Author Topic: Interest & Charge-off Rate Changes  (Read 13051 times)

DLIFVOIP

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Re: Interest & Charge-off Rate Changes
« Reply #15 on: May 04, 2014, 09:43:55 AM »
This is what I do for a living, so I am able to dedicate the required time.

That sounds like a nice place to be.  But I do hope you have a plan B for if/when LC decides to shut down new investment from retail folks.  Although now that I'm thinking things through, you don't even need  a plan B:

You said you're making 9.5% on average.  And spending a LOT of time on it, by the sounds of it ($25 notes with with your large acct size, all manual).  If you took all your cash and threw it in a boring mutual fund or some other stable investments which don't require babysitting, surely you could earn 8.0% over the long haul without much more risk.  In essence, you are spending all of these hours each day for an extra 1.5% return.  Is that really worth it?

Yeah LC shutting down would be an issue.  But I would have approx 4 years to figure out what to do (average time it would take for the portfolio to wind down).  I am a CPA, so I guess I would just go back to that daily grind.

I also advise clients, so my account is not the only account I manage.  So I am making more than just 1.5%.

My IRR is 9.5%.  That is really not my true return as that method of calculation considers my cash invested the day it leaves my bank and clearly it can take almost 2 weeks (most of the time longer) for the cash to start making a return.

As I said I am a CPA and I lived in one of the largest offshore financial hubs of the world for 4.5 years and learned a lot about how the markets really work and spent a lot of time looking at historical returns, timing, etc.  I will not disagree that I am not hitting a "home run" with my returns, but I also do not have to sit and wait to hit that "home run" either.  I will also not disagree that the equity market historically makes money, some will argue what that real % return is (mainly based on what types of investments you have and when you bought in plus the issues regarding whether or not you are continuously investing throughout time). 

My biggest argument against investing in the market is timing. 
#1 - When do you get in?  Wait for another 2008?  When is that going to happen again?
#2 - What if you are 60 wanting to retire at 65 and the year is 2007 and a 2008 happens?  You could have all the right investments and made all the right choices, but the timing of when you wanted to start getting out and the timing of the market is not something you can control.

At the end of the day it all boils down to risk tolerance.  Mine is fairly low and as I stated, I prefer a flat line that is up and to the right and can be employed on a large $'s as opposed to trying to hit a "home run" on small $'s.  Making 20% on 25k is great, but will not change anyones day to day life forever.  Making 9-10% on a large amount of money has allowed me to work for myself and play as much golf as my heart desires.
« Last Edit: May 04, 2014, 09:57:40 AM by CircleT009 »

DLIFVOIP

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Re: Interest & Charge-off Rate Changes
« Reply #16 on: May 04, 2014, 09:55:16 AM »
Show me an investment vehicle that can provide a net return (these are my net return rates) of 6.5% (Grade A) or 9.3% (Grade B) that provides monthly cash flow, has no reliance on the markets ups and downs and is essentially a fixed return.

But they are not fixed returns.  You may think you're making 6.5% (grade A) over time but you're not.  That's just what you've averaged so far.  Next time the economy takes a nosedive and you take some losses, then you factor that in, then you will know what your real return is.  I think that's probably what people are getting at when they talk about these grade A's... there isn't room in there for much profit after taking into account the risk that you seem to be ignoring.

And before you say, "I've been doing this for 4.5 years and I've never had any problems"...  I can drive home from the bar hammered every night for 20 years and never kill anyone.  That doesn't mean the risk is low.

Quote
I am not greedy, I want solid steady returns.

They are solid steady returns until they aren't.  At 6.5% it doesn't take much of a hiccup to completely wipe away a few years of your tiny gains.  And for someone who seems so risk averse, do you realize you've bet all your cash on ONE company?  If LC goes bankrupt you lose EVERYTHING.  Your principal, your income, and your "job" too, all at once. That doesn't sound like low risk to me.

