HHill recent post in response to a question:"Re: HHill, What happens in a couple of yby: hhill51 07/08/04 08:34 amMsg: 178514 of 178516 << won't there always be enough steepness in the yield curve to allow NFI to continue to generate reasonably consistent earnings and dividents even in a gradually rising interest rate envirement?>>Actually, the steepness of the yield curve is a minor factor in NFI's success. Their typical loan is fixed for two years, and then floats at 600 or more over 6-month LIBOR. Their financing floats 50 over 1-month LIBOR. Those two rates seldom, if ever, get inverted and stay inverted by any meaningful amount. The steepness of the yield curve enters the picture in the form of competing fixed-rate lending. If the fixed 30-year mortgage for subprime credits was 8% while L+600 was 10%, then more people would choose the fixed rate loans, which are more expensive to swap into floating rates.NFI makes its spread on a (mispriced) credit curve. That credit curve charges a premium of 400 basis points for poor credit, even though this pool of borrowers only gives the lender around 100 basis points per annum of credit losses. That is the essence of where the profit will come from, no matter what shape we have in the Treasury yield curve."
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