FolioFN Sell All In-Grace-Period Loans

[sociallender]

I just read this article from lendingmemo.com regarding how the author avoids defaults by selling in-grace-period loans:

http://www.lendingmemo.com/lending-club-foliofn/

Based on the article, it suggests that it is a good idea to discount all in-grace-period loans at a suggested discount of 10% (give or take).  Does anyone have experience with this strategy?  Perhaps any data that supports the recommendation? 

I have very little experience with foliofn, but seems on the surface statistically that it makes sense.  I could potentially automate this type of strategy but not sure if it is worth the effort. 

Thanks,
SL

[core]

If you can get rid of them at a 10% discount I'd say go for it.  Just don't expect to sell a large percentage at that price.  I skimmed over the article and Simon's point was any that do get sold is money in your pocket.  But you are still going to have defaults unless you agressively lower the price as the next status downgrade date approaches.

As for automation, you have to be very careful about that.  Lending Club likes to decide not to process payments whenever they feel like it and your notes could temporarily go into grace period status for no valid reason.

[sociallender]

Thanks for the feedback.

As for automation, you have to be very careful about that.  Lending Club likes to decide not to process payments whenever they feel like it and your notes could temporarily go into grace period status for no valid reason.

OK, so you are saying because LC may be late processing payments, then the reason a note goes into late status could be the result of LC accounting delays.  Is this prevalent? 

I never really payed much attention to the status of my notes as I am a passive investor.  I just realized that LC doesn't display "in-grace-period" notes in the "my notes at a glance" box on the account summary page.  So, i just checked the notes.csv file and see that i have a handful of notes that are in "grace period".    I see there is also a column named "LoanStatusDate".  I am wondering if that date is after/later than the NextPaymentDate, would that mean that LC has processed the loan and is really in grace period?

[sociallender]

I just checked a couple of accounts I have in LC and the LoanStatusDate appears to always be after the NextPaymentDate.  I tried looking around to see what specifically the "LoanStatusDate" means (perhaps when the loan was placed in grace period status).  So, I am not sure using the LoanStatusDate as a measure of whether LC has processed payments will work. 

Another thought is since you know the next payment due date, you could schedule sale of the note for foliofn a few days before late16 status.  If it doesn't sale within a reasonable time, iterate discounting until sale or reach max discount.     Any thoughts?

[rlv99]

I currently have 6 InGracePeriod loans and a single 15-31 DaysLate note out of over 1000 issued notes.  If my past experience is any clue as to what the future holds for these notes, 4-5 will become current again.  I don't believe it is worth the effort to sweat theses notes since, again, it has been my experiernce that LC is regularly late themselves in posting payments/collecting.

If you are a $25. investor, as I am 90% of the time, then you bought-in to the buy and hold/diversification "strategy" promoted by LC.   If you do,  you  won't experience the selling of IGP's and/or late notes at a discount and them see them become current a few days after they close on Folio.

As I have stated in other threads,  LC payment posting and collection practices are flawed and may lead them to serious problems in the not to distant future.

As a side note, in their "Careers" section they have been looking for a Collections Manager for the past 4 months.  It is difficult for me to  understand how a company with the number of accounts they have and the amount of dollars coming in can be without a Collections Manager for over 4 months!

[core]

As a side note, in their "Careers" section they have been looking for a Collections Manager for the past 4 months.  It is difficult for me to  understand how a company with the number of accounts they have and the amount of dollars coming in can be without a Collections Manager for over 4 months!

I haven't read the job posting, but just because they are advertising it doesn't mean the position isn't currently being handled by someone.  It's possible the person is being promoted but will handle their old position until it is filled.  Or they are about to be sacked.

[rlv99]

Or they are about to be sacked.

I would second that!

[sociallender]

I currently have 6 InGracePeriod loans and a single 15-31 DaysLate note out of over 1000 issued notes.  If my past experience is any clue as to what the future holds for these notes, 4-5 will become current again.  I don't believe it is worth the effort to sweat theses notes since, again, it has been my experiernce that LC is regularly late themselves in posting payments/collecting.

Are you saying that you experience less defaults from in-grace-period than LC 23% average?

https://www.lendingclub.com/info/statistics-performance.action

If so, I assume it has to do with your loan selection strategy.  It seems logical that if you are an average investor, 23% will eventually go into default.  If you can sell at a discount less than 23% then statistically should be better off in the long run.  If you are a better than average investor, then perhaps the discount should be proportional to your strategy's expected default rate.

I dont know if I am splitting hairs here in terms of maximizing return but the article seems to make a decent point.  I am thinking the decision to sell should at least be based on:

* Expected default rate for the specific loan
* Time before entering into the next status (which significantly devalues the loan)

SL

[New Jersey Guy]

"If my past experience is any clue as to what the future holds for these notes, 4-5 will become current again."

I've notice this quite a bit lately, too.  I think it's a delay in the processing.

Another thing I noticed were "Partial Payments".  I can't figure this one out at all.

About 2 weeks ago, I had 5 notes go into "Grace".  All had partial payments of like 3 to 7 cents.  No borrower contact!  As a matter of fact, not even the usual emails and stuff you see in the logs.