I hold over 7k grade A loans and my default rate over the last 4.5 years on Grade A loans is 0.94%.  So with that much diversification, I would argue that is a fixed return.  Based on my investment strategy a lot of $hit would have to hit the fan for my default rate to increase almost 7 times it current rate to start losing money.  And based on the types of borrowers I invest in for Grade A loans my "educated guess" is that these borrowers will not be the ones losing their jobs when $hit hits the fan. 

I will not disagree that what you are stating "could happen", but keep in mind LC is not the market.  In reality one loan defaulting has no impact on the other.


core

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Re: Interest & Charge-off Rate Changes
« Reply #17 on: May 04, 2014, 10:02:08 AM »
I will not disagree that what you are stating "could happen", but keep in mind LC is not the market.  In reality one loan defaulting has no impact on the other.

True, one borrower defaulting does not affect the other borrower.  But the same event that caused borrower #1 to lose their job could be affecting many of your borrowers if it's a widespread deal.  I don't know what the odds are of this even affecting you in your lifetime is, to the point where you lose double digits.  I admit it's probably low, but it's still possible.

Now how about my point about how you put all your eggs in one basket with LC and could lose everything overnight?  Doesn't that scare the *** out of you, since you're so interested in stability?  Now we're not talking about borrowers or the economy, just the decisions of ONE company, maybe even one bad move by one 27 year old chick named Stephanie.  No comment there I see?  This must be the 'pray to God' investment strategy.
« Last Edit: May 04, 2014, 10:10:55 AM by core »

DLIFVOIP

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Re: Interest & Charge-off Rate Changes
« Reply #18 on: May 04, 2014, 10:57:18 AM »
I will not disagree that what you are stating "could happen", but keep in mind LC is not the market.  In reality one loan defaulting has no impact on the other.

True, one borrower defaulting does not affect the other borrower.  But the same event that caused borrower #1 to lose their job could be affecting many of your borrowers if it's a widespread deal.  I don't know what the odds are of this even affecting you in your lifetime is, to the point where you lose double digits.  I admit it's probably low, but it's still possible.

Now how about my point about how you put all your eggs in one basket with LC and could lose everything overnight?  Doesn't that scare the *** out of you, since you're so interested in stability?  Now we're not talking about borrowers or the economy, just the decisions of ONE company, maybe even one bad move by one 27 year old chick named Stephanie.  No comment there I see?  This must be the 'pray to God' investment strategy.

Ok so at least we are starting to agree on a few things.

I apologize, I missed that one.  But again, I have not invested in LC.  I have invested in individual loans.  And further more these are not loans even issued by LC.  They are simply serviced by LC.  I admit I have not looked at it in probably 2 years, but if memory serves me correctly Web Bank is the issuer of the loan and while they have no incentive to service the loan as they are not holding the risk that still does not concern me.  Again if memory serves me correctly, another third party agreement is in place that would take affect if LC was to go away.  Meaning a new company would step into LC's place and service the loans.  I know that the likely hood of this company continuing to issue new loans is nil, but they would service them to payoff.

By no means am I preaching that everyone should only invest in LC and not in the market.  I believe clearly believe in diversification.  If another 2008 happens.  I fully admit I will stop reinvesting monthly payments from LC and put those funds to work in the market.  I am also not saying I do not have other investments (including those which are in the market).  I was simply stating that I believe LC provides a more stable reliable return than the market (in my experience).  Again maybe not for those looking to make 20% or those only investing a few grand, but for those in a position to build a large account and have the time to put in, I believe it provides a great return.

