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Lending Club Discussion => Investors - LC => Topic started by: Fred93 on February 19, 2017, 04:45:11 AM

Title: a view of LC's deteriorating investor returns
Post by: Fred93 on February 19, 2017, 04:45:11 AM
We've all looked at the deterioration in LC loan performance over 2015 & 2016 in a variety of ways.  We've charted delinquencies, chargeoffs, by time, by vintage, used different return measures, etc.  Here's something really simple.

I used numbers from LC's chart with all those dots, https://www.lendingclub.com/info/statistics-performance.action

This chart shows the performance of INVESTORS rather than performance of loans, so is therefore close to investor's hearts.  One downside is that this chart uses ANAR to measure investor performance.  I won't detail all the characteristics of ANAR here, but one is important enough that I have to say it.  ANAR measures your performance since you opened your account.  Those of us who have been investing with LC for a long time, have higher ANARs, just because ANAR averages over all the time our accounts have been open, and returns were higher in past years than they are now.  My account is 9 years old, so this is painfully clear to me.  I suspect that many accounts have been open just a few years, so perhaps this effect isn't so bad on the average.  Just be aware.  If Joe's ANAR is 7%, he may be earning only 4% now, for example.

This chart has been changing vs time.  Lets look at what this chart NOW says. 

I made the following selections...
Adjustment for past-due notes: ON
Min number of notes per account: 500  (Lets look at well diversified accounts, so we know the numbers are not noise)
Max note size less than 0.5%  (Same thing, ie well diversified accounts)
Now, there's one more selection, the weighted-average-interest-rate WAIR.  This, like credit grade, is just a measure of the riskiness of the loan, as LC sees it. 

In the middle of the graph, LC highlights accounts with average age of loans in the portfolio of 12 to 18 months.  This is a reasonable definition of a steady-state account, so lets use that selection.  LC displays 10th percentile, median, and 90th percentile ANAR for accounts in this range.

Finally, here's how the median ANAR varies with WAIR.
Code: [Select]
  WAIR     10%   Median    90%
 0- 9%    4.8%    5.3%    6.0%
 9-12%    4.2%    5.2%    6.4%
12-15%    3.4%    4.7%    6.3%
15-18%    2.2%    3.6%    6.5%
  18+%    0.5%    3.6%    6.5%
  ALL     2.7%    4.8%    6.3%

A lot of numbers.  Just look at the Median column.  This shows ANAR for the median account in the selected group.  As you can see, as WAIR goes up, ANAR goes down.  Its monotonic!  The best performing accounts TODAY are those who invested over the past few years in the low interest rate (ie safest) loans.  The worst performing accounts are those who invested in the riskiest loans. 

Among today's accounts, you can see that investing in higher risk loans did not give most investors any advantage.  This is true for the median account, and also true (within one tenth of a percent) at the 10 percentile and 90 percentile account! 

The median LC investor today holds an account with an ANAR of 4.8% .  My account's ANAR is much higher, and yours probably is too, but I opened that account about 10 years ago, so my ANAR averages over times when returns were considerably higher.  Doesn't mean I'm doing better than average lately.  In fact, I have very little idea how I'm doing relative to other LC investors lately.

Meanwhile, the facts for today are that accounts TODAY have a median ANAR of 4.8%, and accounts TODAY show higher ANAR if they have portfolios of lower interest rate loans.  (Those accounts picked those loans over the last few years, so this result tells us about the performance of those vintages.  Unfortunately doesn't tell us what loans picked today will do.)

This is consistent with facts we know about loan performance degradation during the past two years.  Performance and returns on the higher risk grades have gone to crap.

Historically, we have a name to categorize times when loans perform this way (ie when investing in the safest loans was the best strategy, and investing in the risky loans was the worst strategy).  We call those times recessions, or credit crises, or some such name.  We haven't been in either a recession or a credit crisis during 2015/2016, so the explanation is elsewhere. 

I blame LC.  I believe they made considerable changes to their loan underwriting in 2015 to accept more loans, in order to drive volume.  Also possible of course that they just screwed up.  Although they have (multiple times) given lip service to improving loan quality, I see no evidence of same.  I will continue to look.

Among other things, these changes have invalidated all the wonderful historical data.  A lot of back-testing is now simply misleading.  This is quite a loss.  We now have nothing to guide us.  Most of us still use filters we derived from back-testing.  I do.  However, over the past year I've changed how I think about back-testing quite a lot.  I'm suspect this change in attitude is widespread.  In past years, careful attention to historical data gave me an edge of several percent.  Now it looks like that edge is gone.  That's just the way it is.

Title: Re: a view of LC's deteriorating investor returns
Post by: rawraw on February 19, 2017, 07:16:39 AM
I blame LC.  I believe they made considerable changes to their loan underwriting in 2015 to accept more loans, in order to drive volume.  Also possible of course that they just screwed up.  Although they have (multiple times) given lip service to improving loan quality, I see no evidence of same.  I will continue to look.

Among other things, these changes have invalidated all the wonderful historical data.  A lot of back-testing is now simply misleading.  This is quite a loss.  We now have nothing to guide us.  Most of us still use filters we derived from back-testing.  I do.  However, over the past year I've changed how I think about back-testing quite a lot.  I'm suspect this change in attitude is widespread.  In past years, careful attention to historical data gave me an edge of several percent.  Now it looks like that edge is gone.  That's just the way it is.
I really think you are overstating this position.  Of course trying to use backtests on loans simply by grade and filter is not a good idea and has never been a good idea.  I have posted before that even backtesting then, the number to pay attention to was the charge-offs and not the return, given the change in interest rates over the years.  When LC started underwriting loans with looser standards, there was no reason to believe that the backtest would approximate the performance of those loans, since they didn't exist in the historical sample.  This does not mean that ALL backtest data is useful, because there are still loans being made that are similar to those loans made in the past.   Unfortunately good backtesting isn't simple as saying what is my return on A grade notes going to be.

If anything, I think this forum is learning very basics of credit.  The market looks great until it doesn't, so terms can get looser and the credit box expands because risk is no longer salient.  Then all of the sudden, people start to realize the risk they were actually taking (this risk didn't change, just the awareness paid to it).  And then lenders leave the asset class, funding dries up, and that's exactly the point in which a lender can make the best loans at the most conservative credit metrics.  Smart lenders observe this cycle and use it to make those loans.  Dumb lenders just chase the other high flying asset class that doesn't have salient risk.   

There is an extra variable in our case, given that LC chooses to expand the credit box and not us.  LC chooses the price and not us.  But luckily, we still choose which of these offerings by LC is appropriate.  Based on this forum over the years, if it was up to a retail vote, I suspect LC would have had to expand the credit box even more.  There was at one point people were upset LC made majority loans to ABC.  We used to constantly complain about the lack of high grade notes.  Now we complain about the charge offs that come with high risk notes.   I personally have little sympathy for this.  The consumer market as a whole got ahead of itself.  Now we get to see the weakness in auto ABS, LC loans, and elsewhere.  A lot of the people on this forum don't have as much experience in the lending arena, but it seems like they are getting the experience now.  Luckily the economy hasn't soured, because the loosening of credit combined with a bad economy is when people really start to lose lots of money
Title: Re: a view of LC's deteriorating investor returns
Post by: Rob L on February 19, 2017, 10:46:59 AM
Nice work as always! In Nov 2015 jheizer provided a web based tool used by those who contribute to the "Understanding Your Returns" thread (after P2P Quant discontinued the tool). His tool makes use of the "dots" data set and he may have archived some of this data over time. If so and if he could provide you a few historic samples it would be interesting to see how the numbers you've provided have changed over time. Even one sample in Jan 2015 would be neat. Of course he may not have data sets by WAIR so all you could compute would be the "all" numbers.
Title: Re: a view of LC's deteriorating investor returns
Post by: smihaila on February 19, 2017, 11:05:28 AM
If anything, I think this forum is learning very basics of credit.  The market looks great until it doesn't [...]

Who is this "market"?? I really appreciate the OP's input - great, precise and meaningful research. Your reply on the other hand, sorry to say, seems condescending and arrogant.

The OP is making super-valid points: we've been risking our skins in this game more than we should've been, and the reward is no longer matching this risk. A very good indication that LC's not doing its job as they've been doing it in the past.

Thanks.
Title: Re: a view of LC's deteriorating investor returns
Post by: rawraw on February 19, 2017, 11:25:25 AM
If anything, I think this forum is learning very basics of credit.  The market looks great until it doesn't [...]

Who is this "market"?? I really appreciate the OP's input - great, precise and meaningful research. Your reply on the other hand, sorry to say, seems condescending and arrogant.

The OP is making super-valid points: we've been risking our skins in this game more than we should've been, and the reward is no longer matching this risk. A very good indication that LC's not doing its job as they've been doing it in the past.

Thanks.
It has a negative tone because it's getting really old just hearing people taking no responsibility and blaming LC. In terms of your question, please refer to the second and third paragraph. The market is any place where there are buyers and sellers of money

Sent from my SAMSUNG-SM-G935A using Tapatalk

Title: Re: a view of LC's deteriorating investor returns
Post by: jheizer on February 19, 2017, 11:37:07 AM
Nice work as always! In Nov 2015 jheizer provided a web based tool used by those who contribute to the "Understanding Your Returns" thread (after P2P Quant discontinued the tool). His tool makes use of the "dots" data set and he may have archived some of this data over time. If so and if he could provide you a few historic samples it would be interesting to see how the numbers you've provided have changed over time. Even one sample in Jan 2015 would be neat. Of course he may not have data sets by WAIR so all you could compute would be the "all" numbers.

I did not track or log anything. The thread where we talked about me making it will probably have some sample data from that month though.  I could start recording it if we feel it would be worth while.

I think I've decided ANAR is just worthless at this point. Especially for those that have been around a while (which I'm not in that club). Just a 6 or 12 month trailing XIRR seems like the only reasonable metric now to me.  Along with knowing the acount age, not just the current loan average age.

FWiW, I've personally tried to not be as anal about all of this lately. I use to check it every night asap to see the payments and fees for the day. At first it was a great hobby but for me personally the amount of time vs the amount of money I have in my account started to just be crazy.  If I would get off my butt and automate selling late notes on folio I could be even more hands off.

So if you all see a value to me logging the compare data just let me know and I'll add that and give a page to reference it some how.  And maybe finally do the larger scatter plot I said I'd do weeks ago...
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 19, 2017, 05:19:34 PM
... it's getting really old just hearing people taking no responsibility and blaming LC.

To be clear... I don't blame LC for defaults.  Never have. 

I do however blame LC for shifting the baseline, in other words changing the underwriting so significantly without telling us they were doing it.
Title: Re: a view of LC's deteriorating investor returns
Post by: Rob L on February 19, 2017, 05:34:03 PM
So if you all see a value to me logging the compare data just let me know and I'll add that and give a page to reference it some how.  And maybe finally do the larger scatter plot I said I'd do weeks ago...

It's pretty easy from the bleachers to say why not try this or that. That's what you call lazy. If I do that someone ought to smack me around. I do not plan to log the "dot data" so it would be more than presumptuous to suggest you do. Similarly it's inappropriate for me to suggest Fred93 look at any historical data that you might have. Much better for me to post original items I think might be interesting to others and say simply FWIW.  :)
Title: Re: a view of LC's deteriorating investor returns
Post by: fliphusker on February 19, 2017, 06:16:25 PM
It has a negative tone because it's getting really old just hearing people taking no responsibility and blaming LC. In terms of your question, please refer to the second and third paragraph. The market is any place where there are buyers and sellers of money

Sent from my SAMSUNG-SM-G935A using Tapatalk
First off, I find this thread extremely interesting.  And want to go back and read more of it.  My first year will be up next month here.  I have made many mistakes.  Not even sure I am on the right track yet. 
Now rawraw, you were one of the first people that started giving me great feedback when I first started.  It will always be appreciated.  Think you got jaded about 6 months ago with people complaining here.  Absolutely too many people saw the gravy train and thought they could ride it with having very little knowledge.  (I did a lot of research, and I absolutely was one who still lacked the knowledge.  Still might.)
Stay positive though, you have so much to offer.  :)
Title: Re: a view of LC's deteriorating investor returns
Post by: jasondhsd on February 20, 2017, 01:47:26 AM
It's simple common sense that something just ain't right anymore.  The economy is a lot better then it was 5-10 yrs ago but now D-G loans are performing worse. Makes no sense.
Title: Re: a view of LC's deteriorating investor returns
Post by: smihaila on February 20, 2017, 10:28:08 AM
It's simple common sense that something just ain't right anymore.  The economy is a lot better then it was 5-10 yrs ago but now D-G loans are performing worse. Makes no sense.

Precisely, couldn't agree more!  (Sick of condescending and arrogant "experts" arguing that we are too greedy or not doing our homework right). My returns are now a measly 2.05% after about 1 year - only 3-year loans, 180 notes originally, 30 defaults already. I'm no longer putting new money into LC...
Title: Re: a view of LC's deteriorating investor returns
Post by: newstreet on February 20, 2017, 10:45:14 AM
It's simple common sense that something just ain't right anymore.  The economy is a lot better then it was 5-10 yrs ago but now D-G loans are performing worse. Makes no sense.

Precisely, couldn't agree more!  (Sick of condescending and arrogant "experts" arguing that we are too greedy or not doing our homework right). My returns are now a measly 2.05% after about 1 year - only 3-year loans, 180 notes originally, 30 defaults already. I'm no longer putting new money into LC...

The "real experts"- have been telling you to not to invest in LC notes for the past year. :)
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 20, 2017, 05:57:30 PM
It's simple common sense that something just ain't right anymore.

Well put.  Sometimes I get the feeling that I use more words than necessary.