I put all 5 up for sale on Folio at a slight discount.  Eventually, 4 of the 5 went back to "Current".  Upon looking at the payment log, the partial payments were no longer showing up.  It reflected the full payment.

[core]

Are you saying that you experience less defaults from in-grace-period than LC 23% average?

I wouldn't trust any of these numbers Lending Club tosses around especially when doing these types of calculations.  Usually when they talk about these averages they're referring to how often some cash is recovered after the event happens.  If they collect $0.01 it's still treated as a win but that really doesn't help you.  Even if the metric is how often a note is brought back current, then there's still a higher chance the note will go back into late status in the future.   None of this is taken into account with these simplistic figures.

[Abberation]

Are you saying that you experience less defaults from in-grace-period than LC 23% average?

I wouldn't trust any of these numbers Lending Club tosses around especially when doing these types of calculations.  Usually when they talk about these averages they're referring to how often some cash is recovered after the event happens.  If they collect $0.01 it's still treated as a win but that really doesn't help you.  Even if the metric is how often a note is brought back current, then there's still a higher chance the note will go back into late status in the future.   None of this is taken into account with these simplistic figures.

I'd say the issue with trying to flip grace period notes is not only the lack of detailed statistics, or the technical issues experienced by lending club, there's also the issue of the other market participant having superior knowledge / filters. Who's to say that some of these hedge funds don't have a couple of real pros writing algorithms to buy only the in grace notes with the highest chances of curing, leaving you with lemon notes that have a much lower chance of going back to current?

[rlv99]

It seems logical that if you are an average investor, 23% will eventually go into default.

I go to great lengths to assure that I am NOT an "average investor".  I suppose if you just pick notes randomly then the 23% default rate might apply.  But, simply using filters implies that your goal is something a whole lot better.  I wouldn't be an LC investor if the default rate that I expect here wasn't substantially better than 23%; my goal is <4%

If you can sell at a discount less than 23% then statistically should be better off in the long run.

Why?  Default rate and discount rate are mutually exclusive!  The note you are selling at a discount has an inherent probability of being cured and P+I realized, as long as LC coninues with its reckless payment posting and collection practices.

Another thing I noticed were "Partial Payments".  I can't figure this one out at all

Yes, partial payments are troublesome.  I have had a few go "Fully Paid" a few days later as  well. 

[yojoakak]

I put all 5 up for sale on Folio at a slight discount.  Eventually, 4 of the 5 went back to "Current".  Upon looking at the payment log, the partial payments were no longer showing up.  It reflected the full payment.

If you still have the notes, you should verify those payments in your Account Activity.

Sometimes LC merges multiple payments (even if they happen on different days) into a single payment in the Payment Log.

LendingClub's database must be a nightmare.

[sociallender]

I go to great lengths to assure that I am NOT an "average investor".  I suppose if you just pick notes randomly then the 23% default rate might apply.  But, simply using filters implies that your goal is something a whole lot better.  I wouldn't be an LC investor if the default rate that I expect here wasn't substantially better than 23%; my goal is <4%

Just to be clear, your goal is < 4% for notes which are in IGP or notes from origination?  There is a big difference.

Why?  Default rate and discount rate are mutually exclusive!

Do the math and you will see the benefit of discounting relative to default rate.

[Joleran]

Do the math and you will see the benefit of discounting relative to default rate.

Of course these variables are linked, but it's not as simple as saying that a default rate of, for example, 10% means that the "fair" break-even discount is 10%.

To analyze why this is, first examine a perfect, simple world with no transaction costs, no opportunity costs, total loss on default, perfectly shared knowledge of risk, and only a single payment remaining.  Then assume $100 payment due on any given note and a default rate of 10% for the note's current status.  Then, the person selling the note would receive $100 (P=0.9) or $0 (P=0.1).  With diversification, they would make $90 on average and it might appear reasonable that $90 is a fair market value for the note.  But remember, this is a break-even value, and what buyer wants to risk their money for no possibility of greater return on average?  The actual market value of a note in this situation is actually discounted more than the default risk!

How then, do notes regularly sell for less of a discount than would make sense?

Firstly, there is no perfectly shared knowledge of risk, and a note's risk isn't perfect knowledge to begin with because every note has a different real risk than the mean.  Buyers who believe the note's risk is substantially less than the average will be disposed to value it higher.  Many things can effect this perception, so I'm not getting into that.

On a more direct financial matter, the discount in this case is not off of YTM, but just P+I.  There are more cashflows coming!  So, a 10% discount on a $100 note on Folio that would have a total PV'd YTM value of $110 is actually more like a 18% discount in the context of comparing it to the default rate.

Then there are more minor factors like opportunity cost.  A seller of the note gets their money immediately, but the money is no longer working for them.  It may take them a couple of weeks to reinvest their money, and up to a couple of months to start getting cashflows from it again.  Another factor is that default is not always a total loss, and recoveries are made in collections.  Transaction costs cause a slight lowering of the discount as the seller tries to close their margin.