DLIFVOIP

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Re: Interest & Charge-off Rate Changes
« Reply #19 on: May 04, 2014, 11:13:08 AM »
From the 10-K

"Back up Servicing Arrangement:
We have a backup and successor servicing agreement with Portfolio Financial Servicing
Company (“PFSC”). Pursuant to this agreement, PFSC will prepare and then stand ready to service Loans. Upon PFSC
becoming the servicer of the Loan, we will pay PFSC a one-time declaration fee and PFSC will be entitled to retain a
servicing fee on the amounts it collects as servicer. Our agreement with PFSC was renewed as of September 2011 for a three
year term with automatic annual renewals thereafter unless advance notice of non-renewal is provided by either party. If our
agreement with PFSC were to be terminated, we would seek to replace PFSC with another backup servicer.


WebBank serves as the true creditor for all Loans facilitated through our platform."

core

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Re: Interest & Charge-off Rate Changes
« Reply #20 on: May 04, 2014, 11:15:24 AM »
But again, I have not invested in LC.  I have invested in individual loans.

Not correct.  If you're a CPA you should have known better than to invest in something before reading the prospectus.  There's a link to it at the bottom of every page on LC's site for your convenience.  Or go read the 10-K.  Whatever you prefer.

I see you posted a reply while I was typing this.  That doesn't change anything.  Servicing the loan means servicing the borrower member loan.  So what?  LC's obligation to you has nothing to do with that.  In fact LC's obligation to you may be at the back of a very long line of creditors, with you never seeing a cent.  Someone's gotta keep servicing the loans, sure, but that doesn't help _you_.

You have no relationship with the borrower nor Web Bank.  You purchased a note from Lending Club and Lending Club owes you the money... well only dependent on the performance of that borrower member loan performance.  But the simple answer is LC owes you money, the borrower does not.  If LC spends too much on copier paper and has to go BK, then you just lost everything.

Prosper may have things covered better than LC, BK-wise.  Then again Prosper has one foot in the grave so that's probably wise!  You should be demanding that LC have something similar in place.  Until then, everything is at risk.
« Last Edit: May 04, 2014, 11:21:23 AM by core »

Half Right

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Re: Interest & Charge-off Rate Changes
« Reply #21 on: May 04, 2014, 12:30:35 PM »
LC Advisors and the Private Placement funds have the individual investor notes held by an independent trustee thereby totally removing the entire issue of a LC Bankruptcy out of the picture

gamassey

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Re: Interest & Charge-off Rate Changes
« Reply #22 on: May 04, 2014, 01:00:09 PM »

I hold over 7k grade A loans and my default rate over the last 4.5 years on Grade A loans is 0.94%.  So with that much diversification, I would argue that is a fixed return.  Based on my investment strategy a lot of $hit would have to hit the fan for my default rate to increase almost 7 times it current rate to start losing money.  And based on the types of borrowers I invest in for Grade A loans my "educated guess" is that these borrowers will not be the ones losing their jobs when $hit hits the fan. 

I will not disagree that what you are stating "could happen", but keep in mind LC is not the market.  In reality one loan defaulting has no impact on the other.

For whatever it is worth, I have made the same analysis and I agree with you CircleT009.  Of course every investment has an inherit risk, my goal is to simply find a way to diversify my holdings in something other than stocks and bonds that has a predictable risk with a reasonable ROI.  I think everyone here believes P2P provides that or they would not be investing money here.  So the real decision is what percentage of holding belongs in P2P.  I am thinking about a third.

DLIFVOIP

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Re: Interest & Charge-off Rate Changes
« Reply #23 on: May 04, 2014, 01:35:27 PM »
But again, I have not invested in LC.  I have invested in individual loans.

Not correct.  If you're a CPA you should have known better than to invest in something before reading the prospectus.  There's a link to it at the bottom of every page on LC's site for your convenience.  Or go read the 10-K.  Whatever you prefer.

I see you posted a reply while I was typing this.  That doesn't change anything.  Servicing the loan means servicing the borrower member loan.  So what?  LC's obligation to you has nothing to do with that.  In fact LC's obligation to you may be at the back of a very long line of creditors, with you never seeing a cent.  Someone's gotta keep servicing the loans, sure, but that doesn't help _you_.

