Author Topic: The Fitch P2P Lending Report: 5 Things They Got Right and 3 Things They Did Not  (Read 6870 times)

lascott

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Title: The Fitch P2P Lending Report: 5 Things They Got Right and 3 Things They Got Wrong
by Stu Lustman
via http://p2plendingexpert.com/the-fitch-p2p-lending-report-5-things-they-got-right-and-3-things-they-got-wrong/

Overview --- see details at link above.

The Rights
1) Limited Operating History
2) Unpredictable Cash Flows
3) Underwriting generally consistent with industry practices
4) Minimal Cash/Capital Requirements
5) Key Man Issues

The Wrongs
1) The Impact of Rising Interest Rates
2) Lack of Diverse Funding Sources
3) Online Platform Increases Potential for Fraud

http://www.investopedia.com/terms/f/fitch-ratings.asp
Quote
Definition of 'Fitch Ratings'
An international credit rating agency based out of New York City and London. The company's ratings are used as a guide to investors as to which investments are most likely going to yield a return. It is based on factors such as how small an economic shift would be necessary to affect the standing of the bond, and how much, and what kind of debt is held by the company.

Investopedia explains 'Fitch Ratings'
Along with Moody's and Standard & Poor's, Fitch is one of the top three credit rating agencies. Its rating system is very similar to S&P's in that they both use a letter system.
« Last Edit: August 29, 2014, 10:17:57 AM by lascott »
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brycemason

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I find the rising rate scenario compelling. I suspect that due to a hard cap of 30% interest on the loans the average credit quality will rise as lower quality applicants simply get rejected. Overall volume may suffer. I'll take an A graded borrower at 12%, thank you.

rawraw

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I find the rising rate scenario compelling. I suspect that due to a hard cap of 30% interest on the loans the average credit quality will rise as lower quality applicants simply get rejected. Overall volume may suffer. I'll take an A graded borrower at 12%, thank you.
I think it may also influence the POD as well, especially for lower grade borrowers.

yojoakak

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Wasn't Fitch one of the ratings agencies that refused to lower their ratings on toxic subprime "securities" until late into that financial crisis?

lascott

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I find the rising rate scenario compelling. I suspect that due to a hard cap of 30% interest on the loans the average credit quality will rise as lower quality applicants simply get rejected. Overall volume may suffer. I'll take an A graded borrower at 12%, thank you.
I think it may also influence the POD as well, especially for lower grade borrowers.
POD? http://www.acronymfinder.com/Business/POD.html
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rawraw

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I meant PD, my phone corrected it

Lovinglifestyle

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Gee, I made up my own "Percent of Default".  Now I have to think of something for "PD"?

rawraw

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Gee, I made up my own "Percent of Default".  Now I have to think of something for "PD"?
Probability of default.  In credit modeling, you normally see Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD).  PD * LGD * EAD = expected loss.  So basically, PD says how likely it is to default.  LGD tells you how much you'll lose (if collateral exists, it offsets it.  collections do as well).  And exposure at default is basically how much will be outstanding when it defaults (so this is when in the life cycle the loan will default.  First payment defaults have the highest EAD).

Anyway, I think a fair amount of low grade borrowers have expenses that will rise with rising rates.  Variable rate debt, credit cards, rental rates (in some markets are depressed due to financing costs on the real estate project).  So while LGD and EAD may stay similiar (EAD may change as well), I think the PD may increase when rates rise.  Especially if its rapid.

Lovinglifestyle

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Gee, I made up my own "Percent of Default".  Now I have to think of something for "PD"?
Probability of default.  In credit modeling, you normally see Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD).  PD * LGD * EAD = expected loss.  So basically, PD says how likely it is to default.  LGD tells you how much you'll lose (if collateral exists, it offsets it.  collections do as well).  And exposure at default is basically how much will be outstanding when it defaults (so this is when in the life cycle the loan will default.  First payment defaults have the highest EAD).

Anyway, I think a fair amount of low grade borrowers have expenses that will rise with rising rates.  Variable rate debt, credit cards, rental rates (in some markets are depressed due to financing costs on the real estate project).  So while LGD and EAD may stay similiar (EAD may change as well), I think the PD may increase when rates rise.  Especially if its rapid.

Thank you for the explanations, and the sensible insights too.  Now it sounds "Positively Delectable"!  Education and entertainment--what more could one ask of a forum stacked with brainiacs? 

Gas and food prices aren't helping the low grade borrowers either. 

lascott

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Gee, I made up my own "Percent of Default".  Now I have to think of something for "PD"?
Probability of default.  In credit modeling, you normally see Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD).  PD * LGD * EAD = expected loss.  So basically, PD says how likely it is to default.  LGD tells you how much you'll lose (if collateral exists, it offsets it.  collections do as well).  And exposure at default is basically how much will be outstanding when it defaults (so this is when in the life cycle the loan will default.  First payment defaults have the highest EAD).

Anyway, I think a fair amount of low grade borrowers have expenses that will rise with rising rates.  Variable rate debt, credit cards, rental rates (in some markets are depressed due to financing costs on the real estate project).  So while LGD and EAD may stay similiar (EAD may change as well), I think the PD may increase when rates rise.  Especially if its rapid.
Thanks. That helped me find this cool discussion thread I had overlooked.

Topic: Math on benefit of avoiding defaults
http://www.lendacademy.com/forum/index.php?topic=2423.0

And a paper I got lost in!

Modeling exposure at default and loss given default: empirical approaches and technical implementation
Author: Bill HuajianYang and Mykola Tkachenko
Source: Journal of Credit Risk | 30 Jun 2012
Categories: Credit Risk Topics: Loss given default (LGD), Probability of default (PD)
via: http://www.risk.net/journal-of-credit-risk/technical-paper/2186497/modeling-exposure-default-loss-default-empirical-approaches-technical-implementation
Pointing to paper here:
http://www.risk.net/digital_assets/5508/jcr_yang_web.pdf
« Last Edit: August 30, 2014, 11:36:51 PM by lascott »
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rawraw

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Article you guys may find interesting.  It's about the problems with financial jargon

http://www.newyorker.com/magazine/2014/08/04/money-talks-6

And this is a simple example (http://en.wikipedia.org/wiki/Expected_loss)


    Original home value $100, loan to value 80%, loan amount $80
        outstanding loan $75 (Exposure at Default)
        current home value $70
        liquidation cost $10

    Loss given default = Magnitude of likely loss on the exposure / Exposure at default
        -$75 loan receivable write off Exposure at default
        +$70 house sold
        -$10 liquidation cost paid =
        -$15 Loss
        Express as a %
        -15/75 =
        20% Loss given default

    Probability of default
        Since there is negative equity 50 homeowners out of 100 will "toss the keys to the bank and walk away", therefore:
        50% probability of default

    Expected loss
        In %
            20% x 50% =10%
    In currency
        currency loss x probability
        $15 * .5 = $7.5
    check
        loss given default * probability of default * loan carry amount
    20% * 50% * $75 = $7.5


« Last Edit: August 31, 2014, 07:07:53 AM by rawraw »