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Lending Club Discussion => Investors - LC => Topic started by: rawraw on November 15, 2012, 05:22:49 AM

Title: Loss Mitigation Strategies
Post by: rawraw on November 15, 2012, 05:22:49 AM
Are there any investors on here that utilize the FolioFN platform to mitigate loss of principal?  I've done it with a fair amount of success and was curious the strategy of others.

For me, I pay attention to processing.  Once a loan has been processing greater than 4 days, I look at the FICO trend and Original Note.  Based on this financial information, I make the determination if I want to sell it.  I immediately place it on FolioFN for a small discount, but normally still in the money for me due to past received payments.  Generally they sell where I break even or make a slight bit of return. 

I also monitor the FICOs of my portfolio weekly.  I sit down and look at all the trends.  I do mostly credit card refinancing loans.  If I see the FICO trending downward or the new level of FICO no longer justify the interest rate (650 FICO whom got a Grade A loan), I'll sell these in the FolioFN as well.  They sell quicker than the above loans, but I rarely take losses on either.

Anyone else have a similar strategy?
Title: Re: Loss Mitigation Strategies
Post by: thezinfan on November 15, 2012, 04:41:46 PM
I do the first part of your strategy every day.

I haven't totally implimented the second part of your strategy, as I have yet to see a good enough correlation between the FICO decrease and what happens to the payments. I also have been selling smaller notes, though, and have been concentrating on the decreasing FICO notes.
Title: Re: Loss Mitigation Strategies
Post by: rawraw on November 15, 2012, 04:44:03 PM
My rational for #2 is since I'm doing revolving debt consolidation loans, FICO shouldn't be decreasing dramatically.  I'm talking drop of like 100 or so points in a month or two.
Title: Re: Loss Mitigation Strategies
Post by: yojoakak on November 15, 2012, 04:44:12 PM
How do you detect "Processing..." notes?

Do you really go through every loan every day and check the Payment History?

That must take a while.
Title: Re: Loss Mitigation Strategies
Post by: thezinfan on November 15, 2012, 06:33:21 PM
if you sort your notes by Payment Due Date, its very easy to find the one's that are processing. They go into processing on the payment due date, but the payment does'nt usually get recorded for 4-6 days. And i don't really look at them except for the notes that are one day from Grace period, so the ones that are 6 days past the due date. At 7 days they go Grace period.
Title: Re: Loss Mitigation Strategies
Post by: rawraw on November 15, 2012, 06:33:32 PM
How do you detect "Processing..." notes?

Do you really go through every loan every day and check the Payment History?

That must take a while.
Sort all notes by payment due date.   If it is past 4 business days, the payment failed.  I check this Monday - Friday, takes 2 minutes.

Title: Re: Loss Mitigation Strategies
Post by: yojoakak on November 15, 2012, 07:57:23 PM
Sort all notes by payment due date.   If it is past 4 business days, the payment failed.  I check this Monday - Friday, takes 2 minutes.

Caution: That value might not be 100% accurate e.g. for notes on a Payment Plan.
Title: Re: Loss Mitigation Strategies
Post by: rawraw on November 16, 2012, 05:23:43 AM
Sort all notes by payment due date.   If it is past 4 business days, the payment failed.  I check this Monday - Friday, takes 2 minutes.

Caution: That value might not be 100% accurate e.g. for notes on a Payment Plan.
Well yes, of course I forgot to mention I also check the payment history once its 4 days processing.
Title: Re: Loss Mitigation Strategies
Post by: faeriering on November 17, 2012, 08:26:43 AM
But notes that go onto payment plans show a higher chance of default, so ditching those may not be a bad way to go either.
Title: Re: Loss Mitigation Strategies
Post by: rawraw on November 18, 2012, 08:44:23 AM
Some notes appear to always pay in the grace period.  Like I have one that is always past 4 days processing, but is paid on the 20th each month.  I generally judge if I want to take the risk of not having a warning sign like normal notes.  If the underlying note and FICO appear very sound, I let it.  Otherwise, I try to sell it.
Title: Re: Loss Mitigation Strategies
Post by: SeanMcD on November 19, 2012, 04:44:18 PM
I also monitor the FICOs of my portfolio weekly.  I sit down and look at all the trends.  I do mostly credit card refinancing loans.  If I see the FICO trending downward or the new level of FICO no longer justify the interest rate (650 FICO whom got a Grade A loan), I'll sell these in the FolioFN as well.  They sell quicker than the above loans, but I rarely take losses on either.