Quote
The economy is a lot better then it was 5-10 yrs ago but now D-G loans are performing worse. Makes no sense.

There is some debate on this point.  The Federal reserve consumer loan delinquency series says everything is good.  The federal reserve credit card delinquency series says everything is good.  (All consistent with what you're saying.)  However, there are some data series which show some degradation in recent months.  Several people here have cited stories that say "subprime auto" is degrading.  Here's a chart with some data about auto loans.  I don't remember where I got this chart.  Might have been from an Equifax publication.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FFed-Auto-Delinquenc7y-6a01348793456c970c01b7c8b5d78d970b-500wi.jpg&hash=1f219ea9636494db0948a393276059b3)

IMHO nothing is obvious here.  Yes, this clearly shows some subprime auto loans have increased delinquency thru 2014/5/6, but that blue curve is for FICO<620 which is way below where LC loans happen.  Even the red curve is below LC loans.  When you get up to 660, ie the brown curve, things look pretty good.

NB: These are "Equifax Risk Score 3.0" whatever that means, rather than FICO numbers, but I suspect they are intended to be similar.

So some have argued that even tho FICO doesn't match, but there's "something" about LC borrowers which make them act like the subprime auto borrowers, so what we're seeing at LC is the same thing we're seeing in the blue curve.  To my mind, that's a giant stretch.  I am open to the notion that this is partially correct however, and continue to look for more data.

I think it's more likely that LC just greatly lowered their underwriting criteria during 2015.
Title: Re: a view of LC's deteriorating investor returns
Post by: M0lina on February 20, 2017, 08:02:40 PM
I recommend going to the following for data for time series regional trend analysis by credit type

https://www.newyorkfed.org/microeconomics/databank.html

Specifically:

All 50 states : https://www.newyorkfed.org/medialibrary/Interactives/householdcredit/data/xls/area_report_by_year.xls   (Q4 2015)

Largest States: https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/xls/HHD_C_Report_2016Q4.xlsx  (Q4 2016)







Title: Re: a view of LC's deteriorating investor returns
Post by: yojoakak on February 20, 2017, 09:42:14 PM
I don't remember where I got this chart.  Might have been from an Equifax publication.


Google Image Search suggests this:

http://libertystreeteconomics.newyorkfed.org/2016/11/just-released-subprime-auto-debt-grows-despite-rising-delinquencies.html
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 20, 2017, 10:27:51 PM
I don't remember where I got this chart. ...
Google Image Search suggests this:
http://libertystreeteconomics.newyorkfed.org/2016/11/just-released-subprime-auto-debt-grows-despite-rising-delinquencies.html

Woohoo.  Ye old image search proves its worth.  Yes, that was the article.
Title: Re: a view of LC's deteriorating investor returns
Post by: DLIFVOIP on February 21, 2017, 09:02:50 AM
I am not disagreeing with anyone and think most who have posted have valid points.

However, to me it is very clear why returns have declined.  I have said it before and will say it again.

The lowering of the interest rates has done the most damage.  We as investors were forced to either accept lower returns and maintain our risk appetite (meaning we use filters to choose which loans to invest in and the return was the return) or in order to try and maintain returns we increased our risk appetite and invested in loans that would not have met our previous filters in order to chase the interest rate higher.

Title: Re: a view of LC's deteriorating investor returns
Post by: apc3161 on February 21, 2017, 10:22:53 AM
The correct strategy should have been this: You have your filters (with their known returns), and you stick with them. If lending standards got worse and/or interest rates were lowered, this would have resulted in a lot of unused cash in your account. This cash should have then been withdrawn and put in stocks, bonds, real estate etc. If/once your filters started to find matches again, you can bring that cash back into LC.
Title: Re: a view of LC's deteriorating investor returns
Post by: Emmanuel on February 21, 2017, 11:11:50 AM
The correct strategy should have been this: You have your filters (with their known returns), and you stick with them. If lending standards got worse and/or interest rates were lowered, this would have resulted in a lot of unused cash in your account.

Indeed. If your algorithms says 'don't go out when it rains', you stay dry, whatever the weather outside. At least LC still provides investors with enough information so they can judge if the interest rate they decided for a given loan makes it worth the risk.
Title: Re: a view of LC's deteriorating investor returns
Post by: DLIFVOIP on February 21, 2017, 11:27:41 AM
The correct strategy should have been this: You have your filters (with their known returns), and you stick with them. If lending standards got worse and/or interest rates were lowered, this would have resulted in a lot of unused cash in your account. This cash should have then been withdrawn and put in stocks, bonds, real estate etc. If/once your filters started to find matches again, you can bring that cash back into LC.

You are exactly correct.  I do not choose loans to invest in based on the interest rate, I base my investment on credit criteria. 
Title: Re: a view of LC's deteriorating investor returns
Post by: SLCPaladin on February 21, 2017, 11:36:59 AM
I am not disagreeing with anyone and think most who have posted have valid points.

However, to me it is very clear why returns have declined.  I have said it before and will say it again.

The lowering of the interest rates has done the most damage.  We as investors were forced to either accept lower returns and maintain our risk appetite (meaning we use filters to choose which loans to invest in and the return was the return) or in order to try and maintain returns we increased our risk appetite and invested in loans that would not have met our previous filters in order to chase the interest rate higher.

I completely agree. This was my biggest complaint about LC's underwriting. They lowered interest rates too far, and too fast. I think they should be raising interest rates now. It should be pretty easy to see interest rate's impact on borrower demand for loans, but interest rate impact on lender returns (e.g., ANAR) take much longer to discern, and an error is only apparent with much hindsight (as we are seeing now). I'd rather LC err on the side of having higher borrower rates to ensure that lenders have a cushion for any downturn that might be coming.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 21, 2017, 02:59:52 PM
I am not disagreeing with anyone and think most who have posted have valid points.

However, to me it is very clear why returns have declined.  I have said it before and will say it again.

The lowering of the interest rates has done the most damage.

It is true that reduction in interest rates in the 2014/5 time frame reduced our returns.  However, performance of loans also substantially decreased, and I disagree with your "most damage" characterization.  I've published vintage delinquency curves in another thread, where you can clearly see that performance of loans in 2015 and 2016 is much worse than prior years.

Quote
We as investors were forced to either accept lower returns and maintain our risk appetite (meaning we use filters to choose which loans to invest in and the return was the return) or in order to try and maintain returns we increased our risk appetite and invested in loans that would not have met our previous filters in order to chase the interest rate higher.

Well I certainly did NOT increase my risk appetite.  I did not "chase the interest rate higher".  I accepted that I would receive a lower return when rates dropped, and I quantified that via back testing.  (My own back testing ... which used current rates, not like the NSR back testing which uses the rates that were in effect when the old loans issued.)  However, during 2016 my portfolio (like everyone else's) performed much more poorly than previous experience or backtest results suggested.  The reason is that loans of these vintages performed more poorly than expected.

In fact, I tightened my filters several times during 2016.  My risk appetite was constant, but I perceived that the LC grades had shifted, so I changed my filters, based on back testing of more recent loan performance, to shift me toward the higher quality grades.  It wasn't enough.  Loans from 2016 have performed much more poorly than the back test results predicted.  That's my experience.

My position is that LC changed the underwriting, producing a lower quality product.

Title: Re: a view of LC's deteriorating investor returns
Post by: DLIFVOIP on February 21, 2017, 05:02:51 PM
I am not disagreeing with anyone and think most who have posted have valid points.

However, to me it is very clear why returns have declined.  I have said it before and will say it again.

The lowering of the interest rates has done the most damage.

It is true that reduction in interest rates in the 2014/5 time frame reduced our returns.  However, performance of loans also substantially decreased, and I disagree with your "most damage" characterization.  I've published vintage delinquency curves in another thread, where you can clearly see that performance of loans in 2015 and 2016 is much worse than prior years.

Quote
We as investors were forced to either accept lower returns and maintain our risk appetite (meaning we use filters to choose which loans to invest in and the return was the return) or in order to try and maintain returns we increased our risk appetite and invested in loans that would not have met our previous filters in order to chase the interest rate higher.

Well I certainly did NOT increase my risk appetite.  I did not "chase the interest rate higher".  I accepted that I would receive a lower return when rates dropped, and I quantified that via back testing.  (My own back testing ... which used current rates, not like the NSR back testing which uses the rates that were in effect when the old loans issued.)  However, during 2016 my portfolio (like everyone else's) performed much more poorly than previous experience or backtest results suggested.  The reason is that loans of these vintages performed more poorly than expected.

In fact, I tightened my filters several times during 2016.  My risk appetite was constant, but I perceived that the LC grades had shifted, so I changed my filters, based on back testing of more recent loan performance, to shift me toward the higher quality grades.  It wasn't enough.  Loans from 2016 have performed much more poorly than the back test results predicted.  That's my experience.

My position is that LC changed the underwriting, producing a lower quality product.

Out of curiosity, was your vintage testing performed on performance meaning based on net return or was it based on quantity of loans (meaning you completely ignored interest rates and looked at percentage of default/charge off as a percentage of the population)?
Title: Re: a view of LC's deteriorating investor returns
Post by: storm on February 21, 2017, 05:45:17 PM
I completely agree. This was my biggest complaint about LC's underwriting. They lowered interest rates too far, and too fast. I think they should be raising interest rates now. It should be pretty easy to see interest rate's impact on borrower demand for loans, but interest rate impact on lender returns (e.g., ANAR) take much longer to discern, and an error is only apparent with much hindsight (as we are seeing now). I'd rather LC err on the side of having higher borrower rates to ensure that lenders have a cushion for any downturn that might be coming.

There is another active thread on here about the rising trend of prepayments, so obviously borrowers are finding loans with better rates.  LC needs to go back to the whatever they were doing prior to the last 2 years to filter out the deadbeats.  If nothing else, create new credit grades with really high interest and filter the sub-prime borrowers there.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 21, 2017, 06:15:36 PM
Out of curiosity, was your vintage testing performed on performance meaning based on net return or was it based on quantity of loans (meaning you completely ignored interest rates and looked at percentage of default/charge off as a percentage of the population)?

Outputs of the back test are WAIR, and IRR, from which one can impute the annual credit loss. 

My risk appetite has always been to keep IRR > 2 x credit loss.  The idea behind this is that this allows a recession or credit crisis, such as the last one, to roughly triple the loss rate, and I'd still break even.  Over time, I've adjusted my filters to make my back test results meet my risk criteria.  As loan quality has degraded, my filters look more and more conservative.

In the past, I was able to achieve this 2x objective with IRR > 10% .  And ... Actual results matched back test results.

Using recent times for the back test (ie 2015) I can achieve about 7.5% IRR in back test, but my portfolio is now doing substantially worse.  (Back test numbers change a bit every month of course, as I download the new loan data files every month)

IRR for the month...
10/2016  6.3%
11/2016  5.41%
12/2016  7.65%
01/2017  3.88%

There is a lot of complexity hidden in dozens of choices one makes about how to do these back test calculations.  I earlier pointed out that NSR uses the old interest rates, whereas I use the new interest rates for each grade, because I am interested in how a given filter  will perform on loans I select NOW.  I'm using the back test process to choose a filter.  For my filters, the increase in interest rates from 2015 to present has been 0.64%, so you might expect actual loans from 2015 to do a bit worse than today's back test result.  On the other hand, during 2015 my filter was a bit different, and the back test results then, using the actual rates LC applied to those loans, told me to expect > 9%, which hasn't happened by a long shot.  In recent times,  my experience is that loans have performed worse than the back test told me to expect.

There's a lot of noise in monthly numbers.  I expect that the low January number is low mostly because of noise, and not an indication of the latest trend, but we'll have to wait and see.  I hope to see the IRRs level off.

Aside: LC's Broad Based Credit fund, which is essentially filterless, ie "broad based", is now earning 0%.  They have fallen more than I have.
Title: Re: a view of LC's deteriorating investor returns
Post by: rawraw on February 21, 2017, 06:27:18 PM

My position is that LC changed the underwriting, producing a lower quality product.

In terms of underwriting, what do you mean by this term?  If you mean the selection of grade based on credit metrics, it seems like this is an empirical question (since LC discloses the data and the grade assigned).  However, you always seem to crunch numbers, so I'm assuming you would have tested this hypothesis already.  I wouldn't be surprised that the definition of a given credit grade has changed over time.   Given that I haven't seen you mention testing it, are you suggesting something LC does that we can't observe has changed?=
Title: Re: a view of LC's deteriorating investor returns
Post by: Rob L on February 21, 2017, 06:28:11 PM
Just checked my account balance and I'm up $7 for the month of February (0.008%). Better than the alternative.
All the effects of halving my portfolio size should be in the rear view mirror by now, but my adjustment amount in dollars is roughly the same as it was before I sold. Yeah, it's that bad ...
Title: Re: a view of LC's deteriorating investor returns
Post by: lascott on February 21, 2017, 08:19:45 PM

My position is that LC changed the underwriting, producing a lower quality product.

