Author Topic: Verified income  (Read 9183 times)

nscap

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Verified income
« on: March 29, 2013, 05:17:17 PM »
Hello all - lately (~2 months or so), I have noticed that the number of loans with verified income has greatly decreased. Given this is a required component of my investment process, this has reduced my total number of investments, and brought some doubt into my mind about scalability. As such, I have a few queries:

1) Has anyone else noticed the # of verified income loans has gone down? Or are they merely being snapped up so fast after being put up that I am missing them?
2) If in fact the # of verified income loans has gone down, what do you guys think is the reason?
3) Does verified income really matter that much? The reason I put so much faith in it is that is literally one of the few metrics I can trust to analyze... do people generally tend to put down their real income? What is stopping someone (who isn't verified) from lying about their monthly income? Is that common?

Many thanks!

Lloigor

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Re: Verified income
« Reply #1 on: March 29, 2013, 05:57:51 PM »
I think that just as many loans have verified income as before, but not during the funding process.  Things are funding so fast that you have to buy in before the information is verified.  You can buy as usual and just sell the ones that don't wind up verified for 1-2% markup.  I believe it's been pointed out that statistically, verified income actually do slightly worse.

rawraw

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Re: Verified income
« Reply #2 on: March 29, 2013, 06:30:48 PM »
Hello all - lately (~2 months or so), I have noticed that the number of loans with verified income has greatly decreased. Given this is a required component of my investment process, this has reduced my total number of investments, and brought some doubt into my mind about scalability. As such, I have a few queries:

1) Has anyone else noticed the # of verified income loans has gone down? Or are they merely being snapped up so fast after being put up that I am missing them?
2) If in fact the # of verified income loans has gone down, what do you guys think is the reason?
3) Does verified income really matter that much? The reason I put so much faith in it is that is literally one of the few metrics I can trust to analyze... do people generally tend to put down their real income? What is stopping someone (who isn't verified) from lying about their monthly income? Is that common?

Many thanks!
You shouldn't be worried if an individual borrowe liesr.  You should worry if you think lying would be common in the population AND LendingClub won't catch it (There are legal requirements for LC/Webbank to attempt to verify incomes. Not sure how it works in P2P context though).  We aren't dealing with individual exposures, but rather behavior of the entire pool.

Just FYI, verified income loans don't do any better (they do slightly worse) than unverified loans.

nscap

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Re: Verified income
« Reply #3 on: March 29, 2013, 06:44:42 PM »
Thank you.

Does LC make efforts to verify all loans? I.e. the ones that are listed as "verified" are just the ones that have already been verified, the other ones haven't been yet (meaning they haven't been left unverified for some sinister reason)? I appreciate the sentiment re: behaviour of the pool vs. an individual issuer, but given that I only have $1k invested, just one borrower lying has an impact on my overall performance (which is why I chose to go with verified only).

Can you point me in the right direction for where to find out more about verified vs. unverified income loans in terms of defaults, performance etc?
« Last Edit: March 29, 2013, 06:49:10 PM by nscap »

Lloigor

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Re: Verified income
« Reply #4 on: March 29, 2013, 07:31:06 PM »
They use internal criteria to decide if they should get verification.  Some classes of borrowers (I'd guess the more creditworthy ones) have less tolerance for hassle and will just abandon LC if it gets too difficult so that population gets fewer verifications, while others are required to verify for approval.

viking

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Re: Verified income
« Reply #5 on: March 29, 2013, 07:43:39 PM »

Just FYI, verified income loans don't do any better (they do slightly worse) than unverified loans.
What is that based on?
I did a quick test using Interest Radar:
Loan Grades D-G
All loans (verified and not)=> Av IRR= 9.4%
Inc Verified => Av IRR= 10.5%

brycemason

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Re: Verified income
« Reply #6 on: March 29, 2013, 08:25:47 PM »
I've also independently checked out whether verified incomes do better or worse. There is no impact according to my research, as I expected. A suprising proportion of loans get verified.

viking

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Re: Verified income
« Reply #7 on: March 29, 2013, 09:59:59 PM »
I've also independently checked out whether verified incomes do better or worse. There is no impact according to my research, as I expected. A suprising proportion of loans get verified.
Well, at least for all D-G loans, verified income produced a higher return Av IRR= 10.5% vs 9.4% (not sure about significance level though....)

brycemason

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Re: Verified income
« Reply #8 on: March 29, 2013, 11:19:43 PM »
Univariate analyses bore me.

rawraw

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Re: Verified income
« Reply #9 on: March 30, 2013, 08:31:34 AM »
Univariate analyses bore me.
This made me LOL

Fred

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Re: Verified income
« Reply #10 on: March 30, 2013, 09:24:08 AM »
If you remember our financial crisis experience from 2007, one of the factors for the problem was that banks were lending money to borrowers without verifying their income.

Perhaps people at that time tend to lie more on their loan application  than today's borrowers.

Or, perhaps size matters: income verification does not affect small loans (< $35 K) as significantly as it does mortgages?


rawraw

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Re: Verified income
« Reply #11 on: March 30, 2013, 06:09:11 PM »
If you remember our financial crisis experience from 2007, one of the factors for the problem was that banks were lending money to borrowers without verifying their income.