Why do you monitor these weekly?  From what I've seen, the score is only updated once per month, and scores for all loans are updated on the same day.
Title: Re: Loss Mitigation Strategies
Post by: SarahV on November 19, 2012, 11:39:24 PM
Sean, what day do they update? They would be useful to know for those of us who like to monitor it.

I have almost an identical system to the OP and it's been working well for me so far. I sell as soon as they go late or when they have a drastic FICO drop. (I don't worry about a small drop, but for example I had someone drop from 690 to 510, and that makes me feel like they are probably having a serious financial problem.) I bookmark the ones I sell with a note about why they were sold, and I check up on them every week or two just to see how my strategy is panning out.

So far, the results of the sell-offs were:

2 severe FICO drops have not seen any payment problems
5 missed payments, went into grace period, then paid and are now current
1 missed a payment, went 17 days late, paid, and is now current
2 are currently in grace period
1 never paid after I sold it and is now a week from being charged off
1 never paid after I sold it and is about 30 days into late period

Most of them were sold at par or a slight discount. One or two were sold at 10-20% discount and one was actually sold at a 50% profit - I'd picked it up absurdly cheap in grace period and flipped it in 24 hours. Overall I think I nearly broke even on what I paid for them and what I sold them for, as a group. And I suspect at least two of them are going to default soon and others are not looking great (multiple payments in grace period). So I think this is a strategy that is doing well for me. I don't have a single note that is so much as a day late because I'm aggressive about selling them.

The downside is that it's pretty work-intensive and you have to be checking in daily and micromanaging it a bit. I don't know if you would want to do it for a larger-scale investment.
Title: Re: Loss Mitigation Strategies
Post by: brycemason on November 20, 2012, 12:51:36 AM
My concern is that this type of information asymmetry probably won't last. You are getting an advantage in the secondary market. At some point the market maker will recognize that this is harmful to their business model long term and fix it so that anyone can look up anything about any loan, including pre-grace period, days "processing," etc.
Title: Re: Loss Mitigation Strategies
Post by: SeanMcD on November 20, 2012, 02:04:37 PM
Sean, what day do they update? They would be useful to know for those of us who like to monitor it.

I've only been watching it for the last 6 months, but so far it's generally been on or near the 27th.  Last month was an anomaly - scores were updated a couple weeks earlier, but that coincided with the release of the new scoring model with narrower FICO bands.  They haven't updated for November yet, so I'm guessing the schedule will be back to normal this month.
Title: Re: Loss Mitigation Strategies
Post by: thezinfan on November 20, 2012, 03:57:50 PM
My concern is that this type of information asymmetry probably won't last. You are getting an advantage in the secondary market. At some point the market maker will recognize that this is harmful to their business model long term and fix it so that anyone can look up anything about any loan, including pre-grace period, days "processing," etc.

Brycemason.....I think both buyers and sellers on folio see this info. What info is asymmetric?
Title: Re: Loss Mitigation Strategies
Post by: brycemason on November 20, 2012, 06:32:40 PM
As far as I can understand, the initial investors in loans have the ability to find notes that are in so-called "pre-grace." That is, they can tell a day or two ahead of time that a note will go "in grace period" but the investors on FolioN will see the loan as "current." This is asymmetric.
Title: Re: Loss Mitigation Strategies
Post by: SeanMcD on November 20, 2012, 07:31:00 PM
All the information being discussed is in the Payment History of the note.  There is no additional information available to initial investors.
Title: Re: Loss Mitigation Strategies
Post by: Keltset on November 20, 2012, 07:47:31 PM
As far as I can understand, the initial investors in loans have the ability to find notes that are in so-called "pre-grace." That is, they can tell a day or two ahead of time that a note will go "in grace period" but the investors on FolioN will see the loan as "current." This is asymmetric.

You can do the same math by looking at the note itself in the payment history section by looking at the date it entered "processing payment" to and count the days up until 'insert whatever day today is'. This is the what is happening here and not an official change of the notes status itself. To the seller the note also appears "current".
Title: Re: Loss Mitigation Strategies
Post by: SarahV on November 20, 2012, 09:54:13 PM
Yes, it's not asymmetric at all. I see the same info as a buyer or seller on Folio. I learned the hard way after buying a heavily discounted note or two that immediately went into grace period the next morning. After that I paid careful attention and figured out how it worked. Anyone else can do the same.