In terms of underwriting, what do you mean by this term?  If you mean the selection of grade based on credit metrics, it seems like this is an empirical question (since LC discloses the data and the grade assigned).  However, you always seem to crunch numbers, so I'm assuming you would have tested this hypothesis already.  I wouldn't be surprised that the definition of a given credit grade has changed over time.   Given that I haven't seen you mention testing it, are you suggesting something LC does that we can't observe has changed?=
I was called a couple weeks back to ask about withdrawals I was making. In the conversation, I was told Lending Club was tightening their criteria such as DTI from 40 to 35. (To rawraw's point I think we could see this in the loan data file ... ie. max DTI month to month). Indicating that even tho the economy is doing well, people are using that to spend more ... on credit. That was the only example they divulged.
Title: Re: a view of LC's deteriorating investor returns
Post by: Rob L on February 22, 2017, 09:10:00 AM
It's easy to be a Monday morning quarterback but the reasons could just be this simple. At the end of 2014 consumer loan charge offs were at an all time historic low. Beginning around that time LC embarked on a series of interest rate reductions. In hindsight dramatically lowering rates just when chargeoffs were at historic lows was a really really bad idea (at least for lenders). It was an easy thing to do as it increased LC's originations at the expense of OPM (ours). Fast forward over the next couple of years and chargeoffs began to rise back to more normal levels while interest rates were ratcheted down. This double whammy is what we are living through now. Presently LC has increased interest rates but charge offs are still on the rise (possibly just back to more normal levels) and we investors are still behind the curve so to speak.
Title: Re: a view of LC's deteriorating investor returns
Post by: newstreet on February 22, 2017, 10:11:23 AM
It's easy to be a Monday morning quarterback but the reasons could just be this simple. At the end of 2014 consumer loan charge offs were at an all time historic low. Beginning around that time LC embarked on a series of interest rate reductions. In hindsight dramatically lowering rates just when chargeoffs were at historic lows was a really really bad idea (at least for lenders). It was an easy thing to do as it increased LC's originations at the expense of OPM (ours). Fast forward over the next couple of years and chargeoffs began to rise back to more normal levels while interest rates were ratcheted down. This double whammy is what we are living through now. Presently LC has increased interest rates but charge offs are still on the rise (possibly just back to more normal levels) and we investors are still behind the curve so to speak.

Well--investors in the notes are behind the curve...LC has effectively proven that they don't know credit (have you see the Colchis and LC partners annual returns--YIKES!!!!!). The math speaks for itself. But.....they are showing they know how to churn and burn as well as the brokerage industry in order to drive fees. As long as institutions are desperate for yield-(they have mandated FI allocations)-LC will churn for fees and keep loosening credit standards.
Title: Re: a view of LC's deteriorating investor returns
Post by: apc3161 on February 22, 2017, 11:21:08 AM
Quote
Aside: LC's Broad Based Credit fund, which is essentially filterless, ie "broad based", is now earning 0%.  They have fallen more than I have.

Where do you find this data?
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 22, 2017, 01:12:18 PM
Quote
Aside: LC's Broad Based Credit fund, which is essentially filterless, ie "broad based", is now earning 0%.  They have fallen more than I have.

Where do you find this data?

LC's subsidiary "LC Advisors" publishes a 2 page performance tear sheet monthly.  Each contains historical performance data.  You can call LC and ask for it.  It is sent to a mailing list, but is not published on their web site.
Title: Re: a view of LC's deteriorating investor returns
Post by: Rob L on February 22, 2017, 01:52:41 PM
Quote
Aside: LC's Broad Based Credit fund, which is essentially filterless, ie "broad based", is now earning 0%.  They have fallen more than I have.

Where do you find this data?

LC's subsidiary "LC Advisors" publishes a 2 page performance tear sheet monthly.  Each contains historical performance data.  You can call LC and ask for it.  It is sent to a mailing list, but is not published on their web site.

Not sure this is correct, but think "LC Advisors" is the "Managed Accounts" shown in the chart below from LC's recent 2016 Q4 presentation.
Maybe "Managed Accounts" is more than just "LC Advisors"; I dunno ...
Either way "Managed Accounts" provided 43% of the funding for loans last quarter. Way more than any other funding source.
Meanwhile self managed individuals has slipped to a two year low both in relative % and absolute $.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Fi.imgur.com%2Ffjunmgv.png&hash=a1714d69cfc806ec4d7f5ea146f136c5)
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 22, 2017, 01:54:33 PM
Not sure this is correct, but think "LC Advisors" is the "Managed Accounts" shown in the chart below from LC's recent 2016 Q4 presentation.
Maybe "Managed Accounts" is more than just "LC Advisors"; I dunno ...
Either way "Managed Accounts" provided 43% of the funding for loans last quarter. Way more than any other funding source.

LC Advisors is one manager among many.  There are a lot of 3rd party money managers who manage money for others by investing it in LC loans.  This category includes all of them. 
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 22, 2017, 01:56:58 PM
It's easy to be a Monday morning quarterback but the reasons could just be this simple. ...Fast forward over the next couple of years and chargeoffs began to rise back to more normal levels while interest rates were ratcheted down. This double whammy is what we are living through now.

Except that the above theory doesn't match the data.  Federal reserve and others still show consumer lending still at near all time best performance.  Delinquency and charge-off at LC however, have gone up significantly.
Title: Re: a view of LC's deteriorating investor returns
Post by: Rob L on February 22, 2017, 02:02:08 PM
Not sure this is correct, but think "LC Advisors" is the "Managed Accounts" shown in the chart below from LC's recent 2016 Q4 presentation.
Maybe "Managed Accounts" is more than just "LC Advisors"; I dunno ...
Either way "Managed Accounts" provided 43% of the funding for loans last quarter. Way more than any other funding source.

LC Advisors is one manager among many.  There are a lot of 3rd party money managers who manage money for others by investing it in LC loans.  This category includes all of them.

Including for example Peer Cube, Lending Robot, BlueVestment, etc. and all the financial planning firms that manage accounts for individual clients?
Title: Re: a view of LC's deteriorating investor returns
Post by: apc3161 on February 22, 2017, 02:52:04 PM
Not sure this is correct, but think "LC Advisors" is the "Managed Accounts" shown in the chart below from LC's recent 2016 Q4 presentation.
Maybe "Managed Accounts" is more than just "LC Advisors"; I dunno ...
Either way "Managed Accounts" provided 43% of the funding for loans last quarter. Way more than any other funding source.

LC Advisors is one manager among many.  There are a lot of 3rd party money managers who manage money for others by investing it in LC loans.  This category includes all of them.

Including for example Peer Cube, Lending Robot, BlueVestment, etc. and all the financial planning firms that manage accounts for individual clients?

I don't think so. Those services simply login and manipulate your account (you give them permission to do this).
Title: Re: a view of LC's deteriorating investor returns
Post by: rawraw on February 23, 2017, 09:46:30 AM
It's easy to be a Monday morning quarterback but the reasons could just be this simple. ...Fast forward over the next couple of years and chargeoffs began to rise back to more normal levels while interest rates were ratcheted down. This double whammy is what we are living through now.

Except that the above theory doesn't match the data.  Federal reserve and others still show consumer lending still at near all time best performance.  Delinquency and charge-off at LC however, have gone up significantly.
OK, while it seems you keep ignoring anything I post, I am getting increasingly aggravated at you clinging to the Federal Reserve Data.

As a public service for this forum, I pulled the same data (I work with this data on a daily basis).  I pulled just the numerator for this ratio, the delinquency rates on consumer loans. I wanted to know if this data is flat like the ratio.  This is not seasonally adjusted or manipulated in any way. It's just the total reported data from all banks.

Here is what I found.

Consumers 30-89 past due (year over year change)
2016: 12.7%
2015: 3.5%
2014: -4%
2013: - 6.8%
2012: - 7.9%

Consumers 90 days plus past due
2016: 4.9%
2015: 2.6%
2014: 1.9%
2013: -26.5%
2012:  7.8%

Consumers nonaccrual
2016: 16.2%
2015: - 2.7%
2014: - 16.3%
2013: - 4.7%
2012:  - 23.1%

This data is unambiguous. Consumer loan delinquency has increased for the industry (from very low levels) .

Just like on LendingClub, I can make my delinquency rates look low by growing the balances. That's why vintage analysis is important.

And like I've posted elsewhere,  various credit agency vintage analysis show a similar trend to LC. Does this mean I don't blame or fault LC for anything? No. But the stance on this forum is too far on the other side. 

Sent from my SAMSUNG-SM-G935A using Tapatalk

Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on February 23, 2017, 02:25:47 PM
I believe you are correct. Typically, managed accounts are the ones where clients don't do their own investing instead a representative manages all activity inside the account. Otherwise it will be difficult to attribute account performance/actions to a single entity. At least for PeerCube, we don't prevent our users lending/trading on their own in same account. We are not money managers. I doubt that we are clubbed in managed accounts. Though Lending Club requires us to send a unique token (issued to PeerCube) along with user credentials for any lending/trading so who knows how Lending Club uses and classifies transactions through our platform.
 

LC Advisors is one manager among many.  There are a lot of 3rd party money managers who manage money for others by investing it in LC loans.  This category includes all of them.

Including for example Peer Cube, Lending Robot, BlueVestment, etc. and all the financial planning firms that manage accounts for individual clients?

I don't think so. Those services simply login and manipulate your account (you give them permission to do this).
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 23, 2017, 04:08:57 PM
As a public service for this forum, I pulled the same data (I work with this data on a daily basis).  I pulled just the numerator for this ratio, the delinquency rates on consumer loans.

Whoa.  Slow down a bit.  You've lost me.  Where exactly did you pull this data from? 

You say "just the numerator" ... would that be the number of loans delinquent, or what?

You say "the same data", which makes it sound like federal reserve, but I don't see where they publish "just the numerator", so I'm not following you.

I would like to follow along, but you haven't explained enough to allow me to do so.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 23, 2017, 06:54:12 PM
My position is that LC changed the underwriting, producing a lower quality product.

In terms of underwriting, what do you mean by this term? 

I mean that they have either changed their criteria for either accepting loans (perhaps changing sourcing for example) or changed their rules for categorizing loans into grade, or both.

Quote
If you mean the selection of grade based on credit metrics, it seems like this is an empirical question (since LC discloses the data and the grade assigned).

LC has never said that they disclose to us ALL the data they use to assign loans to grade.  In fact I believe they do not.  Just look at the huge # credit report fields that Prosper discloses.  Obviously one can get a lot of data from the credit bureaus.

In the historical data, grade appears to predict performance of loans much better than other data, so I use it.


Quote
Given that I haven't seen you mention testing it, are you suggesting something LC does that we can't observe has changed?

I have not made this point, but I suspect that it is correct.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 23, 2017, 07:26:15 PM
Here's yet another way to look at the LC loan performance data.  I start with the chargeoff by vintage data that LC publishes.  In the past I've used delinquency data rather than chargeoff, because delinquency comes before chargeoff, so you get an earlier view.  There are difficulties with that choice.  In particular, nobody knows quantitatively what delinquency predicts.  Chargoff on the other hand, is pretty final, so we know its quantitative impact.

We can't wait until loans are "done" to look at chargeoff, because that would be years after we've invested.  I'm going to look at chargeoff during early months of loans.  I start at month 5 because that's when the action begins.  The first payment is due 1 month after origination, and the loan can be 4 months late and therefore eligible for chargeoff at 5 months.  I end at month 10 because I don't want to show too many curves, and also because this is the last age that is available for vintage 16Q1.  I could plot more months, but they would be shorter curves.

I'm going to plot the numbers the "other way".  Ie, instead of the usual way of plotting one curve for every vintage, and making the horizontal axis be months since origination, I'm going to draw one curve for each "months after origination" and make the horizontal axis be the vintage.  Then as you scan from left to right you can see how loan behavior has changed vs date of origination.

The first chart is all LC 36 month loans.  Data is from the Feb2017 chargeoff file. 
(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-chargeoff-vintage1-Feb2017.png&hash=35214c218b999a32558fdc4e34791232)

You can see that as we move from 2012 to 2016 things got worse.  Frankly in this view, it doesn't look all that bad.  Things are still much better than they were back in 2008/9.  You can see tho that the curves jump up a significant fraction of the distance up to where we were in 2008/9.  This is different than say the federal reserve consumer loan data where there is a bump up as we hit 2016, but its very very small relative to the big bump back in 2008/9.

So now lets look at this by grade.  I'm not going to do a separate chart for each grade.  I'm just gonna plot "E" loans.  The data for F&G is very noisy, and I'm not very interested in F&G because I have always avoided them.  So lets let "E" be our proxy for the riskier end of the spectrum at LC...
(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-chargeoff-vintage2-Feb2017.png&hash=4dd2724af92ae73064a407d19ebf3789)
Well!  That's a horse of a different color.  We can see that performance is getting worse as we move from 2011 thru 2016 vintages, and it is getting worse in a much more dramatic way than the numbers for all loans.   Depending on which curve you like to look at and your starting point, it appears that chargeoffs have doubled or tripled!  That's a pretty damn big change.  And get this... At month 10, the recent vintages are worse than 2008/2009 vintages!

For many years, I used the 2008/2009 crisis as my benchmark for a worst case recession.  We are at present not even in a recession, and yet E grade notes of recent vintage are performing worse than 2008/2009. 

And note that this behavior is strongly associated with vintage.  What would make behavior strongly correlated to vintage?  Well of course the underwriting rules the originator had in place at the time of loan acceptance.  This is the sort of thinking that leads me to believe that a 2015/6 "E" is not the same animal as a 2011/12/13/14 "E".

I am not saying rawraw is wrong about consumer loan performance on the whole getting some worse in 2015/6.  I suspect that many things have contributed, so perhaps we're debating degree of each contribution.

By the way, I suppose some of you have seen Peter Renton's blog this week about performance.  Its a bit of a confusing read, because he headlines all-history performance, but inside the article he mentions several other metrics, including trailing 12 month, and most-recent-quarter.  When thinking about how returns have changed vs time, I the most recent quarter data is most revealing, so I suggest as you read his blog you concentrate on that, and don't get confused by the other numbers. 

At one point he says
Quote
Overall my defaults in Q4 were the highest they have ever been. Several of my Lending Club accounts had negative months where the charge-offs were more than the total interest earned. December seemed to be a little better and January was also decent so I am hoping the worst is behind us. We are all paying for the mistakes made by Lending Club and Prosper in 2015 as they clearly mispriced many of their loans, particularly those in the higher risk loan grades where my portfolio is focused.

Yep.