Perhaps people at that time tend to lie more on their loan application  than today's borrowers.

Or, perhaps size matters: income verification does not affect small loans (< $35 K) as significantly as it does mortgages?
Fred, I like the way you are thinking.  I wish more people on this board thought critically.  But I think you are going down the wrong path.  The MBS mortgage didn't blow up solely because of verification of income (The Credit Card industry is still chugging along, without verifying most people's income).  The MBS market blew up because loans were being made with the source of repayment being collateral and not cash flow.  If you aren't involved in finance/banking, basically what this means is that everyone forecasted the collateral values would at least remain constant (most forecasted they'd increase forever).  They weren't worried about incomes because if the borrower didn't pay, the bank could foreclose on the asset and sell it.  Since they were increasing Y/Y, not much risk to the bank (we do have selling costs and such, but those are helped by the gain in market value).  But what happened?  The loans were made to bubble-level prices and the floor came out from under them.  Borrowers don't want the houses anymore (they are underwater and mortgages have lots of various laws (state and federal) which limits the recourse.  These precipitous drops in collateral values were accompanied with spikes in unemployment as well.  Basically, what I'm saying is income wasn't the sole purpose of the problem.  It did play a part, but there were a lot of moving parts.
« Last Edit: March 30, 2013, 06:10:44 PM by rawraw »

Fred

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Re: Verified income
« Reply #12 on: March 31, 2013, 12:20:01 AM »
Fred, I like the way you are thinking.  I wish more people on this board thought critically.  But I think you are going down the wrong path.  The MBS mortgage didn't blow up solely because of verification of income (The Credit Card industry is still chugging along, without verifying most people's income).  The MBS market blew up because loans were being made with the source of repayment being collateral and not cash flow.  If you aren't involved in finance/banking, basically what this means is that everyone forecasted the collateral values would at least remain constant (most forecasted they'd increase forever).  They weren't worried about incomes because if the borrower didn't pay, the bank could foreclose on the asset and sell it.  Since they were increasing Y/Y, not much risk to the bank (we do have selling costs and such, but those are helped by the gain in market value).  But what happened?  The loans were made to bubble-level prices and the floor came out from under them.  Borrowers don't want the houses anymore (they are underwater and mortgages have lots of various laws (state and federal) which limits the recourse.  These precipitous drops in collateral values were accompanied with spikes in unemployment as well.  Basically, what I'm saying is income wasn't the sole purpose of the problem.  It did play a part, but there were a lot of moving parts.

Well put, rawraw.  I agree that there were a lot of moving parts.

Full disclosure: I was a "quant" in 2007-2008 working on RMBS (Residential MBS) pricing engine for a Wall Street bank.  RMBS, CDO, CDS are hot potatos now.  However, I do believe some lessons learned on credit risks are still applicable to P2P consumer loans.

There are almost 100 attributes in downloadable LC loan data, somebody can analyze which are (statistically) significant factors for default. 

I do give statistical preference in my model to loans whose "is_inc_v" is TRUE.  Note, this is just a statistical preference, not a binary yes-no decision.



 

rawraw

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Re: Verified income
« Reply #13 on: March 31, 2013, 08:14:10 PM »

Well put, rawraw.  I agree that there were a lot of moving parts.

Full disclosure: I was a "quant" in 2007-2008 working on RMBS (Residential MBS) pricing engine for a Wall Street bank.  RMBS, CDO, CDS are hot potatos now.  However, I do believe some lessons learned on credit risks are still applicable to P2P consumer loans.

There are almost 100 attributes in downloadable LC loan data, somebody can analyze which are (statistically) significant factors for default. 

I do give statistical preference in my model to loans whose "is_inc_v" is TRUE.  Note, this is just a statistical preference, not a binary yes-no decision.

I do think there are lessons as well.  Recently Lending Club took the interest rate determining formula from publicly displayed to a proprietary formula.  If LC gets greedy (as humans and institutions inevitability do), I could see similar incentives that helped the MBS spiral out of control since its much harder to see what underwriting criteria they are using.  Everyone thought MBS were risk free instruments as well since they were geographically diversified - this sentiment is held by many on this forum now about P2P.   These are one of the main reasons I'm skeptical to let my portfolio go on an "auto pilot" filter investing strategy, as others on this forum are now doing.  Not looking at stuff critically is how the market for Alt-A and subprime MBS became such a large part of people's portfolio.  One of my buddies in college saw the junk piling up and shorted some entity with a large exposure.  He made an average American's yearly income off of that trade lol.

Fred

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Re: Verified income
« Reply #14 on: March 31, 2013, 09:18:48 PM »
Recently Lending Club took the interest rate determining formula from publicly displayed to a proprietary formula.

I think LC still posts their "rates table" -- along with the various modifiers --  here:
https://www.lendingclub.com/public/how-we-set-interest-rates.action


Not looking at stuff critically is how the market for Alt-A and subprime MBS became such a large part of people's portfolio.  One of my buddies in college saw the junk piling up and shorted some entity with a large exposure.  He made an average American's yearly income off of that trade lol.

Ah Alt-A ....  It's been a few years since I last dealt with this term.  The years of living dangerously.  ;)

Once LC becomes a public company, investors of LC Notes can always hedge their LC Notes holding by shorting the LC stocks.