You have no relationship with the borrower nor Web Bank.  You purchased a note from Lending Club and Lending Club owes you the money... well only dependent on the performance of that borrower member loan performance.  But the simple answer is LC owes you money, the borrower does not.  If LC spends too much on copier paper and has to go BK, then you just lost everything.

Prosper may have things covered better than LC, BK-wise.  Then again Prosper has one foot in the grave so that's probably wise!  You should be demanding that LC have something similar in place.  Until then, everything is at risk.

Yes I understand that I have not purchased a share of an investor loan directly and that the borrower has no direct obligation to me.  Yes I have read the prospectus.  Yes I understand the structure of the investment.

What I meant was I have not invested in a loan with LC that is paid back with funds generated from the profits or revenue generated from operations of LC.   The performance of our loans has nothing to with whether or not LC is profitable (clearly they were not profitable for a long time and they continued to allocate collected payments from borrowers to investors).  They did not use those payments to cover other obligations.  I would venture to say we both a strong understanding how these loans work and the structure of the investment vehicle.

I will agree the BK of LC would cause an issue.

Beyond that I agree there is risk, I just do not have the same view of the risk as you do regarding collected payments from borrowers.  And I have a hard time believing a BK judge would allow payment received from borrowers to be used to satisfy other creditors first.  I am not saying it could not happen, but it is my opinion it would be difficult for the BK judge to pull that off.  Maybe I am wrong I am not a BK expert by any means.

On that I will politely yield any further comments regarding a LC BK as it is all speculation.

« Last Edit: May 04, 2014, 05:00:23 PM by CircleT009 »

rawraw

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Re: Interest & Charge-off Rate Changes
« Reply #24 on: May 04, 2014, 07:15:22 PM »
Show me an investment vehicle that can provide a net return (these are my net return rates) of 6.5% (Grade A) or 9.3% (Grade B) that provides monthly cash flow, has no reliance on the markets ups and downs and is essentially a fixed return.

But they are not fixed returns.  You may think you're making 6.5% (grade A) over time but you're not.  That's just what you've averaged so far.  Next time the economy takes a nosedive and you take some losses, then you factor that in, then you will know what your real return is.  I think that's probably what people are getting at when they talk about these grade A's... there isn't room in there for much profit after taking into account the risk that you seem to be ignoring.

But Core, the underlying theme is volatility is also not constant among loans.  You may think the the interest rate doesn't price this appropriately, but I'd bet the opposite.  These high grade notes do not price in their volatility correctly.

For example, at the start of it all (from NSR: http://www.nickelsteamroller.com/blog/2012/07/hedging-high-risk-p2p-portfolios/): During the height of the financial turmoil that occurred in 2008 A grade loans performed the best, producing ~+4.0% returns. F grade loans which are currently the best returning loans, returned (-3.85)% annualized for those issued in 2008.

Now things have changed. But low FICOs high DTIs are disproportionately impacted by downturns.  This is also why I manage regional concentrations -- I think I'm one of the only ones here who does that.  People just avoid certain states because they don't understand the problem with state concentrations in the first place.

Rob L

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Re: Interest & Charge-off Rate Changes
« Reply #25 on: May 04, 2014, 07:17:18 PM »
Good.  I think they should knock them down some more.  Keep clobbering rates until there isn't a favourite group that everybody just HAS to have like some silly console gaming system on Christmas Eve.  It's not bad news for investors.  It's bad news for people who refused to invest in anything but a small slice of the grades.
No, this is a thumb in every investor's eye; or another digit somewhere else.
Let me remind you (courtesy of NSR back testing) that LC ROI on 20,000 completed loans has been underwhelming.
Risk has not been met with reward (B notes the best ROI).
A     4.65%
B     5.17%
C     5.10%
D     5.05%
E     4.39%
F    -3.47%
G   -1.10%
I know, this is ancient history; obviously the pendulum must have swung the other way now, so let's wax the lenders; they're so stupid they'll buy anything.
The change is a tacit admission their model is so poor that not only were the rates too high, but the projected defaults too low.
Or
it's a tacit admission there is so much money chasing these loans now who cares; lets write more. You pick.
I thought the early days of Prosper would have provided an example that sticking it to lenders doesn't pay off in the long run.

