Author Topic: Does "sell on FICO drop" strategy really work?  (Read 12385 times)

turing

  • Full Member
  • ***
  • Posts: 222
    • View Profile
    • PeerToPeerQuant.com
    • Email
Does "sell on FICO drop" strategy really work?
« on: October 31, 2014, 01:39:31 PM »
I've heard lots of people talking about a "sell on FICO drop strategy".  Based on data from PeerCube about default vs FICO change.

The FICO decline is public data when you go to sell the note.  Buyers should be compensating for the risk of default when they decide to make a purchase.

As the seller you see your default rate go way down, but you don't really know how the loans ended up.  How do you know you came out ahead?

Even if the strategy works now then buyers are getting tons of losses and eventually they will stop buying them or require a bigger discount.

Has anyone ever done a control test to see how well it does vs just holding the notes?

Ran

  • Full Member
  • ***
  • Posts: 148
    • View Profile
    • Email
Re: Does "sell on FICO drop" strategy really work?
« Reply #1 on: October 31, 2014, 02:23:48 PM »
I think that analysis is correct in that large FICO drop does lead to higher default rate. However, for that "Sell FICO drop" strategy to work you have to sell early, because you will not only get a bigger audiance when the note is still current, but also a higher appetite because the note is current. IGP or Late note with big FICO drop is a bomb that needs considerable discount to off load. In terms of public information, I think it matters most in an efficient market where supply and demand is balanced and market is matured. But Folio current notes are always in short supply by penned up demand from inexperienced investors and those from Folio only states.

Fred

  • Hero Member
  • *****
  • Posts: 1421
    • View Profile
Re: Does "sell on FICO drop" strategy really work?
« Reply #2 on: October 31, 2014, 02:49:42 PM »
As a Folio trader, I can say the answer is "it depends" on how deep the discount is.

For a D grade note with Current status and DOWN FICO, the discount at one point was 36%.

turing

  • Full Member
  • ***
  • Posts: 222
    • View Profile
    • PeerToPeerQuant.com
    • Email
Re: Does "sell on FICO drop" strategy really work?
« Reply #3 on: October 31, 2014, 02:58:36 PM »
As a Folio trader, I can say the answer is "it depends" on how deep the discount is.

For a D grade note with Current status and DOWN FICO, the discount at one point was 36%.

Does the discount depend on how much the FICO score is down?

Quote from: Ran
I think it matters most in an efficient market where supply and demand is balanced and market is matured. But Folio current notes are always in short supply by penned up demand from inexperienced investors and those from Folio only states.

Sounds like it is a temporary opportunity then.  Post IPO there will be no Folio only states.

Ran

  • Full Member
  • ***
  • Posts: 148
    • View Profile
    • Email
Re: Does "sell on FICO drop" strategy really work?
« Reply #4 on: October 31, 2014, 03:01:51 PM »
As a Folio trader, I can say the answer is "it depends" on how deep the discount is.

For a D grade note with Current status and DOWN FICO, the discount at one point was 36%.

If I am allowed to take a guess for this note, it should be a note already with recent late history. "Sell FICO drop" is most effective with the note otherwise looking perfect. I have not seen NEVER LATE notes in Folio with -5% discount for a very very long time. People simply dive for Those never late but big FICO drop notes

Fred

  • Hero Member
  • *****
  • Posts: 1421
    • View Profile
Re: Does "sell on FICO drop" strategy really work?
« Reply #5 on: October 31, 2014, 03:49:50 PM »
Does the discount depend on how much the FICO score is down?

Not necessarily.  Many notes with smaller drop were discounted deeper. It seems to depend on the seller's desperation.

Sounds like it is a temporary opportunity then.

Yep, Folio is rife with arbitrage opportunities.

rawraw

  • Hero Member
  • *****
  • Posts: 2795
    • View Profile
Re: Does "sell on FICO drop" strategy really work?
« Reply #6 on: October 31, 2014, 05:51:11 PM »
I believe it does.  This is the thing, even selling at a discount doesn't mean I'm taking a loss.  And it increases the yield a lot for the borrower.  A typical 12 month year old note can be pretty deeply discounted and still break even, due to the P&I along the way.  The question is if you end up selling too many notes that don't end up defaulting at discounts to offset the avoided defaults.  I used to track my strategy in InterestRadar and the avoided defaults outweighed the false positives

Fred

  • Hero Member
  • *****
  • Posts: 1421
    • View Profile
Re: Does "sell on FICO drop" strategy really work?
« Reply #7 on: October 31, 2014, 08:25:57 PM »
I have not seen NEVER LATE notes in Folio with -5% discount for a very very long time.

