking about), I did a little more digging.
I think the full picture was not presented by the man in the video nor by you.
Here were the results of some digging:
- How does Affirm work?
At the checkout point, under payment options, you are offered the option to spread out your payments for whatever you’re purchasing. You apply and are usually approved in seconds for what’s basically a short-term loan. You make a small down payment, then agree to pay off the rest in installments over a few weeks or months.
The way that BNPL programs like Affirm work, the merchant is not offering you this credit. Instead, a third-party lender that has partnered with the merchant is providing the credit. Affirm is one of these third-party lenders.
Affirm says it takes current economic conditions into account. Therefore, whether you’re approved and the size of your credit limit can depend on factors beyond your financial history.
https://www.investopedia.com/how-does-affirm-work-5183684
- Does Affirm require a credit check?
Yes and no. It seems that in some cases, it does, and in other cases it does not. Here is a website claiming to have researched several types of lenders, and in the table down the page, it says there is no credit check (at least for some types of loans, I assume):
https://www.elitepersonalfinance.com/buy-now-pay-later-no-credit-check/
- Does Affirm report to credit bureaus?
Not all BNPL loan providers report to credit rating agencies, but the most popular ones do. Affirm, for example, reports to credit bureaus, &&&but not for all their loans*** ... if you default on your Affirm loan or make late payments then a report will be filed
https://finance.yahoo.com/news/buy-now-pay-later-loans-131358423.html
- How does Affirm make money?
You don't think they just lend money, and then sit back and collect 0% interest for their effort, do you?
Affirm makes money through four revenue streams: network revenue, interest income, gains on sales of loans, and servicing income.
Gains on sales of loans: Affirm sells a portion of the loans it originates or purchases from the originating bank partners to third-party investors.
Servicing income: Affirm also makes money by providing professional services to manage loan portfolios on behalf of its third-party loan owners.
https://thestrategystory.com/2022/02/26/how-does-affirm-make-money-business-model/
- Which bank is the actual funder of Affirm loans?
Affirm Holdings Inc. is seeking new sponsor banks to diversify the sources of loan originations, as the buy-now, pay-later platform comes under pressure to improve earnings after a slowdown in growth.
Affirm began accelerating the search for new bank partners in the first half of fiscal 2023, between July 2022 and December 2022, according to a Form 10-Q filing posted Feb. 8. It began reducing originations by Cross River Bank in January 2023, and as of Jan. 31, the majority of loans facilitated through its platform were originated by its other bank partner, Celtic Bank Corp.
The search for bank sponsors comes as the consumer lender is shifting to interest-bearing loans from its interest-free Pay in 4 product, in part driven by the Federal Reserve's rate hike.
Clearly, Affirm has more than one business model for making money.
- Is it true that Affirm sells its loans as securities?
Yes, and no.
Affirm recently had to delay the sale of one of its asset-backed securities.
The delayed sale had to do with one of Affirm's asset-backed securities (ABS), which is a pool of Affirm loans the company had packaged together through a trust or special purpose vehicle to sell to investors, which it has done several times before. Investors buy the securities, removing them from Affirm's balance sheet. The investors then collect principal and interest from the borrowers' payments on their individual loans.
https://www.fool.com/investing/2022/03/18/should-investors-be-concerned-about-affirms-delaye/
In an interesting twist, an appeals court has ruled that these types of vehicles are legally considered to be "syndicated loans" rather than "securities," and therefore are not subject to securities laws.
The United States Court of Appeals for the Second Circuit upheld on August 24, 2023, a decision from the District Court to dismiss a securities fraud case brought by a Chapter 11 bankruptcy trustee, on the grounds that a $1.8 billion syndicated loan was not a security.
The analysis of the Kirschner opinion is helpful to syndicated loan structurers and lawyers who want to characterize their transactions as loans and avoid potential liability under federal securities laws for nondisclosure of material information.
- Are these loans packaged up and sold to investors?
Yes.
CDO's vs. CLO's.
I wrote "Collateralized Debt Obligations" (CDO's) in my OP, because that is what it looked like to me, but the video did not explicitly state this.
But I did not know about the court decision or the marketing of these things.
Turns out, the are actually called "Collateralized Loan Obligations" (CLO's).
CLO ETFs are popping up on investors' radar, offering high yield, diluted risk and diversification.
CLOs tend to have higher yields than most stocks and corporate bonds, due to the underlying loans' credit risk, and they've traditionally been the purview of big institutional investors. Over the long term, CLO tranches (groups of interest-paying bonds) have performed well overall compared with some other corporate debt categories.
Fledgling collateralized loan obligation exchange-traded funds, or ETFs, have been taking off in recent years, making these sophisticated investments more accessible. The Janus Henderson AAA CLO ETF (ticker: JAAA), one of the "veteran" ETFs at nearly 3 years old, has $3.7 billion in assets under management, or AUM.
Firms like VanEck and BlackRock have also entered the industry and released their own CLO ETFs, launched in 2022 and 2023, respectively. Those funds have a combined $160 million in AUM and feature high yields.
CLOs carry some risk, especially those focused on non-investment-grade borrowers. And tying money up in a fund that has lower assets and is less liquid can make it harder to sell that position to access the cash. ETFs are one way to diversify and bring risk down, but investors should always do their due diligence before hopping on investment trends.
https://money.usnews.com/investing/articles/collateralized-loan-obligations-etfs-to-consider
That article is not specific, the the video in my OP stated that the average credit of these borrowers is sub-prime ("C" or "D" type of credit), but the CLO's are packaged and rated as "A."
This is the exact same scenario as what happened in the mortgage melt-down, which ended up with a lot of loan fraud and crazy approvals of loans that should never have been done, even where fraud did not occur. These were also "C" and "D" type of credit but the collateralization gave the ratings agencies cover to grade the investments as "A." But they were never worthy of those ratings.
So, in summary, I see the info in the video as more or less accurate. It did not include a deep dive, but rather gave a summary.
The only question is what is the real risk?
Since Affirm and similar companies say they use "modernized risk models" and do not disclose what that means, we have no idea what the real risk is.
Just like taking a vaccine with a mystery drug cocktail.
Good luck!
LOL