Quote
They have since increased interest rates and tightened underwriting considerably so we should see better results from 2016 and 2017 vintages

Here I differ a bit with Peter's view.  I don't see any evidence that they have "tightened underwriting considerably".  I know that they've repeatedly said that, but I just don't see the evidence that they've really done it.  In fact, the charts above show that loans have continued to get worse, even after they made that statement the first few times.  Like Peter, I hope things have leveled off.  Maybe they have.  I just don't see evidence yet.
Title: Re: a view of LC's deteriorating investor returns
Post by: jheizer on February 23, 2017, 09:23:30 PM
Thank you all again that really crunch the numbers and provide so much data on this forum.  As someone who joined here and LC January of 2015 with no credit experience or anything I think at this point I'm just happy I've stayed positive, let alone still squeezing out ~6% returns.  I look at your second chart Fred93 and think about all the nights and hours upon hours I spent backtesting what turned into many different strategies all the while not knowing that the data was about to have a huge spike and most of my research would be worthless.  Or at least not nearly as profitable as I had first thought.  As of this moment I'm sitting at around a 6% charge off rate (not counting late lows that were sold).  Hopefully things improve soon.  I took all of Q4 2016 off from funding loans.  I hope Feb 2017 and on are better.
Title: Re: a view of LC's deteriorating investor returns
Post by: SLCPaladin on February 24, 2017, 11:27:47 AM
I don't really have much to add here other than I'm sort of perplexed with where to go. My historical returns have dropped now and my recent returns are not good. My portfolio is pretty mature and I'm hesitant to reinvest the new proceeds because I can't seem to get any clarity as to whether the ship is being righted or if there is a second shoe yet to drop. I'd appreciate some comments from other users as to how they are playing this. For instance, what are you all doing in light of what you know? What filters do you see working in this new environment or are you waiting it out altogether.
Title: Re: a view of LC's deteriorating investor returns
Post by: Rob L on February 24, 2017, 11:44:48 AM
I had changed to B loans only a short while back. Then, in light of the 2016Q4 results, I stopped reinvesting completely. Not doing any Folio selling just letting cash build up. My reading of the 8k was that LC doesn't plan any additional steps in favor of retail lenders so I don't expect things to get better for us any time soon. If they do I'll resume investing; if not I'll cash out in phases. Might look into Folio selling another half the portfolio if I get around to it but I'm in no hurry.
Title: Re: a view of LC's deteriorating investor returns
Post by: SLCPaladin on February 24, 2017, 12:23:52 PM
I had changed to B loans only a short while back. Then, in light of the 2016Q4 results, I stopped reinvesting completely. Not doing any Folio selling just letting cash build up. My reading of the 8k was that LC doesn't plan any additional steps in favor of retail lenders so I don't expect things to get better for us any time soon. If they do I'll resume investing; if not I'll cash out in phases. Might look into Folio selling another half the portfolio if I get around to it but I'm in no hurry.

That seems like a reasonable strategy. I build cash up so quickly in my account and I don't have any good alternatives at the moment for where to deploy it. The latest CPI numbers show inflation seems to be accelerating, so I hesitate to just have cash building up, but I'd much rather that than lose it with a bad investment! A local credit union has CDs for 2.75% with a one-time bump up option, but the terms are 5-years. Just trying to figure out alternatives if I stay on the sidelines.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on February 24, 2017, 12:59:49 PM
I don't really have much to add here other than I'm sort of perplexed with where to go. My historical returns have dropped now and my recent returns are not good. My portfolio is pretty mature and I'm hesitant to reinvest the new proceeds because I can't seem to get any clarity as to whether the ship is being righted or if there is a second shoe yet to drop.

I think that describes our situation well.

Quote
I'd appreciate some comments from other users as to how they are playing this. For instance, what are you all doing in light of what you know? What filters do you see working in this new environment or are you waiting it out altogether.

I shifted my filters several times during 2016 and early 2017 toward the safe more conservative end.  This was done principally via grade and term, but also a few of the credit variables.

I implemented an automated folio selling program to reduce my exposure to some of the loans that would no longer meet my buy criteria.   I have started with the loans that are far outside my present criteria.  Folio has very low liquidity for notes above the $25 size, so this is very slow.  However, liquidity for larger size notes in increasing vs time.

At the present rate of sale, it would take 10 years to liquidate my portfolio, so this is more of an experiment than a practical tool at this time.  Of course I could reach in and turn a knob (discount formula) and make it go faster if I wished.  I'm presently pricing at a fair discount, not a panic price. 

I am continuing to reinvest, but not adding new funds.  Scratching my head tho about whether I am doing the right thing.
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on February 24, 2017, 07:30:31 PM
If inflation is your concern, look into I-series bonds from TreasuryDirect. We max out our allocation of I-series bond every year ($10,000 per SSN per year). You don't have to pay taxes on interest until bond matures or you cash out and interest rate adjusts for inflation every six months.


That seems like a reasonable strategy. I build cash up so quickly in my account and I don't have any good alternatives at the moment for where to deploy it. The latest CPI numbers show inflation seems to be accelerating, so I hesitate to just have cash building up, but I'd much rather that than lose it with a bad investment! A local credit union has CDs for 2.75% with a one-time bump up option, but the terms are 5-years. Just trying to figure out alternatives if I stay on the sidelines.
Title: Re: a view of LC's deteriorating investor returns
Post by: SLCPaladin on February 24, 2017, 10:48:41 PM
Thanks for the suggestion Anil. I do have quite a few I-series bonds, as it happens. I need to look at those again. I haven't invested in them in some time. The ones that I picked up in the early 2000's were making 6-7% though, which was incredible. The current fixed rate portion of these bonds is set at 0%. Many years ago, I remember picking up these I-bonds when the fixed ratio portion was about 3%+, plus the CPI inflation portion added on top of that. Needless to say, those bonds are still sitting in my Treasury Direct account.

If inflation is your concern, look into I-series bonds from TreasuryDirect. We max out our allocation of I-series bond every year ($10,000 per SSN per year). You don't have to pay taxes on interest until bond matures or you cash out and interest rate adjusts for inflation every six months.


That seems like a reasonable strategy. I build cash up so quickly in my account and I don't have any good alternatives at the moment for where to deploy it. The latest CPI numbers show inflation seems to be accelerating, so I hesitate to just have cash building up, but I'd much rather that than lose it with a bad investment! A local credit union has CDs for 2.75% with a one-time bump up option, but the terms are 5-years. Just trying to figure out alternatives if I stay on the sidelines.
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on February 24, 2017, 11:18:07 PM
Lucky you! I wish I had those 3%+ I-series bonds. I am sure those bonds are still generating 4.5+% for you with minimal risk. No investment will come close to offering risk-adjusted return of those bonds. Right now the fixed portion is 0% but I still buy them as they offer inflation-protection and deferred taxes on interest.

Thanks for the suggestion Anil. I do have quite a few I-series bonds, as it happens. I need to look at those again. I haven't invested in them in some time. The ones that I picked up in the early 2000's were making 6-7% though, which was incredible. The current fixed rate portion of these bonds is set at 0%. Many years ago, I remember picking up these I-bonds when the fixed ratio portion was about 3%+, plus the CPI inflation portion added on top of that. Needless to say, those bonds are still sitting in my Treasury Direct account.

If inflation is your concern, look into I-series bonds from TreasuryDirect. We max out our allocation of I-series bond every year ($10,000 per SSN per year). You don't have to pay taxes on interest until bond matures or you cash out and interest rate adjusts for inflation every six months.
Title: Re: a view of LC's deteriorating investor returns
Post by: SeattleSun on March 09, 2017, 04:03:48 PM
.
.

Wow, rare to see a discussion of I-Bonds IMO most times I bring them up I just get blank stares.

Back in the "good old days" me and the Mrs bought our annual limit of $30,000 per SSN and have the 2001 $60k tranche with a fixed component of 3.0%, the 2003 $60k tranche has a fixed component of 1.1% and the 2005 $60k tranche has a fixed component of 1.0%  And yes they are so old they are "paper bonds". 

Add to that the current semi-annual inflation rate (CPI-U) 1.38%  and you get a yield of : 2001 +5.20%, 2003 +3.35% and 2005 +3.17% and all is "tax deffered" so far.  Sometimes I lament having those three plus % returns on those 2003 and 2005 returns so it was comforting to see AnilG say, "No investment will come close to offering risk-adjusted return of those bonds".  I think "risk adjusted return" must be the key words there.

Since I do this investing stuff as a "hobby" maybe one of you "smart finance guys" would tell me what you think about my I-Bond returns to date. Note the return gets adjusted every six months so I am just quoting the interest earned over the time I have held the I-Bonds.

1)  An Oct 2001  $10,000 I-Bond have  earned interest of $11,872 as of 1/1/17 - 15 years + 3 Months or 183 months.  Good, bad or average investment. 

One of my reference is the gold bullion I bought in the fall of 2001 at $299/oz and is up 400% as today's close at $1,200 an ounce. 

2)  A July 2003  $10,000 I-Bonds has earned interest of $5,660 as of 1/1/17.

3)  A Nov 2005 $10,000 I-Bonds has earned interest of $4,202 as of 1/1/17.

SOMETIMES I FEEL I OVER PAID FOR HAVING THE US GOVERNMENT INFLATION PROOF  $180,000 OF MY CASH STASH.

When I did my retirement planning in 2005 I ran senerios at 4%, 6%, 8%, 10% and 12% inflation.   LOL

That's what living through the 1970's does to your mind!



================================================================

More on the topic of this thread I decided to stop investing in P2P (Propser)in June of 2016 since I had an investment opportunity that did in fact have a 21% return last year.  Priority day trading strategy, so sorry can't tell.   High "pucker factor" as one might imagine.

I have just been letting my P2P account "decay" naturally and harvest the cash quarterly. So far have withdrawn $38k

The family has two accounts one yielding 10.1% and mine yielding 9.1%

Edit: after reading this full thread, note that the two account are "old" and full of 36 month loans.

All "Debt Consolidation"
A 12%
B 48%
C 28%
Cash 12% which I will pull out at the end of March

So maybe I got "lucky" being "conservative" with my "self directed" selection criteria.


SeattleSun



If inflation is your concern, look into I-series bonds from TreasuryDirect. We max out our allocation of I-series bond every year ($10,000 per SSN per year). You don't have to pay taxes on interest until bond matures or you cash out and interest rate adjusts for inflation every six months.


That seems like a reasonable strategy. I build cash up so quickly in my account and I don't have any good alternatives at the moment for where to deploy it. The latest CPI numbers show inflation seems to be accelerating, so I hesitate to just have cash building up, but I'd much rather that than lose it with a bad investment! A local credit union has CDs for 2.75% with a one-time bump up option, but the terms are 5-years. Just trying to figure out alternatives if I stay on the sidelines.
Title: Re: a view of LC's deteriorating investor returns
Post by: SeattleSun on March 09, 2017, 05:00:46 PM
.
That seems like a reasonable strategy. I build cash up so quickly in my account and I don't have any good alternatives at the moment for where to deploy it. The latest CPI numbers show inflation seems to be accelerating, so I hesitate to just have cash building up, but I'd much rather that than lose it with a bad investment! A local credit union has CDs for 2.75% with a one-time bump up option, but the terms are 5-years. Just trying to figure out alternatives if I stay on the sidelines.


Hoping not to be "Captain Obvious" but in a rising interest rate environment you want to lend short term and keep rolling over you money into a higher interest rate. 

So going "long" with a 5 year CD now seems "wrong".  Yea it appears they are willing to give you one adjustment but ......

Build a "ladder" of monthly CDs and keep rolling them over.   I helped my conservative Mom and Dad do that into the 1981 interest rate peak.  Then when rates start to fall go long term. 
Title: Re: a view of LC's deteriorating investor returns
Post by: SLCPaladin on March 10, 2017, 12:22:57 AM
.
That seems like a reasonable strategy. I build cash up so quickly in my account and I don't have any good alternatives at the moment for where to deploy it. The latest CPI numbers show inflation seems to be accelerating, so I hesitate to just have cash building up, but I'd much rather that than lose it with a bad investment! A local credit union has CDs for 2.75% with a one-time bump up option, but the terms are 5-years. Just trying to figure out alternatives if I stay on the sidelines.


Hoping not to be "Captain Obvious" but in a rising interest rate environment you want to lend short term and keep rolling over you money into a higher interest rate. 

So going "long" with a 5 year CD now seems "wrong".  Yea it appears they are willing to give you one adjustment but ......

Build a "ladder" of monthly CDs and keep rolling them over.   I helped my conservative Mom and Dad do that into the 1981 interest rate peak.  Then when rates start to fall go long term.

I really do appreciate this insight. I think this is only true if one knows that interest rates are indeed going higher. If we fall into a recession (we are due for one), inflation and interest rates could stay low, or reverse course.

I should have mentioned that the credit union 2.75% 5 year certificate has the option of a 1-time rate readjustment that can be exercised by certificate holder. This gives me a bit of confidence to pull the trigger. The math here is always challenging because I have to essentially forecast how quickly rates will rise as locking money into a 6-month, 1-year, or 18-month risk-free CD guarantees paltry returns (likely below the most recent CPI). On the other hand, lock into a 2.75% and if interest rates shoot up rapidly (like in the 80s), then my gamble will most certainly be a bad one.
Title: Re: a view of LC's deteriorating investor returns
Post by: nonattender on March 11, 2017, 01:55:26 PM
I really do appreciate this insight. I think this is only true if one knows that interest rates are indeed going higher. If we fall into a recession (we are due for one), inflation and interest rates could stay low, or reverse course.

I think they're going higher.  Of course, I own a ton of bank stocks, so, I might be biased - but my money is aligned with my big mouth.

