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Lending Club Discussion => Investors - LC => Topic started by: Ran on January 13, 2014, 10:33:05 AM

Title: >95% off notes
Post by: Ran on January 13, 2014, 10:33:05 AM
There is a guy or probably a few guys buying out 95% off notes at Folio, including the famous Chapter 7 bankruptcy notes.
Are those guys finding something new regarding Chapter 7 recovery rate or they are just plain dumb.
I lost a lot of fun(really) when everything got cut off 95%.
Title: Re: >95% off notes
Post by: New Jersey Guy on January 13, 2014, 10:52:07 AM
Ran.....Like Big Foot and UFO's, this has been a P2P mystery that has been discussed before and really never solved.

Most of the speculation has been based on the buyers not bothering to read the log.

I will also admit that there have been several times where I pushed the wrong button on Interest Radar ending up with a BK note. 

Other than that, I cannot think of any advantage of buying a BK-7 note.
Title: Re: >95% off notes
Post by: lcdude on January 13, 2014, 12:07:29 PM
It's a tax strategy.
Title: Re: >95% off notes
Post by: New Jersey Guy on January 13, 2014, 12:18:35 PM
Quote
It's a tax strategy.

You'll need to explain that one in more detail.
Title: Re: >95% off notes
Post by: core on January 13, 2014, 12:24:16 PM
I think it would be best if he didn't.
Title: Re: >95% off notes
Post by: dontvote on January 13, 2014, 12:42:19 PM
I suppose there is a possibility of a tax loss harvesting strategy here but it is far from passing a basic 'smell test'. Where's AmCap when you need him?

dontknowmuchbiology...
Title: Re: >95% off notes
Post by: Bohb Daishi on January 14, 2014, 03:49:00 AM
There is a guy or probably a few guys buying out 95% off notes at Folio, including the famous Chapter 7 bankruptcy notes.

Caught me red handed.  8)
Title: Re: >95% off notes
Post by: Bohb Daishi on January 14, 2014, 04:34:07 AM
Seriously though, there is an actual strategy with these. A few months ago I had a note where the bankruptcy was dismissed and the borrower made a payment. That was a very rare event, however.

Because there is very limited risk (i.e. there will always be a sucker buyer at >95%), you can normally get out of the note at about the same price you paid. The true risk comes in when LC decides to charge off the notes a month or two before they normally would. The other risk is that you simply forget about the note and it ends up charging off at the normal time, preventing you from selling.

So on average, your profit might be a few pennies per note, after commissions. But when you are only spending $1.00 on a note, an 8-cent profit is an 8% gain. Multiply that by the handful of notes a day that show up on the market and you could make a few bucks a month. Enough for a Big Mac and large fries. But in all honesty, you would make a lot more money working at McDonald's for minimum wage than you would for spending the same amount of time trading these bankrupt notes.
Title: Re: >95% off notes
Post by: Ran on January 14, 2014, 02:02:50 PM
Seriously though, there is an actual strategy with these. A few months ago I had a note where the bankruptcy was dismissed and the borrower made a payment. That was a very rare event, however.

Because there is very limited risk (i.e. there will always be a sucker buyer at >95%), you can normally get out of the note at about the same price you paid. The true risk comes in when LC decides to charge off the notes a month or two before they normally would. The other risk is that you simply forget about the note and it ends up charging off at the normal time, preventing you from selling.

So on average, your profit might be a few pennies per note, after commissions. But when you are only spending $1.00 on a note, an 8-cent profit is an 8% gain. Multiply that by the handful of notes a day that show up on the market and you could make a few bucks a month. Enough for a Big Mac and large fries. But in all honesty, you would make a lot more money working at McDonald's for minimum wage than you would for spending the same amount of time trading these bankrupt notes.

I'd love your comment on this.
Title: Re: >95% off notes
Post by: New Jersey Guy on January 14, 2014, 07:39:11 PM
If you had the fortitude, I bet you could make money buying late notes with the intention of letting them default.

Not sure how many people would want to hold a folder of intentional defaults.
Title: Re: >95% off notes
Post by: core on January 14, 2014, 08:12:25 PM
If you had the fortitude, I bet you could make money buying late notes with the intention of letting them default.

"Make" money?  How so?  Is this anything like the stock picking strategy of trying to lose as much money as possible?  Don't laugh, it's not quite as crazy as it sounds.  Wouldn't really work for Folio though.

How about this one:  As we know, your Lending Club balance reflects the full value of each note even though they may all be seriously late.  By buying these -95% notes, for just pennies on the dollar you could rack up quite a sizable account value... at least on paper.  You may ask, for what purpose?  Say you are getting ready to divorce your wife.  Have your attorney arrange to give the wife the "huge" LC account while you keep everything of real value.  If it's in an IRA it can't be liquidated on Folio, and hopefully her attorney isn't bright enough to know that it's just paper money. 