I see another post slightly pre-empted this one. Similar theme I think.

core

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Re: Interest & Charge-off Rate Changes
« Reply #26 on: May 04, 2014, 10:46:23 PM »
Ok, you two,  I'll admit defeat here.  Maybe instead of decreasing D/E they should have increased F/G.  That's fine with me too.  Anything but this favorite narrow band which is not only illogical (to encourage that, I mean.. I do not blame investors) but gets in the way of my trading.

No, this is a thumb in every investor's eye; or another digit somewhere else.

Around here, Rob, that costs extra.  Don't complain about the freebies.

Booleans

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Re: Interest & Charge-off Rate Changes
« Reply #27 on: May 05, 2014, 11:38:24 AM »

Now things have changed. But low FICOs high DTIs are disproportionately impacted by downturns.  This is also why I manage regional concentrations -- I think I'm one of the only ones here who does that.  People just avoid certain states because they don't understand the problem with state concentrations in the first place.

You inspired me to go look at the proportion of my portfolio concentrated in each state. Whoops. It looks like Mississippi and South Dakota really need to step up and provide more borrowers for me. Not to mention the 7 states where I have 0 notes.


rawraw

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Re: Interest & Charge-off Rate Changes
« Reply #28 on: May 06, 2014, 06:57:20 AM »

Now things have changed. But low FICOs high DTIs are disproportionately impacted by downturns.  This is also why I manage regional concentrations -- I think I'm one of the only ones here who does that.  People just avoid certain states because they don't understand the problem with state concentrations in the first place.

You inspired me to go look at the proportion of my portfolio concentrated in each state. Whoops. It looks like Mississippi and South Dakota really need to step up and provide more borrowers for me. Not to mention the 7 states where I have 0 notes.

Generally a lender is going to have concentration limits on states.  Some states may be higher than others, given their feel for the robustness of the economy.  But generally economic recessions are regional in nature.  For example, an oil bust like in the 80s would probably impact 9% of your portfolio severely.  But that could just as easily be 50% or 2%.  Same with CA and their primary industries.  Or the gas boom going on in the midwest going bust.   It's a good thing to pay attention to IMO. 

I have relative concentrations in VA, TX, and CA.  Budget cuts, oil bust, and tech risks ha ha
« Last Edit: May 06, 2014, 06:59:06 AM by rawraw »

Booleans

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Re: Interest & Charge-off Rate Changes
« Reply #29 on: May 06, 2014, 10:08:59 AM »

Now things have changed. But low FICOs high DTIs are disproportionately impacted by downturns.  This is also why I manage regional concentrations -- I think I'm one of the only ones here who does that.  People just avoid certain states because they don't understand the problem with state concentrations in the first place.

You inspired me to go look at the proportion of my portfolio concentrated in each state. Whoops. It looks like Mississippi and South Dakota really need to step up and provide more borrowers for me. Not to mention the 7 states where I have 0 notes.

Generally a lender is going to have concentration limits on states.  Some states may be higher than others, given their feel for the robustness of the economy.  But generally economic recessions are regional in nature.  For example, an oil bust like in the 80s would probably impact 9% of your portfolio severely.  But that could just as easily be 50% or 2%.  Same with CA and their primary industries.  Or the gas boom going on in the midwest going bust.   It's a good thing to pay attention to IMO. 

I have relative concentrations in VA, TX, and CA.  Budget cuts, oil bust, and tech risks ha ha

I agree and am going to start trying to even out the geographic distribution of my portfolio. It's going to make finding notes even more difficult but I've removed California, Texas, New York, New Jersey, and Florida from my filter.