Quote
I should have mentioned that the credit union 2.75% 5 year certificate has the option of a 1-time rate readjustment that can be exercised by certificate holder. This gives me a bit of confidence to pull the trigger. The math here is always challenging because I have to essentially forecast how quickly rates will rise as locking money into a 6-month, 1-year, or 18-month risk-free CD guarantees paltry returns (likely below the most recent CPI). On the other hand, lock into a 2.75% and if interest rates shoot up rapidly (like in the 80s), then my gamble will most certainly be a bad one.

The rate bump option is good, but it keeps you captive to that one institution - and out of the broader market.  You can only bump up if *they* bump up (that's my understanding - and how those usually work - I didn't look at that specific offer).  Andrews FCU has a 3.00% APY "non-special" 7-year CD w/an EWP that's 180 days, so, if you hold the CD for only one year, then cash in, you'll get effective yield of 1.5%... of course, the longer you hold it, the less effect that 180 day early withdrawal penalty will have.  It's a very short/low EWP, so, it's a pretty good offer if you're looking to hedge and don't think we get above 3% in the next year or two.  More discussion of this in my "Cash Parking" thread (which took a turn for the humorous, after I started dosing my coffee with Baileys as it got cold here for a while).

http://forum.lendacademy.com/index.php/topic,4212.msg39511.html#msg39511

Title: Re: a view of LC's deteriorating investor returns
Post by: SLCPaladin on March 12, 2017, 12:26:12 PM
Quote
The rate bump option is good, but it keeps you captive to that one institution - and out of the broader market.  You can only bump up if *they* bump up (that's my understanding - and how those usually work - I didn't look at that specific offer).  Andrews FCU has a 3.00% APY "non-special" 7-year CD w/an EWP that's 180 days, so, if you hold the CD for only one year, then cash in, you'll get effective yield of 1.5%... of course, the longer you hold it, the less effect that 180 day early withdrawal penalty will have.  It's a very short/low EWP, so, it's a pretty good offer if you're looking to hedge and don't think we get above 3% in the next year or two.  More discussion of this in my "Cash Parking" thread (which took a turn for the humorous, after I started dosing my coffee with Baileys as it got cold here for a while).

http://forum.lendacademy.com/index.php/topic,4212.msg39511.html#msg39511

You are quite right about the bump option. The option is only effective "if" the institution offers a product with higher rates, which they may very well choose not to do if they have all the captive deposits they need, or if the cost of a rate reset is too steep for the institution. Food for thought indeed.

I did see the Andrews FCU offering on depositaccounts.com but I wasn't aware of the early withdrawal penalty. That is a nice option to have and it does seem rather tempting, especially since the certificate is effectively callable. The one drawback that I see is that most of these credit unions and banks that offer an early withdrawal penalty for breaking CDs usually have it buried into their terms and conditions that they can refuse to a redemption request. I had a bunch of high-yielding CDs (I use that term loosely in an ultra-low rate environment) with Discover that I broke and reinvested with Pentagon Federal Credit Union when they offered 5- and 7-year CDs at 3.1% with an early withdrawal option (penalty) similar to what Andrews FCU has.

At this point I'm basically deciding between parking runoff and excess cash in strictly A/B grade at LC, or just going to FDIC or CU equivalent secure term deposits.
Title: Re: a view of LC's deteriorating investor returns
Post by: Larry321 on March 16, 2017, 12:07:32 PM
For the past couple of months, I have not been buying new loans, and instead I am moving money out of Lending Club and over to Fidelity.
My returns have dropped, and write offs have been increasing. In 4 years, as loans mature, I will have moved all my money out of LC.  I will have made money, but not as much as I would have liked.

Title: Re: a view of LC's deteriorating investor returns
Post by: Larry321 on March 16, 2017, 12:10:11 PM
LC is not to blame for defaults.  They ARE to blame for not analyzing historical data about defaults and not providing us with complete data on the probability of which loans might default.

I am slowly pulling my funds out of LC and investing elsewhere.
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on March 16, 2017, 05:54:48 PM
Sometime, it is good to look back in time and see what were your expectations when you started and why? The written thoughts and published articles always help with such exercise. Just came across an old Lending Memo article from 2013 in which Simon (Where is he now?) surveyed some people about their "sustainable" return expectations. I thought it was interesting to look back on the optimistic outlook in 2013.

P2P Lending: What is an Expected Return? A Survey of Industry Voices
http://www.lendingmemo.com/peer-to-peer-lending-return/
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on March 16, 2017, 06:05:51 PM
Best part of that article ... we got to see a photo of Anil Gupta!  Now we know what you look like.
Title: Re: a view of LC's deteriorating investor returns
Post by: jheizer on March 16, 2017, 06:10:28 PM
That is a good point.  I believe when I started I thought that 7% was almost idiot proof, 8-9% was doing good, and my golden hope was 10%.  Lately my ANAR is sitting just below 7 so I guess I am/was an idiot.
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on March 16, 2017, 07:11:51 PM
You can also hear how I sound like by listening to Peter's podcast in 2014 with me http://www.lendacademy.com/lap19-anil-gupta-of-peercube-on-p2p-lending-analysis/.  :)

Best part of that article ... we got to see a photo of Anil Gupta!  Now we know what you look like.
Title: Re: a view of LC's deteriorating investor returns
Post by: Lovinglifestyle on March 16, 2017, 10:50:28 PM
Here's what I'm doing. 

I withdrew all my capital in 2016.  Now my mission is to withdraw cash to reimburse myself for taxes I've paid for prior years through the end of '16.  Add $500 for lost cash equivalent interest, and I'll be even except for '17 and thereafter taxes.  Meanwhile, I am still also reinvesting in new notes if there doesn't seem to be any reason not to.  Philosophy:  I want a return of my money while it's still there to grab back.  Am parking it in short term treasuries and credit union money market. 
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on March 17, 2017, 12:16:02 AM
Sounds a reasonable strategy. It reminded me of my adventures in stock market in late 90s during dot com bubble. I used to buy momentum stocks that were appreciating too fast. When such stocks used to split or gain 100+%, I sold half and recovered my investment and let rest of them ride. Those were some adventurous times. I learnt a lot about stock market, trading and investing between 1993 and 2001. Only hobby still with me till now.

Here's what I'm doing. 

I withdrew all my capital in 2016.  Now my mission is to withdraw cash to reimburse myself for taxes I've paid for prior years through the end of '16.  Add $500 for lost cash equivalent interest, and I'll be even except for '17 and thereafter taxes.  Meanwhile, I am still also reinvesting in new notes if there doesn't seem to be any reason not to.  Philosophy:  I want a return of my money while it's still there to grab back.  Am parking it in short term treasuries and credit union money market.
Title: Re: a view of LC's deteriorating investor returns
Post by: rawraw on March 17, 2017, 05:32:31 PM
Sometime, it is good to look back in time and see what were your expectations when you started and why? The written thoughts and published articles always help with such exercise. Just came across an old Lending Memo article from 2013 in which Simon (Where is he now?) surveyed some people about their "sustainable" return expectations. I thought it was interesting to look back on the optimistic outlook in 2013.

P2P Lending: What is an Expected Return? A Survey of Industry Voices
http://www.lendingmemo.com/peer-to-peer-lending-return/
Anil spot on!
Title: Re: a view of LC's deteriorating investor returns
Post by: mchu168 on March 19, 2017, 01:28:40 PM
If you start with unrealistic expectations, you will surely be disappointed in the end.

Long run equity returns are expected to be mid to high single digit (5-8%). Most people expect longer-duration fixed income assets to have negative returns over the next couple of years. Real estate prices are in bubble territory in many markets.  What do you expect from P2P loans?

I used to think investing was about pushing all assets into one or two bets to maximize returns. 100% tech stock, 100% junk bonds, etc. But I've learned that being wrong with such concentrated bets can/will lead to disaster. So a better approach is to spread the risks around to many asset classes. Most will have positive returns over time and hopefully generate decent long-run risk adjusted returns. Trying to time any market is perilous and will almost always lead to regret and disappointment.  Diversification says I don't have to make the right bets all the time but I will be right in the long run.

P2P lending is definitely in a soft patch right now but therefore isn't this the right time to raise allocation to a struggling asset?  I don't have the answers and I'm not going to try to time this market either. But with diversification I can afford to be a little wrong in the short run...  :)

 
Title: Re: a view of LC's deteriorating investor returns
Post by: rawraw on March 19, 2017, 04:02:28 PM
If you start with unrealistic expectations, you will surely be disappointed in the end.

Long run equity returns are expected to be mid to high single digit (5-8%). Most people expect longer-duration fixed income assets to have negative returns over the next couple of years. Real estate prices are in bubble territory in many markets.  What do you expect from P2P loans?

I used to think investing was about pushing all assets into one or two bets to maximize returns. 100% tech stock, 100% junk bonds, etc. But I've learned that being wrong with such concentrated bets can/will lead to disaster. So a better approach is to spread the risks around to many asset classes. Most will have positive returns over time and hopefully generate decent long-run risk adjusted returns. Trying to time any market is perilous and will almost always lead to regret and disappointment.  Diversification says I don't have to make the right bets all the time but I will be right in the long run.

P2P lending is definitely in a soft patch right now but therefore isn't this the right time to raise allocation to a struggling asset?  I don't have the answers and I'm not going to try to time this market either. But with diversification I can afford to be a little wrong in the short run...  :)

 
I agree.  Although I don't quite know how to think about timing LC returns yet, since theoretically it is easier to get back in and not dependent on gains missed while in cash to the same degree as stocks.  But my first impression is that it is still a bad idea to try and 'time the market'
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on March 19, 2017, 07:45:16 PM
The value of most P2P loans once defaulted goes to zero with no chance of that value to ever recovering to pre-default value.  The "buy low sell high" assets (majority) sooner or later will rise to the implicit value of those assets after their "struggle" phase is over. Though few such assets do become worthless before they had chance to recover. This is the main difference between P2P loans versus the "struggling" assets that you want to buy low and sell high.

P2P loans are discontinuous assets, they exist for fixed period (much shorter duration than typical "buy low sell high" assets) and then expire and new ones are created. There is no relationship between an old "struggling" P2P loans with new "promising" P2P loan. You will not be rewarded for buying and holding "struggling" old P2P loans as once their life expires they can't be resuscitated. In this scenario, you will prefer to avoid buying during struggling phase and wait until you believe the "struggle phase" has passed and then you enter P2P loans market by buying new P2P loans.

P2P lending is definitely in a soft patch right now but therefore isn't this the right time to raise allocation to a struggling asset?  I don't have the answers and I'm not going to try to time this market either. But with diversification I can afford to be a little wrong in the short run...  :)
Title: Re: a view of LC's deteriorating investor returns
Post by: .Ryan. on March 20, 2017, 12:45:47 AM
Sometime, it is good to look back in time and see what were your expectations when you started and why? The written thoughts and published articles always help with such exercise. Just came across an old Lending Memo article from 2013 in which Simon (Where is he now?) surveyed some people about their "sustainable" return expectations. I thought it was interesting to look back on the optimistic outlook in 2013.

P2P Lending: What is an Expected Return? A Survey of Industry Voices
http://www.lendingmemo.com/peer-to-peer-lending-return/

Great article Anil (and great foresight by you as well in your predictions!).

The issue that I have is that we have hit the bottom of the forecasts (~5-6% returns) while conditions are still very strong (strong economy, strong consumer credit performance, etc...). I'm not convinced that the 5-6%(or whatever your diminished returns look like now) we're seeing as the long term average; I'm seeing it as the average during the optimal conditions, which we wont be in forever.

Am I foolish to believe 5-6% is not the long term average, but in fact, the new 'tops'? What are you expecting to returns to look like during a recession? Do you ever see returns rising beyond what we're seeing today?

Title: Re: a view of LC's deteriorating investor returns
Post by: Fred on March 20, 2017, 02:21:47 AM
Here's what I'm doing. 

I withdrew all my capital in 2016.  Now my mission is to withdraw cash to reimburse myself for taxes I've paid for prior years through the end of '16.  Add $500 for lost cash equivalent interest, and I'll be even except for '17 and thereafter taxes.  Meanwhile, I am still also reinvesting in new notes if there doesn't seem to be any reason not to.  Philosophy:  I want a return of my money while it's still there to grab back.  Am parking it in short term treasuries and credit union money market.

Looks like the LC Party is over for many people -- including me. 

Time to go home, get some sleep, and find a new "game" tomorrow.

If I am not restricted by my employer to do short-term trading, I may go back to options again.  However, I may have to accept investing in ETFs for a foreseeable future.
Title: Re: a view of LC's deteriorating investor returns
Post by: rawraw on March 20, 2017, 07:50:45 AM
Sometime, it is good to look back in time and see what were your expectations when you started and why? The written thoughts and published articles always help with such exercise. Just came across an old Lending Memo article from 2013 in which Simon (Where is he now?) surveyed some people about their "sustainable" return expectations. I thought it was interesting to look back on the optimistic outlook in 2013.

P2P Lending: What is an Expected Return? A Survey of Industry Voices
http://www.lendingmemo.com/peer-to-peer-lending-return/

Great article Anil (and great foresight by you as well in your predictions!).

The issue that I have is that we have hit the bottom of the forecasts (~5-6% returns) while conditions are still very strong (strong economy, strong consumer credit performance, etc...). I'm not convinced that the 5-6%(or whatever your diminished returns look like now) we're seeing as the long term average; I'm seeing it as the average during the optimal conditions, which we wont be in forever.