Or maybe you need to inflate your net worth temporarily for whatever reason.  Bank loan, cash bid on real estate that you can't pay for, etc.  Maybe the IRS is about to seize your accounts.  I can think of lots of fun to be had with these notes.
Title: Re: >95% off notes
Post by: Rob L on January 14, 2014, 09:52:07 PM
Ponzi scheme anyone? Nah; go directly to jail, do not pass go, do not collect $200.
Title: Re: >95% off notes
Post by: New Jersey Guy on January 14, 2014, 10:27:33 PM
Quote
"Make" money?  How so?

Go look at your charge-offs and look at your recoveries.

I had 26 charge-offs in 2013.  Surprisingly, a lot of them are making some sort of payment.  Granted, there were a small few that went BK-7, but I've received $25 back so far on those 26 loans.  Obviously, I am not even close to breaking even because of what I paid for those. 

But, what if I had only paid $26 ($1 ea.) for those notes?    I'd have $26 dollar invested against $640 of potential principle.  Nothing you can do but let them sit and hope they pay.  But, isn't that what we do every time we pay $25 for a new issue?  Hey, at least you won't have to worry about them defaulting.   

I think over a 3-5 year period you have a pretty good chance of making a decent return on a small investment.
Title: Re: >95% off notes
Post by: core on January 14, 2014, 10:55:55 PM
That seems like a real dicey strategy to me.  Even -95% seems like too high of a price to be able to make any money.  You have to hope some deadbeat pays up years down the road (but before 5 years) and hope that LC's flaky software decides to properly give you the money after all that time.  (I don't know which of those two events are more unlikely.)  We've already used 'Toilet note strategy' on another one of your strategies, but this one is even more sewerish.  Maybe 'festering effluent strategy' would be appropriate.  I guess I'd have to see some long term numbers.

The one thing I can say about this approach is it would be a very good way to hide some assets.  Hidden so well you can't even get to them.  But you can count on it slowly being released back to you over time, all the while your balance is showing $0 and safe from creditors, ex-wives, BK court, etc.
Title: Re: >95% off notes
Post by: New Jersey Guy on January 15, 2014, 12:20:49 AM
Quote
'festering effluent strategy'

Oh, without a doubt!  Could you imagine having 100, 300 or even 500 notes getting charged off within the next year!  How would that look on your account page NAR?  Then you have a folder of things just "Festering" away as you put it.

I think it can be done.  There's even a good chance you might get some payments before they all go south.  You may even get a couple of lump sum payoffs here-and-there.  Great place to stash some BK-13's if you can get them. 

Guys, go look at your recoveries.  Post your recoveries, number of charge offs, outstanding principle.
IE:
$25 recoveries, 26 notes, $640 outstanding principle.

In the meantime, Core!  Create a new folder, take $1000 and start buying the absolute worst notes known to mankind.  Let's hope for quick defaults so we can get this ball rolling!

Title: Re: >95% off notes
Post by: Bohb Daishi on January 15, 2014, 04:56:30 AM
I had 26 charge-offs in 2013.  Surprisingly, a lot of them are making some sort of payment.  Granted, there were a small few that went BK-7, but I've received $25 back so far on those 26 loans.  Obviously, I am not even close to breaking even because of what I paid for those. 

But, what if I had only paid $26 ($1 ea.) for those notes?    I'd have $26 dollar invested against $640 of potential principle.  Nothing you can do but let them sit and hope they pay.  But, isn't that what we do every time we pay $25 for a new issue?  Hey, at least you won't have to worry about them defaulting.   

I think over a 3-5 year period you have a pretty good chance of making a decent return on a small investment.

Here's my question: of your 26 charge-offs that paid, how many were bankrupt? Deceased? 1-and-outs? Or ones that had zero payments for 4-5 months straight, with zero contact from the borrower?

Or are your recoveries from notes that were already paying monthly, but in such small amounts that they were stuck in the "perpetual late" status?

The odds of finding a trash note at a discount that makes them investment-worthy are extremely low. Or if you do, the profit potential is too low to even make it worth your time.
Title: Re: >95% off notes
Post by: New Jersey Guy on January 15, 2014, 08:33:32 AM
Quote
The odds of finding a trash note at a discount that makes them investment-worthy are extremely low.

I think you're missing the point here.  This is not about building a "Quality" folder.  It's about buying active notes that have quit performing.

Regardless if you paid $1 for the note or $12 for the note, by the time they default, they are equally as bad.  The difference is, you lose much, much less when you spent $1 for the note.

