Author Topic: Changes to Interest Rate and Expected Return  (Read 17766 times)

pplinvestor

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Re: Changes to Interest Rate and Expected Return
« Reply #15 on: June 27, 2013, 10:22:55 PM »
So Lending Club lowered interest rate while increasing expected default rate at the time Mortgage and Bond rate are sharply increased.  Lending Club is loosing attractiveness quick

rawraw

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Re: Changes to Interest Rate and Expected Return
« Reply #16 on: June 28, 2013, 06:16:25 AM »
So Lending Club lowered interest rate while increasing expected default rate at the time Mortgage and Bond rate are sharply increased.  Lending Club is loosing attractiveness quick
Yea, I'm definitely considering jumping into the MBS market to get a 3.5% YTM on a 15 year expected life instrument because LC reduced their rates. . .

berniemadeoff

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Re: Changes to Interest Rate and Expected Return
« Reply #17 on: June 28, 2013, 07:28:53 AM »
Try closed end levered muni funds.  7% tax free looks pretty good right now.

Rob L

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Re: Changes to Interest Rate and Expected Return
« Reply #18 on: June 28, 2013, 07:32:52 AM »
Funny, but I didn't hear this was mentioned at the Lendit conference?

rawraw

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Re: Changes to Interest Rate and Expected Return
« Reply #19 on: June 28, 2013, 11:09:07 AM »
Try closed end levered muni funds.  7% tax free looks pretty good right now.
Right. . . because rising interest rates mean the closed end levered muni funds will do better as their borrowings increase in cost?  Or if rates remain stable and the munis keep getting called?

I understand your point about current yield vs LC yield. I have no idea how it is related to the current movements in the yield curve as the person above me was upset about.  But I don't see any currently yielding above 6.4% -- but I also didn't spend a great deal of time looking, either.
« Last Edit: June 28, 2013, 11:11:15 AM by rawraw »

berniemadeoff

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Re: Changes to Interest Rate and Expected Return
« Reply #20 on: June 28, 2013, 12:05:56 PM »
If you think you can predict movements in the yield curve, more power to you... 

Overall, I think most people should try to hold a diversified portfolio with some allocation to stocks, bonds, alternative investments etc.  If you choose to have some fixed income in your portfolio, there are many options besides P2P lending, and all of them got more attractive in the past month (besides P2P it appears) ...

rawraw

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Re: Changes to Interest Rate and Expected Return
« Reply #21 on: June 28, 2013, 01:40:55 PM »
If you think you can predict movements in the yield curve, more power to you... 

Overall, I think most people should try to hold a diversified portfolio with some allocation to stocks, bonds, alternative investments etc.  If you choose to have some fixed income in your portfolio, there are many options besides P2P lending, and all of them got more attractive in the past month (besides P2P it appears) ...
Oh I completely agree with this.  I just thought it was silly the OP was mad because the yield curve out past 10 years went up something like 30 bps and LC went down what looks like 30 bps on the 'safe' end and up 30bps on the riskier end.

berniemadeoff

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Re: Changes to Interest Rate and Expected Return
« Reply #22 on: June 28, 2013, 01:52:51 PM »
If you think you can predict movements in the yield curve, more power to you... 

Overall, I think most people should try to hold a diversified portfolio with some allocation to stocks, bonds, alternative investments etc.  If you choose to have some fixed income in your portfolio, there are many options besides P2P lending, and all of them got more attractive in the past month (besides P2P it appears) ...
Oh I completely agree with this.  I just thought it was silly the OP was mad because the yield curve out past 10 years went up something like 30 bps and LC went down what looks like 30 bps on the 'safe' end and up 30bps on the riskier end.

It is kinda interesting that LC interest rates are falling and default rates are rising when these fundamentals are doing just the opposite in the real world. 

LonghornSF

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Re: Changes to Interest Rate and Expected Return
« Reply #23 on: June 28, 2013, 02:18:53 PM »

Quote
It is kinda interesting that LC interest rates are falling and default rates are rising when these fundamentals are doing just the opposite in the real world.