Am I foolish to believe 5-6% is not the long term average, but in fact, the new 'tops'? What are you expecting to returns to look like during a recession? Do you ever see returns rising beyond what we're seeing today?
Credit cycles do not need to align with economic problems, although economic problems often cause credit cycles. You can have problems in credit from competition and loosening of terms. That seems to be what happened here, which is why the hiccup isn't nearly as bad as if the loosening of terms met a weak economy. The question is whether this improves the underwriting before a recession or if the deterioration in standards  continues

Sent from my SAMSUNG-SM-G935A using Tapatalk

Title: Re: a view of LC's deteriorating investor returns
Post by: mchu168 on March 20, 2017, 08:26:52 AM
The value of most P2P loans once defaulted goes to zero with no chance of that value to ever recovering to pre-default value.  The "buy low sell high" assets (majority) sooner or later will rise to the implicit value of those assets after their "struggle" phase is over. Though few such assets do become worthless before they had chance to recover. This is the main difference between P2P loans versus the "struggling" assets that you want to buy low and sell high.


The rough patch is the degradation in underwriting. I'm assuming Lending Club overcompensates for weak returns by tightening up lending standards. 
Title: Re: a view of LC's deteriorating investor returns
Post by: mchu168 on March 20, 2017, 08:54:32 AM
http://awealthofcommonsense.com/2017/03/updating-my-favorite-performance-chart-for-2016/
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on March 20, 2017, 08:52:49 PM
What makes you think that ~5-6% return is the bottom for P2P loans?

Some of the best performance (low default or loss rate) of P2P loans was encountered during recovering economy from loans issued during and just after recession. This is typical for all type of debt. During recession, credit criteria tend to be strict so debt gets issued to fewer and best quality borrowers. As borrower's financial situation improves with rising economy, fewer debt to borrowers go bad resulting in best performance for lenders.

Some of the worst performance (high default or loss rate) of P2P loans will be encountered as we slide into recession from the loans just before recession. This is typical for all type of debt. During good economic times, credit criteria tend to be loose so debt gets issued to large number of and marginal borrowers. As borrower's financial situation deteriorates with declining economy, more debt to borrowers go bad resulting in worst performance for lenders.

As we haven't gone through a downturn with Lending Club loans yet, we don't have handle on how bad things can go. A good way to visualize the worst case performance is to use 20+% default/loss rates of Prosper loans issued between 2005 and 2008 and apply to your loans.

Great article Anil (and great foresight by you as well in your predictions!).

The issue that I have is that we have hit the bottom of the forecasts (~5-6% returns) while conditions are still very strong (strong economy, strong consumer credit performance, etc...). I'm not convinced that the 5-6%(or whatever your diminished returns look like now) we're seeing as the long term average; I'm seeing it as the average during the optimal conditions, which we wont be in forever.

Am I foolish to believe 5-6% is not the long term average, but in fact, the new 'tops'? What are you expecting to returns to look like during a recession? Do you ever see returns rising beyond what we're seeing today?
Title: Re: a view of LC's deteriorating investor returns
Post by: JohnnyP on March 20, 2017, 10:45:38 PM
Anil, it sounds like you believe we are on the weak side of a credit cycle. How would this (or how is it presenting itself)? You mentioned competition and loosening. It seems that LC is affected by both. When I look at performance on existing loans, I see that ALL of them are taking a hit. Even 60 month loans in the 2014 vintage have come way off in performance. It is not just the 2015 and 2016 vintages that everybody complains about. That seems to tell me that there is a lot of competition for LC customers these days. Maybe LC competitors have loosened up to the point that LC customers pile on more debt until it becomes default time. We hear fears that borrowers are stacking. We also hear from Lending Club that they see issues with people that have a penchant for taking on too much debt. We also see prepayments rising. In my mind, prepayments are a relatively small hit. These two things are just indicators of the real problem. The real hits seems to be additional borrowing by people that I have already loaned money to.
Title: Re: a view of LC's deteriorating investor returns
Post by: jheizer on March 20, 2017, 11:02:03 PM
Every single time I log into my amex account they are harassing me to take out a loan.
Title: Re: a view of LC's deteriorating investor returns
Post by: investny on March 21, 2017, 03:24:16 AM
2016 worst vintage

http://www.peeriq.com/assets/MPL%20Loan%20Performance%20Monitor%20(PeerIQ_March%202017).pdf
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on March 21, 2017, 08:16:06 PM
I don't make any assertion of which side of credit cycle we are in, only that we most likely have passed the strongest performance vintages for P2P loans during this economic cycle. Anyone else's guess is as good as mine about where we are and what to expect.

I am glad to see that you brought up prepayment rate. It is often an overlooked statistics compared to default, loss and delinquency rate. When prepayment rate goes up, it indicates that we are in credit expansion phase, i.e. the new credit is available to borrowers for refinancing existing debt most probably at better terms. Once prepayment rate stagnates or decline, credit expansion may have stopped. In the table below, that vintage seems to be 2014 and later. At that point onward delinquency, default and loss rate should start to go up. If you quint at the table, you might see somewhat inverse relationship between prepayment rate and delinquency/loss rate.

I don't believe this trend is unique to Lending Club considering most high yield unsecured consumer lending platforms have come out with bad news in last year or so - Lending Club, Prosper, Avant, Marlette, SoFi, Upstart just a few I remember. Similar trends are also being seen in collateralized market, specifically auto, motorcycle, boat type small amount high yield loans.

36 month loans at 12 month
VintagePrepayment RateDelinquency RateLoss Rate
20166.38%0.00%0.66%
201512.18%2.01%2.31%
201412.62%1.77%1.99%
201310.85%1.61%1.87%
20129.57%2.09%2.44%
201110.40%1.57%1.70%
201010.35%2.62%2.37%
20099.78%3.82%3.89%
20087.35%6.79%2.68%

Anil, it sounds like you believe we are on the weak side of a credit cycle. How would this (or how is it presenting itself)? You mentioned competition and loosening. It seems that LC is affected by both. When I look at performance on existing loans, I see that ALL of them are taking a hit. Even 60 month loans in the 2014 vintage have come way off in performance. It is not just the 2015 and 2016 vintages that everybody complains about. That seems to tell me that there is a lot of competition for LC customers these days. Maybe LC competitors have loosened up to the point that LC customers pile on more debt until it becomes default time. We hear fears that borrowers are stacking. We also hear from Lending Club that they see issues with people that have a penchant for taking on too much debt. We also see prepayments rising. In my mind, prepayments are a relatively small hit. These two things are just indicators of the real problem. The real hits seems to be additional borrowing by people that I have already loaned money to.
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on March 22, 2017, 01:17:50 AM
I came across this 30 minutes YouTube video on Reddit. I thought it is relevant to discussion in this thread. Check it out to understand short and long term debt cycles.

https://youtu.be/PHe0bXAIuk0
How The Economic Machine Works by Ray Dalio
Title: Re: a view of LC's deteriorating investor returns
Post by: rawraw on March 22, 2017, 07:47:15 PM
I came across this 30 minutes YouTube video on Reddit. I thought it is relevant to discussion in this thread. Check it out to understand short and long term debt cycles.

https://youtu.be/PHe0bXAIuk0
How The Economic Machine Works by Ray Dalio
Ha that has to be the most famous video in finance. If you don't know anything about Bridgewater, read a little about it.  What a strange place
Title: Re: a view of LC's deteriorating investor returns
Post by: SLCPaladin on March 22, 2017, 11:36:15 PM
I came across this 30 minutes YouTube video on Reddit. I thought it is relevant to discussion in this thread. Check it out to understand short and long term debt cycles.

https://youtu.be/PHe0bXAIuk0
How The Economic Machine Works by Ray Dalio
Ha that has to be the most famous video in finance. If you don't know anything about Bridgewater, read a little about it.  What a strange place

I always enjoy Matt Levine's cheeky comments on Bridgewater and their "radically transparent" culture:

Bridgewater's founder Ray Dalio spoke at a New York Times conference, criticized the story, and explained that Bridgewater's culture really isn't that weird when you think about it:

Speaking at a conference sponsored by The New York Times in Half Moon Bay, Calif., the 67-year-old billionaire likened that culture — which he calls “radical transparency” — to going to a nudist camp for the first time.

“You first walk into a nudist camp and it’s very awkward,” he said at the New Work Summit conference. For people to get beyond that, he said, “there has to be getting over the emotional reaction.”

Levine: Yes wait what? Bridgewater is not that unusual, I suppose, if your context is that it's like a nudist camp; but that's an unusual context to have. Most people are not going to work at hedge funds because they want to expose their most private parts to strangers' critical judgment. But that is exactly what Bridgewater wants. The difficulty is that Bridgewater is run by people who are very smart and rigorously logical, so everything that they do and say makes perfect sense in their context. It's just that they start from a slightly different place from the rest of us.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on April 27, 2017, 06:50:48 AM
Well, here's another way to look at the situation.  We usually look at returns.  Many of us calculate returns different ways, but all of them involve interest rates, chargeoffs, fees, and sometimes other factors.  Tonite I'm going to look at just one factor.  Its the factor that has the little problem ... chargeoffs.

I've calculated a chargeoff rate for two portfolios.  These happen to be two portfolios that I have access to.  The first is my own Fred93 portfolio.  The second is Lending Club's Broad-Based Consumer Credit Fund (which I refer to as BBQ). 

For my own account, each month I take the net chargeoff $ (which means chargeoffs minus recoveries) and divide by the account balance at the beginning of the month.  This produces a monthly chargeoff rate.  I then multiply it by 12 to get an annual rate.  Nothing fancy.  No freaky math like IRR or ANAR.  Everybody can follow along.

Since the beginning of 2016, the BBQ fund has published their monthly net chargeoff rate.  I've multipled this by 12 and plotted it on the same chart as the Fred93 chargeoff rate.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-monthly-net-chargeoff-2017-04-27.png&hash=ca6ca07b30439394162d3a383bbe6010)

I'm very happy that my chargeoff rate is lower than LC's, but that's not the main point of this note. 

You can see that both of these curves used to run along sorta flat, and then in mid 2016, they both started climbing.  That's the cause of the degradation of loan performance that I've often talked about. 

The first thing I notice is that the net chargeoff rate for both these portfolios are moving up together.  That gives me some confidence that it isn't my bad loan selection that made the bend in the red curve.  I don't have the data for all of your portfolios, but I suspect that if you plotted net chargeoff rate vs time, you'd get a similar looking curve, with a bend up.

You can see that neither of these curves looks like it is leveling off.  I hope they're leveling off!  I suspect that they're leveling off.  But... there just isn't data yet to demonstrate that.  So far its a wish and a supposition.

One nice thing about this annualized net chargeoff rate is that you can compare it directly to the average interest rate of your portfolio.  They have the same denominator.  Each month interest comes in, and chargeoffs go out.  You can subtract one from the other.  Lets try that...

Lets do it for the LC fund.   LC's BBQ fund has an average interest rate of 12.96%, and in March had a net chargeoff rate of -13.68%.  Oops.  They're losing money.  They also charged a fee of -0.09%/month, which annualizes to -1.08%.  (The fund charges different size customers different sized fees, and this is their published number for the fund average.)  The result was that they lost money on a cash basis.  Annualized cash basis performance in March was 12.96% - 13.68% -1.08% = -1.8% 

I say "cash basis", because when LC calculates returns on their fund, they throw in an additional term, which they call "adjustment".  In accounting lingo this adjustment is a "non cash item".  The adjustment marks the portfolio down when market interest rates go up and vice versa, when credit quality goes down, and vice versa, and they also adjust for loan age.  They have this scheme where loans are given a haircut at birth because some of them are expected to default later in life.  As life goes on, there is less life left in which to default, so the value goes up.  This may be a perfectly rational system of accounting for some, but it isn't the way most of us value our own portfolios, so I've removed the adjustment, leaving the terms which actually measure movement of cash.  Their adjustment for March was +0.59% which annualizes to +7.08%, so when you add that in, that makes the return they report come out positive.

The adjustments are big, and kinda random looking.  Now let me be clear:  I'm not accusing them of anything.  These adjustments are calculated by an outside firm so that we won't have to worry about insiders making up positive adjustments to hide bad stuff.  I do think that outside firm might employ too many guys with green eyeshades and not enough people with common sense, but that's just my opinion.  I should also mention that the adjustments are negative in some months and positive in others.  I just prefer to ignore the adjustment.  Its hilarious... I charted the BBQ fund returns and the curve jumps up and down like crazy.  Looks ridiculously noisy.  I took out all their adjustments, and got a nice smooth curve! 

The BBQ fund is losing money on a cash basis.  We have every reason to believe that it will continue to do so.  Unless some magical thing makes the net chargeoff rate go down, it will continue to exceed the interest rate, and the fund will lose money.  ...no matter what the adjustments say.

But enough about the BBQ fund.  Back to the shape of the curves. 

Both of these portfolios have seen an increase in chargeoff of around +6% over the period we observe here.  That's huuuge! 

You hear LC from time to time say they've increased interest rates so everything is fine, but the increases in interest rates have been very small compared to the increases in chargeoffs.  I haven't done the math, but you know LC took interest rates down and then up again, and the net change isn't much.  Yea, I know they made some larger increases in the high risk grades, but both these portfolios are similarly middle-grade, centered on "C" grade. 

I've charted vintage chargeoff rates various ways in the past.  These show that recent vintages are performing worse than older vintages, which is nice to know, but doesn't relate directly to cash going in and out of our accounts.   Many of us have published  charts of the ratio of monthly chargeoffs to interest received.  That does something similar to what I've done here, but it's a ratio, which doesn't so easily combine with interest rates.  If you compute the chargeoff rate, you can directly subtract it from your portfolio average interest rate, which seems a little more intuitive. 

Portfolio chargeoff rate is my new favorite thing to track.
Title: Re: a view of LC's deteriorating investor returns
Post by: ThinleyWangchuk on April 27, 2017, 12:03:22 PM
Well, here's another way to look at the situation.  We usually look at returns.  Many of us calculate returns different ways, but all of them involve interest rates, chargeoffs, fees, and sometimes other factors.  Tonite I'm going to look at just one factor.  Its the factor that has the little problem ... chargeoffs.