Sean: thanks for the tip on the date. I will keep that in mind!
Title: Re: Loss Mitigation Strategies
Post by: brycemason on November 20, 2012, 10:28:23 PM
Thanks for helping me understand. I've stayed clear of folioN thus far. What's the magic days processing, 4?
Title: Re: Loss Mitigation Strategies
Post by: rawraw on November 21, 2012, 06:00:41 AM
Thanks for helping me understand. I've stayed clear of folioN thus far. What's the magic days processing, 4?
4 business days, excluding holidays and etc.  That's how long it takes the ACH to clear.  And the clear in California time, so its normally late the fourth day for me (Central time zone).
Title: Re: Loss Mitigation Strategies
Post by: rawraw on November 21, 2012, 06:03:08 AM
I also monitor the FICOs of my portfolio weekly.  I sit down and look at all the trends.  I do mostly credit card refinancing loans.  If I see the FICO trending downward or the new level of FICO no longer justify the interest rate (650 FICO whom got a Grade A loan), I'll sell these in the FolioFN as well.  They sell quicker than the above loans, but I rarely take losses on either.

Why do you monitor these weekly?  From what I've seen, the score is only updated once per month, and scores for all loans are updated on the same day.
Because I don't go through all 300+ notes each week.  I go through roughly a fourth.  Lending Club makes it a few clicks to see each individual FICO trend.

As for why I think FICO is important, I have seen analysis where FICO is correlated with risk.  But this isn't my reason.  I do credit card refinancing loans almost exclusively.  Generally you'll see a FICO bump after turning those credit cards into installment loans.  Since we don't know these people in person (like a loan officer), the FICO is the best way I can use to monitor if they actually cut up those credit cards or if they seem to be increasing in risk afterwards.
Title: Re: Loss Mitigation Strategies
Post by: SeanMcD on November 21, 2012, 08:55:39 PM
I also monitor the FICOs of my portfolio weekly.  I sit down and look at all the trends.  I do mostly credit card refinancing loans.  If I see the FICO trending downward or the new level of FICO no longer justify the interest rate (650 FICO whom got a Grade A loan), I'll sell these in the FolioFN as well.  They sell quicker than the above loans, but I rarely take losses on either.

Why do you monitor these weekly?  From what I've seen, the score is only updated once per month, and scores for all loans are updated on the same day.
Because I don't go through all 300+ notes each week.  I go through roughly a fourth.  Lending Club makes it a few clicks to see each individual FICO trend.

As for why I think FICO is important, I have seen analysis where FICO is correlated with risk.  But this isn't my reason.  I do credit card refinancing loans almost exclusively.  Generally you'll see a FICO bump after turning those credit cards into installment loans.  Since we don't know these people in person (like a loan officer), the FICO is the best way I can use to monitor if they actually cut up those credit cards or if they seem to be increasing in risk afterwards.

No argument from me about FICO's importance - I've sold a few loans where the FICO dropped dramatically over a couple of months, and they appear to be headed for default now. 

A faster method than going through all of your notes is to open the Sell Notes page in FolioFn.  Credit score change is shown in list form there, so after sort your loans by that column, you only need to check out the loans trending downward.
Title: Re: Loss Mitigation Strategies
Post by: rawraw on November 22, 2012, 05:46:06 AM
I also monitor the FICOs of my portfolio weekly.  I sit down and look at all the trends.  I do mostly credit card refinancing loans.  If I see the FICO trending downward or the new level of FICO no longer justify the interest rate (650 FICO whom got a Grade A loan), I'll sell these in the FolioFN as well.  They sell quicker than the above loans, but I rarely take losses on either.

Why do you monitor these weekly?  From what I've seen, the score is only updated once per month, and scores for all loans are updated on the same day.
Because I don't go through all 300+ notes each week.  I go through roughly a fourth.  Lending Club makes it a few clicks to see each individual FICO trend.

As for why I think FICO is important, I have seen analysis where FICO is correlated with risk.  But this isn't my reason.  I do credit card refinancing loans almost exclusively.  Generally you'll see a FICO bump after turning those credit cards into installment loans.  Since we don't know these people in person (like a loan officer), the FICO is the best way I can use to monitor if they actually cut up those credit cards or if they seem to be increasing in risk afterwards.

No argument from me about FICO's importance - I've sold a few loans where the FICO dropped dramatically over a couple of months, and they appear to be headed for default now. 