I am not sure what you mean by "a very very long time", but my collection of FOLIO data shows many NEVER-LATE notes with discount of 5% or more:
 
« Last Edit: October 31, 2014, 08:30:36 PM by Fred »

Ran

  • Full Member
  • ***
  • Posts: 148
    • View Profile
    • Email
Re: Does "sell on FICO drop" strategy really work?
« Reply #8 on: October 31, 2014, 09:41:06 PM »
I have not seen NEVER LATE notes in Folio with -5% discount for a very very long time.

I am not sure what you mean by "a very very long time", but my collection of FOLIO data shows many NEVER-LATE notes with discount of 5% or more:
 


This sample really does not help. I got a few these notes from time to time as well, some are $1 outstanding principal selling for $0.5, some are from nice guys who pressed the wrong button.
The point is that if you were an ordinary investor and you have to manually go to browse notes page to buy notes, you will be lucky to find a NEVER LATE note priced at -5% or less because simply there is no inventory. Anyone who has interest to test this can refresh Folio browse note page as often as you want and see how often you can find a -5% NEVER LATE note

Fred

  • Hero Member
  • *****
  • Posts: 1421
    • View Profile
Re: Does "sell on FICO drop" strategy really work?
« Reply #9 on: November 01, 2014, 01:45:02 AM »
I got a few these notes from time to time as well ...

You made a few unsubstantiated statements already, so forgive me for my unbelief, but please let me know the IDs of the notes -- never-late with discount more than 5% -- that you got above.

hoggy1

  • Sr. Member
  • ****
  • Posts: 401
    • View Profile
    • Email
Re: Does "sell on FICO drop" strategy really work?
« Reply #10 on: November 01, 2014, 06:30:22 AM »
I'm waiting for Core to chime in. He is a Folio only trader with a 400% NAR if I remember correctly so he should have some hard data.
Steve

Ran

  • Full Member
  • ***
  • Posts: 148
    • View Profile
    • Email
Re: Does "sell on FICO drop" strategy really work?
« Reply #11 on: November 01, 2014, 07:52:11 AM »
I got a few these notes from time to time as well ...

You made a few unsubstantiated statements already, so forgive me for my unbelief, but please let me know the IDs of the notes -- never-late with discount more than 5% -- that you got above.
-5.1%, $19.67 outstanding principal, 10/14
https://www.lendingclub.com/foliofn/loanPerf.action?loan_id=10169814&order_id=15288478&note_id=37352760
-25%, $1.86 outstanding principal, 10/16
https://www.lendingclub.com/account/loanPerf.action?loan_id=1505196&order_id=3326310&note_id=13707251
-19%, $18.88 outstanding principal, 9/26
https://www.lendingclub.com/account/loanPerf.action?loan_id=8755946&order_id=13681195&note_id=34108015
-16%, $5.89 outstanding principal, 10/2
https://www.lendingclub.com/account/loanPerf.action?loan_id=1200080&order_id=9203630&note_id=9524040

Fred

  • Hero Member
  • *****
  • Posts: 1421
    • View Profile
Re: Does "sell on FICO drop" strategy really work?
« Reply #12 on: November 01, 2014, 12:16:10 PM »
-5.1%, $19.67 outstanding principal, 10/14
https://www.lendingclub.com/foliofn/loanPerf.action?loan_id=10169814&order_id=15288478&note_id=37352760
-25%, $1.86 outstanding principal, 10/16
https://www.lendingclub.com/account/loanPerf.action?loan_id=1505196&order_id=3326310&note_id=13707251
-19%, $18.88 outstanding principal, 9/26
https://www.lendingclub.com/account/loanPerf.action?loan_id=8755946&order_id=13681195&note_id=34108015
-16%, $5.89 outstanding principal, 10/2
https://www.lendingclub.com/account/loanPerf.action?loan_id=1200080&order_id=9203630&note_id=9524040

Those are simply "listings" of notes, not actual purchases.  Show snapshots with actual purchase prices, dates, and (partial) account ID.

(Had to deal with regulators/auditors before.)

Victor

  • Jr. Member
  • **
  • Posts: 65
    • View Profile
    • Email
Re: Does "sell on FICO drop" strategy really work?
« Reply #13 on: November 01, 2014, 01:57:55 PM »
I'm waiting for Core to chime in. He is a Folio only trader with a 400% NAR if I remember correctly so he should have some hard data.

"Beetlejuice!"  "Beetlejuice!"  "Beetlejuice!"

Ran

  • Full Member
  • ***
  • Posts: 148
    • View Profile
    • Email
Re: Does "sell on FICO drop" strategy really work?
« Reply #14 on: November 01, 2014, 03:09:33 PM »

Those are simply "listings" of notes, not actual purchases.  Show snapshots with actual purchase prices, dates, and (partial) account ID.

(Had to deal with regulators/auditors before.)
:)