I've calculated a chargeoff rate for two portfolios.  These happen to be two portfolios that I have access to.  The first is my own Fred93 portfolio.  The second is Lending Club's Broad-Based Consumer Credit Fund (which I refer to as BBQ). 

For my own account, each month I take the net chargeoff $ (which means chargeoffs minus recoveries) and divide by the account balance at the beginning of the month.  This produces a monthly chargeoff rate.  I then multiply it by 12 to get an annual rate.  Nothing fancy.  No freaky math like IRR or ANAR.  Everybody can follow along.

Since the beginning of 2016, the BBQ fund has published their monthly net chargeoff rate.  I've multipled this by 12 and plotted it on the same chart as the Fred93 chargeoff rate.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-monthly-net-chargeoff-2017-04-27.png&hash=ca6ca07b30439394162d3a383bbe6010)

I'm very happy that my chargeoff rate is lower than LC's, but that's not the main point of this note. 

You can see that both of these curves used to run along sorta flat, and then in mid 2016, they both started climbing.  That's the cause of the degradation of loan performance that I've often talked about. 

The first thing I notice is that the net chargeoff rate for both these portfolios are moving up together.  That gives me some confidence that it isn't my bad loan selection that made the bend in the red curve.  I don't have the data for all of your portfolios, but I suspect that if you plotted net chargeoff rate vs time, you'd get a similar looking curve, with a bend up.

You can see that neither of these curves looks like it is leveling off.  I hope they're leveling off!  I suspect that they're leveling off.  But... there just isn't data yet to demonstrate that.  So far its a wish and a supposition.

One nice thing about this annualized net chargeoff rate is that you can compare it directly to the average interest rate of your portfolio.  They have the same denominator.  Each month interest comes in, and chargeoffs go out.  You can subtract one from the other.  Lets try that...

Lets do it for the LC fund.   LC's BBQ fund has an average interest rate of 12.96%, and in March had a net chargeoff rate of -13.68%.  Oops.  They're losing money.  They also charged a fee of -0.09%/month, which annualizes to -1.08%.  (The fund charges different size customers different sized fees, and this is their published number for the fund average.)  The result was that they lost money on a cash basis.  Annualized cash basis performance in March was 12.96% - 13.68% -1.08% = -1.8% 

I say "cash basis", because when LC calculates returns on their fund, they throw in an additional term, which they call "adjustment".  In accounting lingo this adjustment is a "non cash item".  The adjustment marks the portfolio down when market interest rates go up and vice versa, when credit quality goes down, and vice versa, and they also adjust for loan age.  They have this scheme where loans are given a haircut at birth because some of them are expected to default later in life.  As life goes on, there is less life left in which to default, so the value goes up.  This may be a perfectly rational system of accounting for some, but it isn't the way most of us value our own portfolios, so I've removed the adjustment, leaving the terms which actually measure movement of cash.  Their adjustment for March was +0.59% which annualizes to +7.08%, so when you add that in, that makes the return they report come out positive.

The adjustments are big, and kinda random looking.  Now let me be clear:  I'm not accusing them of anything.  These adjustments are calculated by an outside firm so that we won't have to worry about insiders making up positive adjustments to hide bad stuff.  I do think that outside firm might employ too many guys with green eyeshades and not enough people with common sense, but that's just my opinion.  I should also mention that the adjustments are negative in some months and positive in others.  I just prefer to ignore the adjustment.  Its hilarious... I charted the BBQ fund returns and the curve jumps up and down like crazy.  Looks ridiculously noisy.  I took out all their adjustments, and got a nice smooth curve! 

The BBQ fund is losing money on a cash basis.  We have every reason to believe that it will continue to do so.  Unless some magical thing makes the net chargeoff rate go down, it will continue to exceed the interest rate, and the fund will lose money.  ...no matter what the adjustments say.

But enough about the BBQ fund.  Back to the shape of the curves. 

Both of these portfolios have seen an increase in chargeoff of around +6% over the period we observe here.  That's huuuge! 

You hear LC from time to time say they've increased interest rates so everything is fine, but the increases in interest rates have been very small compared to the increases in chargeoffs.  I haven't done the math, but you know LC took interest rates down and then up again, and the net change isn't much.  Yea, I know they made some larger increases in the high risk grades, but both these portfolios are similarly middle-grade, centered on "C" grade. 

I've charted vintage chargeoff rates various ways in the past.  These show that recent vintages are performing worse than older vintages, which is nice to know, but doesn't relate directly to cash going in and out of our accounts.   Many of us have published  charts of the ratio of monthly chargeoffs to interest received.  That does something similar to what I've done here, but it's a ratio, which doesn't so easily combine with interest rates.  If you compute the chargeoff rate, you can directly subtract it from your portfolio average interest rate, which seems a little more intuitive. 

Portfolio chargeoff rate is my new favorite thing to track.

Great post! Please continue to keep us updated :)
Title: Re: a view of LC's deteriorating investor returns
Post by: rawraw on April 27, 2017, 12:08:54 PM
Thanks for sharing Fred! Just one quirk in your calculation, that probably isn't an issue but figured I would share. Your interest rate assumes that everyone is paying I think. But you actually aren't getting interest on the past due notes which aren't in your charge offs yet. This isn't a big deal for our loans since they charge off relatively quick, but for other loan types they can be nonaccrual for a very long time. So when banks have problem loans, their yields look low because they stay in the denominator but no income is in the numerator. Didn't know if you knew this quirk.

Sent from my SAMSUNG-SM-G935A using Tapatalk

Title: Re: a view of LC's deteriorating investor returns
Post by: investny on April 27, 2017, 01:17:38 PM
Here is a simple summary of returns for beginning of 2016
http://screencloud.net/v/Egaqn

Also,
another way to look a defaults
http://screencloud.net/v/25biR

The around 7% return on C grade loans does not look bad to me.
Title: Re: a view of LC's deteriorating investor returns
Post by: mrwhizzard on April 27, 2017, 02:52:02 PM
Portfolio chargeoff rate is my new favorite thing to track.

I liked this so much, that I made my own. I graphed my LC and Prosper accounts separately:

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Fforum.lendacademy.com%2Findex.php%3Faction%3Ddlattach%3Btopic%3D4306.0%3Battach%3D1666&hash=7a4edd845b04a533cfcd5aced8c52296)
Title: Re: a view of LC's deteriorating investor returns
Post by: jheizer on April 27, 2017, 03:01:46 PM
I'll join the party.  Mine excludes recoveries though as I don't have that in my spreadsheet currently.

(https://lh3.googleusercontent.com/-9fxW1aNMNW8/WQJAd9dd00I/AAAAAAAAGnQ/m45gjanpx4Ac1SqYYDr8ATGV-3RvgP75QCHM/s0/soffice.bin_2017-04-27_14-03-18.png)

Also my late 16 and late 31 categories both have less than half the number of notes as they did 6 months ago.  All my slopes are starting to improve.
Title: Re: a view of LC's deteriorating investor returns
Post by: rubicon on April 27, 2017, 03:10:57 PM
1. I understand the charge-off methodology but I don't really like it since if you hit a bump in your portfolio you only know 9 months later. Also you need to make sure you are comparing against the balance from 9 months ago when calculating the %. This is a cash method as it compares cash interest against actual charge-offs taken.

2. Instead I prefer to use an accrual method, using the monthly change in adjustments for late loans and adding back the cash interest paid as well change in accrued interest. This gives a more real-time read on the portfolio. You also don't have to mess about with the denominator.

Hence I saw that Jan was an absolutely awful month but Feb, Mar and April have improved. Possibly a seasonal impact (tax returns).
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on April 27, 2017, 03:13:14 PM
Thanks for sharing Fred! Just one quirk in your calculation, that probably isn't an issue but figured I would share. Your interest rate assumes that everyone is paying I think. But you actually aren't getting interest on the past due notes which aren't in your charge offs yet. This isn't a big deal for our loans since they charge off relatively quick, but for other loan types ...t

Right.  The correct cash value for the calculation is "interest received" which is not quite the same as "interest due".

These numbers will be close, but not exactly same.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on April 27, 2017, 07:18:19 PM
1. I understand the charge-off methodology but I don't really like it since if you hit a bump in your portfolio you only know 9 months later.

Isn't it 4 months later? 


Quote
2. Instead I prefer to use an accrual method, using the monthly change in adjustments for late loans and adding back the cash interest paid as well change in accrued interest. This gives a more real-time read on the portfolio.

I have no problem with that sort of calculation.  I do it too.  Each has its own pros and cons.  The adjustment for late loans is a guess.  Historically, the relationship between lates and eventual chargeoff has fluctuated considerably.  Also some people (like me) like IRR, whereas others are put off by the math and prefer an ANAR-type calculation.  Others argue about details of ANAR.  Everybody does it differently. 

Sometimes tho clarity comes from backing up and looking earlier in the calculation, at the components in a more unprocessed form.

Quote
Hence I saw that Jan was an absolutely awful month but Feb, Mar and April have improved. Possibly a seasonal impact (tax returns).

I also track late ratio (Late / (late+current)) for a measure of portfolio condition.  For my Fred93 account, lates peaked in August 2016 and have been wiggling in a flat band Oct 2016 thru Mar 2017.  I can't see a trend.  For the LC BBQ fund, the trend in lates is up, with Mar 2017 the highest ever (just barely).  So I don't see improving.

Regardless of which measurement you prefer, do you agree about the large degradation in quality of LC loans over 2015/6/7 ? 

I think the portfolio chargeoff rate shows that very clearly.  Chargeoff rates have doubled or tripled for many portfolios.  This is a big deal.  The changes have been minimized in LC management's public statements, with phrases such as "pockets of underperformance", but hey, when something triples, that's the elephant in the room.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on April 27, 2017, 07:26:59 PM
Here are LC management's public statements about loan quality during the past couple of years.  They consistently attempt to minimize the problem by describing changes as affecting only a small fraction of borrowers.  ... at the same time that the charegoff rate on their own fund tripled.

Quote
8K 4/20/2016
Grades A to C have continued to perform consistent with our expectations.  In some higher risk grades in early 2016, we identified some underperforming pockets of loans and made modifications to pricing and credit policies accordingly.  The population eliminated from the credit policy represents slightly les than 5% of loan volume (annualized based on Q4 2015), and was mainly characterized by high indebtedness, an increased propensity to accumulate debt and lower credit scores.

8K 6/7/2016
Effective June 7, 2016, debt to income (DT() criteria (excluding mortgage and the requested program loan amount) is being reduced to 35% (from 40%) across the standard loan program.  Lending Club expects the change to primarily impact grades E through G.  Lending Club expects standard program loan volume to be reduced by approximately 5% as a result of this change.

8K 10/14/2016
...the thresholds on borrower leverage were tightened on October 12,2016.  The platform will no longer approve loans for certain sub-sgements of borrowers who meet a combination of several risk factors such as high revolving debt, multiple recently opened installment loans, and higher risk scores on our proprietary scorecard.  Accordingly approximately 1% of borrowers who previously would have been able to obtain a loan under prior underwriting criteria will no longer be approved.

8K 1/18/2017
Effective January 11, 2017, changes were implemented to tighten credit criteria based on unique combinations of risk factors such as number of recent installment loans, revolving utilization, and higher risk scores on our proprietary scorecard.  Borrowers who meet these specific combinations of risk factors model lower risk-adjusted returns than their otherwise similar peers.  This group represents a small portion of the total borrower population but a notable portion of higher risk borrowers.

2016Q2 Earnings conference call 8/8/2016
Throughout late 2014 and 2015 we had an excess supply of capital, which allowed us to reduce platform interest rates and therefore returns. When the Fed raised rates in December of 2015 we took the decision to raise rates.  Since then rates were increased three times this year in order to increase the appeal of the asset class.

In total, rates rose by a weighted average 135 basis points since December bringing the weighted average platform rate on our standard program to just over 13%. This average rate remains a very attractive bond from secured consumer credit. 

On the credit side we reduced approval rates for certain targeted segments to eliminate roughly 9% of the higher risk personal loan population that have exhibited a propensity to accumulate debt and could have the most exposure to an economic slowdown.

Based on the above pricing and credit actions standard program returns are expected to increase from 4% to 5% to more than 6% for vintages after June.

2016Q3 Earnings conference call 11/7/2016
this year, we raised rates four times and tightened credit three times based on trends we were seeing in borrower behavior and investor expectations.

In particular, we stopped approving loans to a portion of borrowers that was exhibiting a high propensity to accumulate debt and could have the most exposure to an economic slowdown. The vintages that included these underperforming populations are still expected to deliver solid returns and we're targeting newly issued vintages as a result of the above-mentioned credit and pricing actions to deliver weighted average annual return of approximately 6%.

2016Q4 Earnings conference call 2/14/2017
Throughout 2016, we implemented policy changes involving increased prices and a limiting of certain borrower populations based on observed performance. While it is still early and the data is correspondingly thin, we are pleased to see increase gross yields and signs of stabilization in early delinquency rates through our latest data in January. 

Last month, we implemented an additional change that resulted in our seizing to offer credit to roughly 6% of our total borrower base. The change is disproportionately focused on our higher risk grades, similar to previous adjustments and targets the unique combination of risk factors. While this change will give us some short term pressure in Q1, we’re building a business for the long-term in a truly massive market and prudent credit management is our priority.

To me, management's repeated claims that changes will only affect a small fraction of the borrower base says that their primary concern is VOLUME, not quality.
Title: Re: a view of LC's deteriorating investor returns
Post by: JohnnyP on April 27, 2017, 08:30:21 PM
I appreciate the conversation. A recent post brought up the Orchard Index which I have attached. This is fascinating to me.

https://www.orchardindexes.com/

The Orchard Index represents all outstanding principle on consumer loans for the largest companies (Lending Club, Prosper, etc.). It also reduces returns based upon estimated defaults on late loans, so it does not wait for charge offs to occur before affecting the returns.