Face it.  None are going to go current.  So in order to find out if this would work or not, you'd have to spend no more than $1.00 or 1.05 for each note.  Now, don't buy BK-7's, as these will not return anything.  However, a BK-13 just might as BK-13 filers get put on a payment plan with all their creditors.

So, if you spent $100, you'd have 100 notes.  And let's say each note had $19 of remaining principle.  That comes out to $1900.

$100 spent against $1900 potential gain.

I'm not saying you'll get $1900 back.  Far, far from it.  Yes, some of those notes will go BK-7.  Some will never pay another dime.  One or two might end up pushing daisies.  However, many of those notes will still pay something in collections.  The whole idea is to let them sit (or fester, like Core said) and see what happens.

If it takes 1 year to get your $100 back, you lost nothing.  But, what would happen after that from years 2-5?  If you got another $100 back, you doubled your money.  If you got $150 back in profit after 5-years, what kind of a YTM does that figure out to be?

Look at it like buying a new 60-month note for $100.  How long would the borrower have to pay before you got your original $100 back?  And, would any 60-month note give you the opportunity to double your money?  I think not.
Title: Re: >95% off notes
Post by: RaymondG on January 17, 2014, 10:32:18 AM
I looked at my charge offs $1980 and recoveries $46. Portfolio age 17 months  The recovery rate now is about 2.3%. But I guess the real recovery rate can very likely bove 5%, since most of the defaults happened recently, in last half year.
Title: Re: >95% off notes
Post by: New Jersey Guy on January 17, 2014, 11:16:37 AM
Okay....so how many defaults was that? (The number, not principle amount)
Title: Re: >95% off notes
Post by: RaymondG on January 17, 2014, 11:24:00 PM
69 defaults and recovered $46. So, these defaults do worth more than $1. BTW, average default is $ 1980/69= 28.7 for an occurance.
Title: Re: >95% off notes
Post by: New Jersey Guy on January 18, 2014, 11:21:25 AM
Quote
69 defaults and recovered $46

So basically, if you had paid $1 each for those notes, you'd be about $23 away from breaking even.  And, most of your defaults happened in the past 6 months.  So pretty much, those notes aren't even a year old yet.

Now, you should be able to get an idea of how many of those 69 defaults are producing.  You're going to have 3 categories here:

1.)  The ones that are paying.
2.)  The ones that haven't paid a single cent since default.
3.)  The one that went BK-7 after they were charged off (these are pretty much dead).

Title: Re: >95% off notes
Post by: Ran on January 18, 2014, 01:57:57 PM
I just found I actually received Christmas gift from LC.

652070778   12/25/13   Recovery   Recovered from Charged-off Loan 1619006   $0.02   $0.00
652067156   12/25/13   Recovery   Recovered from Charged-off Loan 1397260   $0.02   $0.00

The principal for these notes around $22.  However, I was wondering why LC does not publish recovery as part of note collection logs or payment history instead put in account activity section.
No one looks at account activity, and worse it's totally detached from a note history.
Title: Re: >95% off notes
Post by: New Jersey Guy on January 18, 2014, 03:38:13 PM
Quote
However, I was wondering why LC does not publish recovery as part of note collection logs or payment history instead put in account activity section.

You'll need to go the prospectus for all the fine details.  In a nutshell, though, once a note is charged-off, it's pretty much considered dead as far as LC is concerned.  That does not mean that all collection attempts cease.  An outside collection agency handles it now.  The borrowers still get hounded.
Title: Re: >95% off notes
Post by: edward on January 18, 2014, 03:47:19 PM
http://www.orchardplatform.com/recovery-rates-for-lending-club/ (http://www.orchardplatform.com/recovery-rates-for-lending-club/)

Here is an analysis article from Orchard regarding recovery data at LC.
Title: Re: >95% off notes
Post by: dontvote on January 20, 2014, 01:04:48 PM
Lots of Orchard stuff being posted recently. Not sure what the usefulness is of their charts of recovery by 'month charged off' is. I do agree with their conclusion which is if a note is charged off don't count on getting anything. I don't know much about recovering this kid of debt outside of what has been discussed in these forums but I don't understand why this debt isn't sold to Encore or another agency for even some small amount of money. They are better at collecting having built a huge business doing it. I would trade a 7% (if they could get that much) dump for those charged off notes vs my current 0%.

I'll also note that my personal recovery levels are not even at the levels on these graphs. I guess I'm stuck with particularly deadbeat deadbeats. My recovery over this time period is less than 1%.

dontvote


http://www.orchardplatform.com/recovery-rates-for-lending-club/ (http://www.orchardplatform.com/recovery-rates-for-lending-club/)

Here is an analysis article from Orchard regarding recovery data at LC.