A faster method than going through all of your notes is to open the Sell Notes page in FolioFn.  Credit score change is shown in list form there, so after sort your loans by that column, you only need to check out the loans trending downward.
I used to do that, but I noticed on some loans the payment histories updated with information (failed payment, etc) before it was displayed.  I was able to sell these loans on the secondary market for part.  So now I randomly check all notes periodically, as I noticed I wasn't being alerted to correspondence in the loan files (it'd be nice to get an alert or something).  It doesn't take much time when spread out a little bit each day.

Title: Re: Loss Mitigation Strategies
Post by: yojoakak on November 22, 2012, 09:55:44 AM
As for why I think FICO is important, I have seen analysis where FICO is correlated with risk.  But this isn't my reason.  I do credit card refinancing loans almost exclusively.  Generally you'll see a FICO bump after turning those credit cards into installment loans.  Since we don't know these people in person (like a loan officer), the FICO is the best way I can use to monitor if they actually cut up those credit cards or if they seem to be increasing in risk afterwards.

I've heard that FICO scores can actually go down when someone pays off their credit card and/or closes the account. Is that true? If so, then a declining FICO score after a debt consolidation would not be surprising.
Title: Re: Loss Mitigation Strategies
Post by: Keltset on November 22, 2012, 01:31:49 PM
An immediate minor drop can be expected when opening a new line of credit and paying off old debt. The drop comes from the total allowable debt. This should recover though and the dip should be quick and near immediate and not a continual trend. The only reason it would continue to trend down after the initial impact of the new loan and payoff would be from a continued increase in debt to available credit [or other normal negative factors like late payments]. This would indicate that the borrower is actually increasing their debt burden not lowering it. An example could be a payoff of all the debt but then a month or two later they go right back to using those cards creating a potential collapse in their finances by continuing to live outside of their means and not really resolving the issue--- which is generally the intent of a consolidation loan.
Title: Re: Loss Mitigation Strategies
Post by: rawraw on November 23, 2012, 05:11:16 AM
As for why I think FICO is important, I have seen analysis where FICO is correlated with risk.  But this isn't my reason.  I do credit card refinancing loans almost exclusively.  Generally you'll see a FICO bump after turning those credit cards into installment loans.  Since we don't know these people in person (like a loan officer), the FICO is the best way I can use to monitor if they actually cut up those credit cards or if they seem to be increasing in risk afterwards.

I've heard that FICO scores can actually go down when someone pays off their credit card and/or closes the account. Is that true? If so, then a declining FICO score after a debt consolidation would not be surprising.
Closing an account would decrease the FICO, especially if the accounts are among their oldest or its their largest credit lines.  Closing the CC would make any remaining revolving debt a higher % of available credit and closing old lines would hurt the history.

But Installment debt is rated better than revolving and is around 10% of the score (I think been a while since I checked).  So you'd expect to see Keltset's explanation.
Title: Re: Loss Mitigation Strategies
Post by: SeanMcD on November 28, 2012, 05:46:29 PM

Sean: thanks for the tip on the date. I will keep that in mind!

Scores for 11/12 are showing today.  I didn't check yesterday, so they were posted on either the 27th or 28th - looks like the trend is back to normal.
Title: Re: Loss Mitigation Strategies
Post by: rawraw on November 28, 2012, 06:13:37 PM

Sean: thanks for the tip on the date. I will keep that in mind!

Scores for 11/12 are showing today.  I didn't check yesterday, so they were posted on either the 27th or 28th - looks like the trend is back to normal.
GOod info :)
Title: Re: Loss Mitigation Strategies
Post by: SeanMcD on February 01, 2013, 03:00:06 PM
Sean, what day do they update? They would be useful to know for those of us who like to monitor it.

I've only been watching it for the last 6 months, but so far it's generally been on or near the 27th.  Last month was an anomaly - scores were updated a couple weeks earlier, but that coincided with the release of the new scoring model with narrower FICO bands.  They haven't updated for November yet, so I'm guessing the schedule will be back to normal this month.

Thread necromancy! Just wanted to note that the scores haven't been updated for January yet.  I started with LC in March 2012, so I don't know whether January scores are usually delayed due to all the additional tax document work going on.
Title: Re: Loss Mitigation Strategies
Post by: SarahV on February 01, 2013, 04:55:12 PM
I've been wondering about that too. I spotted one or two randomly that had updated for 1/13, but most of them have not.
Title: Re: Loss Mitigation Strategies
Post by: SarahV on February 02, 2013, 03:44:01 PM
Just wanted to note that the scores haven't been updated for January yet.  I started with LC in March 2012, so I don't know whether January scores are usually delayed due to all the additional tax document work going on.
Looks like they've all updated now with a 2/13 date.