When you look at the web site, you see scary negative slope from 0.45% monthly return in July, 2016 to 0.04% monthly return in December. How can this happen? The numbers are not by vintage. The numbers represent the entire universe of outstanding principle. That means there could not be much "portfolio" turnover in 6 months. This was not caused by underwriting changes! What does the Forum think?
Title: Re: a view of LC's deteriorating investor returns
Post by: SLCPaladin on April 28, 2017, 02:45:17 PM
Well, here's another way to look at the situation.  We usually look at returns.  Many of us calculate returns different ways, but all of them
I've calculated a chargeoff rate for two portfolios.  These happen to be two portfolios that I have access to.  The first is my own Fred93 portfolio.  The second is Lending Club's Broad-Based Consumer Credit Fund (which I refer to as BBQ). 

For my own account, each month I take the net chargeoff $ (which means chargeoffs minus recoveries) and divide by the account balance at the beginning of the month.  This produces a monthly chargeoff rate.  I then multiply it by 12 to get an annual rate.  Nothing fancy.  No freaky math like IRR or ANAR.  Everybody can follow along.

Since the beginning of 2016, the BBQ fund has published their monthly net chargeoff rate.  I've multipled this by 12 and plotted it on the same chart as the Fred93 chargeoff rate.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-monthly-net-chargeoff-2017-04-27.png&hash=ca6ca07b30439394162d3a383bbe6010)


As always Fred, your posts are very insightful. I've stopped reinvesting in LC for now because I have not been able to discern any leveling out of the default rate, and hence I don't know where the ultimate return rate will be. I'm in de-accumulation mode right now until I see evidence that I've seen a floor, or that LC raises interest rates enough to convince me that I'll be compensated for the "new normal" of defaults.

I do have a question about your calculation though: Wouldn't you expect the charge off rate to be highly correlated to one's average portfolio maturity? What I mean is, whenever I look at the slope of cumulative defaults, I tend to see a lot of them happening in the first 12 months, and certainly within the first 18 months. I would expect that charge-offs trend up according to the natural decay of one's portfolio, so couldn't increasing charge-offs simply be the natural aging associated with the decay process of a portfolio? How much of the uptick to attribute to lax underwriting standards and how much to attribute to normal aging seem to be the problem to solve. To be certain, the slope of "cumulative charge-offs" has definitely increased in the past several quarters and years, so we know that defaults are happening much more frequently than in the past, and, as a result, that returns have dipped dramatically. No surprise there. I certainly think the calculation you've highlighted is a handy tool to quickly calculate returns as a function of interest rates and charge-offs, since they are obviously joined at the hip. But I seem to think that the more useful comparison is by vintage of cumulative charge-offs.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on April 28, 2017, 06:34:51 PM
A recent post brought up the Orchard Index which I have attached. This is fascinating to me.
https://www.orchardindexes.com/

The Orchard Index represents all outstanding principle on consumer loans for the largest companies (Lending Club, Prosper, etc.). It also reduces returns based upon estimated defaults on late loans, so it does not wait for charge offs to occur before affecting the returns.

Thanks for bringing that up.  Orchard plots this as a cumulative return (ie one of those "if you invested $1000 back when it would be worth $xxx now" charts).  However, they give the monthly return numbers they've computed, so I multiplied by 12 to annualize (consistent with the other charts I've recently shown) and charted Orchard Index annual return...

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FOrchardIndex-2017-04-28.png&hash=fb0b0170c8bf315c8089975dfc5118a8)

This is helpful for comparison to our own returns, including the other charts I've shown recently.  If I were to pick nits with them, the nits would be ... They don't say which companies are in the index, so I can't compute, for example, how much of the index is LC.  I can guess of course.  They have taken the time to write out a document explaining their methodology, which is great, but they include "mark" term to mark loans to market, and then their document fails to discuss how this mark is computed, or even what is included in it.  Because it is an all-inclusive index, it doesn't address the question of whether one could easily do better by choosing some subset of the loans offered.

Nevertheless, it is another view, and a big-picture view, which gives us something to compare against. 

What it seems to say is that we're all goin' down.

Edited to add...

PS: This view does seem to say that we (collectively) are doin' better in the early months of 2017 than we did in 2016.

PPS: Another thing that struck me about this is how straight the curve is.  I added a linear trendline, and you can see that except for the 2nd half of 2016, we were hugging close to a linear trend.  Unexpected.  Has this trend been broken?  Hope so.
Title: Re: a view of LC's deteriorating investor returns
Post by: JohnnyP on April 28, 2017, 10:17:05 PM
This trend is not our friend. Nice graph though!

Title: Re: a view of LC's deteriorating investor returns
Post by: RaymondG on April 28, 2017, 10:57:07 PM
Since the beginning of 2016, the BBQ fund has published their monthly net chargeoff rate.  I've multipled this by 12 and plotted it on the same chart as the Fred93 chargeoff rate.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-monthly-net-chargeoff-2017-04-27.png&hash=ca6ca07b30439394162d3a383bbe6010)

I do have a question about your calculation though: Wouldn't you expect the charge off rate to be highly correlated to one's average portfolio maturity? What I mean is, whenever I look at the slope of cumulative defaults, I tend to see a lot of them happening in the first 12 months, and certainly within the first 18 months. I would expect that charge-offs trend up according to the natural decay of one's portfolio, so couldn't increasing charge-offs simply be the natural aging associated with the decay process of a portfolio? How much of the uptick to attribute to lax underwriting standards and how much to attribute to normal aging seem to be the problem to solve. To be certain, the slope of "cumulative charge-offs" has definitely increased in the past several quarters and years, so we know that defaults are happening much more frequently than in the past, and, as a result, that returns have dipped dramatically. No surprise there. I certainly think the calculation you've highlighted is a handy tool to quickly calculate returns as a function of interest rates and charge-offs, since they are obviously joined at the hip. But I seem to think that the more useful comparison is by vintage of cumulative charge-offs.

I guess that Fred93's portfolio is well aged.  It must have been in a relative stable state where loans are close to evenly distributed by age after having been reinvesting for a long time.  In this state, the charge-off rate per month would not change significantly by time passing by.
Title: Re: a view of LC's deteriorating investor returns
Post by: rawraw on April 29, 2017, 08:55:16 AM
Fred, you seem pretty savvy -- do you calculate vintage past due and loss curves?  It may be more useful for you to spot trends
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on April 29, 2017, 06:50:32 PM
Fred, you seem pretty savvy -- do you calculate vintage past due and loss curves?  It may be more useful for you to spot trends

Sure.  You can get such traditional curves on www.insikt.com .  Right now they haven't updated their database since Feb17, whereas the Apr17 files are now available.  Other than that detail, they're fine.

Meanwhile, I've been charting loss (cumulative net chargeoff) a different way than the normal one.  Usually people plot "vintage curves" with one curve for each vintage of loan, and a horizontal axis that represents months since start of loan.  LC just published their April update, so I updated my chart.

{FYI: Vintage means a group of loans issued within a given quarter.}

I've turned the data around, with one curve for every age (ie months since start of loan), and a horizontal axis which represents vintage.  If every vintage performed the same, then all these lines would be strictly horizontal.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-chargeoff-curves-2017-04-29.png&hash=30598de2ad4af5744b94c90c14e18335)

These curves end at different vintages, because that's where time ends.  In other words, 16Q3 loans haven't all reached 8 months age yet, so LC doesn't yet publish that number.

The curves are all tilting up toward the right end.  This means that recent vintages are performing more poorly than prior vintages.

Another thing worth noticing is that the curves don't all have the same shape.  In other words, chargeoffs at 6 months don't predict chargeoffs at 36 months very well.  The early months give a hint, but you can't extrapolate very well.  Things change.  Perhaps economic conditions, seasonality, etc.  Vintage is important, but it isn't everything.

Whether this way of looking at the data is more insightful than some other way is unclear to me.  Each way of looking at the data allows you to see different things.  Attributing the deteriorating performance to cause is more difficult in any case.
Title: Re: a view of LC's deteriorating investor returns
Post by: brycemason on April 30, 2017, 10:55:29 AM
Nice alternative graph, Fred93. I like the iso-time-through concept.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on May 01, 2017, 05:37:20 PM
Thanks Bryce.  Glad somebody understood what I was trying to do.

As we know, the recent deterioration is heaviest on the high risk end.  With that in mind, I've charted the same thing, but this time for "E" grade 36-month only loans...
(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-chargeoff-E-curves-2017-04-29.png&hash=5af04dce0db4fe4b2e2aaff0b8557f00)

The thing I find interesting about this chart is that it shows that E loans are ALREADY doing as poorly as they did in 2008!  We called that time "the financial crisis" or the "great recession".  Today economic indicators today are MUCH better than in 2008/9, but "E" grade loan performance is back to what it was at that time, and are heading toward even worse.  I don't claim to understand this, but the data is clear.



Title: Re: a view of LC's deteriorating investor returns
Post by: Rob L on May 01, 2017, 06:54:58 PM
I'd like to second the very nice work. A fresh perspective, but paints an ugly picture and for now it's only getting worse.
It's pretty clear by contrasting your two charts that the erosion is most pronounced on the high risk end.
What is it with borrowers these days? It's not just LC but consumer debt in general (autos, etc.).
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on May 02, 2017, 02:58:17 PM
The implicit assumption in your analysis is that the credit and loan profile of E Grade loans has stayed similar across vintages. Lending Club has expanded credit criteria several times since 2008 in attempt to increase volume but still assigns these newly eligible borrowers to same 7x5 Grade buckets. I don't believe today's E Grade loans are same as the E Grade loans of 2008-2012, they are more like E+F+G+H of  yesteryears ...

Thanks Bryce.  Glad somebody understood what I was trying to do.

As we know, the recent deterioration is heaviest on the high risk end.  With that in mind, I've charted the same thing, but this time for "E" grade 36-month only loans...
(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC-chargeoff-E-curves-2017-04-29.png&hash=5af04dce0db4fe4b2e2aaff0b8557f00)

The thing I find interesting about this chart is that it shows that E loans are ALREADY doing as poorly as they did in 2008!  We called that time "the financial crisis" or the "great recession".  Today economic indicators today are MUCH better than in 2008/9, but "E" grade loan performance is back to what it was at that time, and are heading toward even worse.  I don't claim to understand this, but the data is clear.
Title: Re: a view of LC's deteriorating investor returns
Post by: Fred93 on May 02, 2017, 03:49:10 PM
The implicit assumption in your analysis is that the credit and loan profile of E Grade loans has stayed similar across vintages.

I believe, like you, that they have not stayed the same.  I don't understand how they have changed, but the performance seems to tell us that they have changed. 

Other folks have done analysis of average FICO, average inquiries, ... in each grade vs time, and those studies seem to conclude that the grades haven't changed much.  I haven't repeated those studies myself.  I accept their results. 

However, I believe, like you, that LC has changed its underwriting over time in a way that changes the meaning of the grades.

This is the simplest explanation of the loan performance data.  Being the simplest explanation doesn't make it right, but it surely puts it on the short list.
Title: Re: a view of LC's deteriorating investor returns
Post by: Rob L on May 02, 2017, 06:51:38 PM
The implicit assumption in your analysis is that the credit and loan profile of E Grade loans has stayed similar across vintages.

I believe, like you, that they have not stayed the same.  I don't understand how they have changed, but the performance seems to tell us that they have changed. 

Other folks have done analysis of average FICO, average inquiries, ... in each grade vs time, and those studies seem to conclude that the grades haven't changed much.  I haven't repeated those studies myself.  I accept their results. 

However, I believe, like you, that LC has changed its underwriting over time in a way that changes the meaning of the grades.

This is the simplest explanation of the loan performance data.  Being the simplest explanation doesn't make it right, but it surely puts it on the short list.

I've lost all perspective on what grade/sub-grade is even supposed to mean. It's very clear the definition has changed over time and there's nothing consistent about it. Maybe it serves a psychological "anchoring" purpose for LC regarding lenders but in truth there simply is no meaning.
Title: Re: a view of LC's deteriorating investor returns
Post by: AnilG on May 03, 2017, 12:58:44 AM
Shoot... I lost everything I wrote before, my desktop reset on its own. Anyway, the gist is averages don't always tell the whole story. I quickly looked at box plot for a few credit attributes for E Grade 36 month loans. Annual Income, DTI, Bankcard Utilization, and Accounts opened in last 24 months stood out. The inflection point seems to be in 2012 which kind of agrees with your charts. I also seem to recall that these were the time when LC started expanding some of these credit attributed for loan eligibility. Whatever model LC switched to 2012 may not be working.

The implicit assumption in your analysis is that the credit and loan profile of E Grade loans has stayed similar across vintages.

I believe, like you, that they have not stayed the same.  I don't understand how they have changed, but the performance seems to tell us that they have changed. 

Other folks have done analysis of average FICO, average inquiries, ... in each grade vs time, and those studies seem to conclude that the grades haven't changed much.  I haven't repeated those studies myself.  I accept their results. 

However, I believe, like you, that LC has changed its underwriting over time in a way that changes the meaning of the grades.

This is the simplest explanation of the loan performance data.  Being the simplest explanation doesn't make it right, but it surely puts it on the short list.
Title: Re: a view of LC's deteriorating investor returns
Post by: lascott on May 03, 2017, 12:09:26 PM
April statements are on your LC site now: https://www.lendingclub.com/account/lenderDocuments.action

I was negative on my Taxable acct and positive on my ROTH acct ... and overall negative. And I thought I was one of the more conservative investors here.  :(