Author Topic: Chargeoff Rates vs Time  (Read 8101 times)

Fred93

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Chargeoff Rates vs Time
« on: July 17, 2014, 06:40:23 AM »
An important thing to know about consumer loans is that chargeoff rates change with time.  We're in a very benign time right now, when consumer loans are performing well.  At the next downturn, they may once again perform poorly.  Prosper and Lending Club loans have performed similarly to the credit card curve. 



As you can see, there have been times when chargeoff rates have tripled (example 2006 to 2010), and this could happen again.  I see people bragging about the returns they've been getting on their high-interest-rate low-grade loans.  If good times persist, these people will be very happy.  If bad times return, some of those portfolios are going to perform badly.

lascott

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Re: Chargeoff Rates vs Time
« Reply #1 on: July 17, 2014, 09:12:55 AM »
Great post and reality for some of us who are new to this but have not see such a chart.

In doing some searching I found an interesting blog post about this and related items (bold below).

http://mjperry.blogspot.com/2012/05/credit-card-delinquency-rate-falls-to.html

Title: Credit Card Delinquency Rate Falls to Record Low; Household Fin. Obligation Ratio Lowest Since 1984



The Federal Reserve released new data today on delinquency and charge-off rates at U.S. commercial banks for the first quarter of 2012. For consumer credit cards, the delinquency rate fell for the 11th consecutive quarter to 3.07% during the January-March period, which is the lowest level ever recorded since the Federal Reserve started tracking these data back in 1991 (see blue line in chart).

For all consumer loans, the first quarter delinquency dropped to 2.89%, the lowest rate since the 2.8% reading in the first quarter of 2006, well before the recession started (see red line in chart).

Delinquency rates for all consumer loans and credit card debt are both back to pre-recession levels, and credit card delinquencies are at the lowest level ever recorded.  Likewise, the charge-off rates for all consumers loans and credit card loans are both back to pre-recession levels (data here).

The drops in delinquency and charge-off rates for consumer debt are consistent with the drops in the household debt service ratio (required payments on mortgage and consumer debt as a share of disposable personal income) in Q4 last year to 10.88% (red line in chart below), the lowest since 1993; and the drop in household financial obligations ratio (adds automobile lease payments, rental payments on tenant-occupied property, homeowners' insurance, and property tax payments to the household debt service ratio) in Q4 to 15.93%, the lowest since 1984. 


MP: U.S. households appear to be managing debt better than at almost any time during  the last 20 years, in terms of a record-low delinquency rate on credit card debt, a return of the delinquency rate on all consumer debt to pre-recession levels, and the lowest share of monthly disposable income in almost 20 years going towards monthly car loans/lease payments, monthly mortgage/rent payments, and monthly credit card payments in almost 20 years.


« Last Edit: June 28, 2015, 10:20:58 AM by lascott »
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Rob L

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Re: Chargeoff Rates vs Time
« Reply #2 on: July 17, 2014, 09:33:31 AM »
With the severe tightening of credit standards over the past few years it isn't surprising to see "U.S. households appear to be managing debt better than at almost any time during  the last 20 years".
Many have not exactly had a choice in the matter.

Fred

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Re: Chargeoff Rates vs Time
« Reply #3 on: July 17, 2014, 10:49:43 AM »
Prosper and Lending Club loans have performed similarly to the credit card curve. 

Thanks for sharing the chart.  I agree with your statement above.  In fact, for low-grade LC loans (F+G), we should expect worse charge-off than credit card.

I see people bragging about the returns they've been getting on their high-interest-rate low-grade loans.  If good times persist, these people will be very happy.  If bad times return, some of those portfolios are going to perform badly.

+1
We investors/lenders should always have an answer -- preferably quantitatively --  to the question "is it worth the risk?"

BruiserB

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Re: Chargeoff Rates vs Time
« Reply #4 on: July 17, 2014, 11:06:54 AM »
Good post.  While I'm quite happy with my returns today, I've wondered what would happen if there were another significant downturn in the economy and wondered what the best course of action would be if it were to happen.  Right now my default losses seem to be about 28% of my interest earned.  So if default rates tripled, is it a valid assumption to say they would become around 80% of my interest earned??  If that were to happen, it would be significantly worse performance than I've been seeing, but I would still be coming out ahead or at worst losing only a small amount of my overall account. 

Is that a valid way to look at it?  I've also wondered what would be the best course of action if things started to turn?

1) Liquidate through Folio?  Seems like there would be panic selling by others too, so might be hard to sell even current notes without discounting significantly.   Then where to put the proceeds.....if the economy is tanking, the stock market probably is too.  Buy gold or commodities?  I don't know enough about them to know if that would make sense?