I'm telling you guys, its because LC has too much demand from investors. There's a reason they don't really care what investors think - people are throwing money at LC given how high the returns are. LC could cut interest rates another few % and the vast majority of loans would still get funded in a short period of time. To a pension fund earning 4-6% on medium to long duration corporate bonds, LC loans look like the investment of the century given their short duration and higher rates.

berniemadeoff

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Re: Changes to Interest Rate and Expected Return
« Reply #24 on: June 28, 2013, 03:00:44 PM »

Quote
It is kinda interesting that LC interest rates are falling and default rates are rising when these fundamentals are doing just the opposite in the real world.

I'm telling you guys, its because LC has too much demand from investors. There's a reason they don't really care what investors think - people are throwing money at LC given how high the returns are. LC could cut interest rates another few % and the vast majority of loans would still get funded in a short period of time. To a pension fund earning 4-6% on medium to long duration corporate bonds, LC loans look like the investment of the century given their short duration and higher rates.

I completely agree with you. 

So what level of return is justified given the risks under normal supply/demand conditions?  If the LC's average returns fall to mid-single digit or lower, I think people will question if they are being fairly compensated.  Maybe tax exempt investors like Pensions, endowments, and so on continue to invest.  For me, my pre-tax return of ~10% barely justifies the risk, and if rates continue to rise making other fixed income assets more attractive, I will lower my exposure to P2P.  I'm not sure when this will happen, as it is completely driven by the market, but we are inching closer to that threshold every day it seems.



 



Peter

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Re: Changes to Interest Rate and Expected Return
« Reply #25 on: June 29, 2013, 09:28:56 AM »
So what level of return is justified given the risks under normal supply/demand conditions?  If the LC's average returns fall to mid-single digit or lower, I think people will question if they are being fairly compensated.  Maybe tax exempt investors like Pensions, endowments, and so on continue to invest.  For me, my pre-tax return of ~10% barely justifies the risk, and if rates continue to rise making other fixed income assets more attractive, I will lower my exposure to P2P.  I'm not sure when this will happen, as it is completely driven by the market, but we are inching closer to that threshold every day it seems.

Everyone has to decide for themselves what level of risk is acceptable. To me, this is not a surprising move and no doubt the interest rate changes are driven by investor demand.

But let's think about Lending Club as an investment. Any way you look at it they are a lower risk investment than they were one or two years ago. They are profitable have a lot of cash on their balance sheet and are planning an IPO next year. And as we all know they are awash in investor dollars. There is very little platform risk any more. That probably justifies a lower return than one or two years ago. So, I think investor returns will have to go much lower before we see any kind of investor exodus from Lending Club.
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berniemadeoff

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Re: Changes to Interest Rate and Expected Return
« Reply #26 on: June 29, 2013, 10:09:36 AM »
Very good points Peter.  Investors are fickle though (just look at fixed income fund flows over the past month), and bringing down expected returns in this environment does not seem wise in my opinion... (nor is it good for my portfolio performance  ;))

brycemason

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Re: Changes to Interest Rate and Expected Return
« Reply #27 on: June 29, 2013, 06:12:52 PM »
Lowering rates attracts more borrowers, which is probably their chief concern at the moment.

Rob L

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Re: Changes to Interest Rate and Expected Return
« Reply #28 on: June 30, 2013, 01:15:03 AM »
Okay, I perfectly understand LC's ability to set interest rates for whatever reasons and however they choose. They want more borrower demand so they lower rates. We set our own levels of acceptable risk/reward.

I don't understand the change in expected default rates. Does this mean "our earlier estimates were wrong, and they really should have been these new numbers"? Or, "we have loosened our underwriting standards going forward; the old numbers were correct and were our best estimates for loans before our underwriting changes, and now these new numbers are our best estimates for loans going forward"? Or, "we would rather under-promise and over-deliver rather than visa versa so we have tightened our model"? Does anyone know (or does everyone know but me)? Maybe I just didn't get the memo.

Randawl

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Re: Changes to Interest Rate and Expected Return
« Reply #29 on: June 30, 2013, 01:44:41 AM »
Does this mean "our earlier estimates were wrong, and they really should have been these new numbers"?

I would go with this.  Also, their standards changed in December and these new numbers likely reflect that as well.