2) Stop Reinvesting and Ride it Out with Previously Purchased Notes?  Cash generated through payments could either just be held in cash or invested in other alternatives, but would face the same questions of where to put it as in 1.

3) Just Keep on Keeping On?  Continue to reinvest earnings.....I'd assume new loans would be priced to reflect the new risky environment?  Would take my lumps on previous investments, but really shouldn't lose too much principal even at a 3x default rate.....probably more than I can say for any stock investments I'd have.

4) Reinvest Earnings in Other's Folio Sales?  I suppose some people will panic and try to leave even if it's not the rational thing to do.  Might be the best time to buy low from those running for the exits.

Has anyone else given this some thought?  Are there other options that are significantly different from the above that make even more sense?

lascott

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Re: Chargeoff Rates vs Time
« Reply #5 on: July 17, 2014, 12:44:10 PM »
In fact, for low-grade LC loans (F+G), we should expect worse charge-off than credit card.
A pretty bad scenario already today relative to D and higher.
https://lendingrobot.com/#/resources/charts
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Fred

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Re: Chargeoff Rates vs Time
« Reply #6 on: July 17, 2014, 02:05:10 PM »
We should be careful not to confuse charge-off rates vs. default rates vs. delinquency rates.

Conceptually they all refer to "bad loans", but numerically they have different values.

lascott

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Re: Chargeoff Rates vs Time
« Reply #7 on: July 17, 2014, 03:27:01 PM »
We should be careful not to confuse charge-off rates vs. default rates vs. delinquency rates.
Conceptually they all refer to "bad loans", but numerically they have different values.
Thanks for that reminder. I was thinking in relative comparison of E and above vs F and below.
http://www.federalreserve.gov/releases/chargeoff/
Quote
Charge-offs are the value of loans and leases removed from the books and charged against loss reserves. Charge-off rates are annualized, net of recoveries.
Delinquent loans and leases are those past due thirty days or more and still accruing interest as well as those in nonaccrual status.
Title: National Credit Card Delinquency and Charge-Off Rates
http://www.cardhub.com/edu/credit-card-charge-off-delinquency-statistics/
« Last Edit: July 17, 2014, 03:28:36 PM by lascott »
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Fred93

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Re: Chargeoff Rates vs Time
« Reply #8 on: July 17, 2014, 04:12:03 PM »
While I'm quite happy with my returns today, I've wondered what would happen if there were another significant downturn in the economy and wondered what the best course of action would be if it were to happen.  Right now my default losses seem to be about 28% of my interest earned.  So if default rates tripled, is it a valid assumption to say they would become around 80% of my interest earned??

Yes, I think that is a reasonable hypothesis.  No one can know the future, but we know things that have happened in the past can happen again. 

There are some people investing in portfolios where the losses as a fraction of interest income is higher than in your porftolio.  Those people may have problems when a downturn comes.

I like the idea of looking at the loss rate as well as the interest rate, and their relative values when choosing loan selection criteria. 

As for what you can do ... After the s*** hits the fan I'm not sure there's much you can do.  Before it does, you can choose investments which you hope will weather the storm, if and when it comes. 

Rob L

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Re: Chargeoff Rates vs Time
« Reply #9 on: July 17, 2014, 05:34:02 PM »
We investors/lenders should always have an answer -- preferably quantitatively --  to the question "is it worth the risk?"
I would certainly be interested in your approach to measuring risk quantitatively. Probably everyone would.
My own approach is unfortunately rather crude and subjective. The antithesis of LTC.
It's something like "sell down to the sleeping point"... and I'm pretty old and I nod off rather quickly.
I don't believe losing it all would be a 7 sigma event. Stranger things have happened.
Maybe LC's "no more than 10% ..." is reasonable; as long as it isn't correlated with the other 90% or your net worth.
Age matters. We know what Keynes had to say about that. Investment wise I'm personally am at a very conservative point in life.
Don't sleep too good, but that isn't because I'm worried about my P2P investments.

rawraw

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Re: Chargeoff Rates vs Time
« Reply #10 on: July 17, 2014, 05:40:36 PM »
Good post.  While I'm quite happy with my returns today, I've wondered what would happen if there were another significant downturn in the economy and wondered what the best course of action would be if it were to happen.
I'm trying to build a stress test for LC currently because I'm always concerned about the embedded volatility of investment vehicles.  If I get one that seems useful, I'm going to talk to one of these computer guys on the forum to try to put it on their website.  But about those curves -- my first step in my stress test was to pull those data series.  Fred said that for F+G loans, we should expect it to be more.  But if you look at the loss curves, many of the loan grades may perform a little worse than the credit card proxy.  It's hard to know for certain because LC is growing so much, though.  I've been trying to see if I can find some credit card loss curves from the crisis to compare to the LC loss curves.