Author Topic: LC lowers rates gain  (Read 22508 times)

Unfolder

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Re: LC lowers rates gain
« Reply #15 on: February 05, 2015, 11:50:10 PM »
Indeed, LC has introduced grades below the visible ABCDEFG grades.  They are not offering them on the retail platform however.  They are available in the form of a fund from LC Advisors (a division of LC).  This fund is available to accredited investors.  You can call LC and get the info.  I have not invested in it, as I believe that these loans will perform poorly in the next downturn (whenever that is).  I don't invest in F or G loans either for same reason.

While I appreciate LC's good intentions and middling results in defense of its investors' capital, it is continually baffling to me to see logic like this locking borrowers out of the main market. The whole POINT of LC is to make wild gambles seeking extreme yields feasible, not just feasible, but halfway reasonable en masse and in scale to one's liquidity. Would I sink $10,000 in a meth lab note at 50%? Of course not. But would I loan $1000 dollars to 40 meth heads so they could score? Hmmmm, PERHAPS??? What is suicidal in single becomes at least technically possible in aggregate. LC will succeed, as a public company, based on its BORROWING pool, not its investing pool. If half of LC's investing pool was wiped out tomorrow, all loans would still be filled without difficulty because the world is awash in cash seeking yield. Drowning in it. But the people seeking credit are finite, and sought after on all sides by all parties. GET THEM. ALL OF THEM. MARK THEIR NOTES AS X CLASS BUT GET THEM

bobeubanks

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Re: LC lowers rates gain
« Reply #16 on: February 06, 2015, 12:19:23 AM »
GET THEM. ALL OF THEM. MARK THEIR NOTES AS X CLASS BUT GET THEM

Eventually legal limits to interests rates make it so you can't charge high enough to justify the default risk. Even if you didn't have legal limits to worry about, as interest rates rise, so will default rates - especially for unsecured loans.

RazzleDazzle

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Re: LC lowers rates gain
« Reply #17 on: February 06, 2015, 12:25:14 AM »
Yep. Usury laws and default rates rise proportionally.

Fred

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Re: LC lowers rates gain
« Reply #18 on: February 06, 2015, 01:52:10 AM »
But the people seeking credit are finite, ....

I am not sure what this means.  The number people on earth is finite.  The total money in the world is finite.  The number of stars in the universe is finite.

If you meant the people seeking credit are limited, I'd still disagree.  LC rejected 90% of the applicants, so the pool of people seeking credit is quite large.

I believe recently we had a borrower in this Forum requesting $4000 for a wedding ring.  Looks like nobody wants to "get him"?

Fred93

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Re: LC lowers rates gain
« Reply #19 on: February 06, 2015, 02:08:28 AM »
The whole POINT of LC is to make wild gambles seeking extreme yields feasible, not just feasible, but halfway reasonable en masse and in scale to one's liquidity.

I don't think LC would agree with that characterization.  I think they would object to phrases like "wild gambles" and "extreme yields" while describing the product they sell to the general public.

From LC's perspective, when experimenting with a new class of borrowers which we know are more risky, and while we have no experience or data to quantify the risk or the quality of underwriting, it seems reasonable to offer same at first only to folks who can afford to lose money.  First institutional investors, then accredited investors.  To do otherwise would be to risk the wrath of regulators.

Just my opinion. 


rawraw

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Re: LC lowers rates gain
« Reply #20 on: February 06, 2015, 06:15:33 AM »
Unfolder is the reason why I've long said this will end up getting regulated away from retail investors.  People like that

turing

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Re: LC lowers rates gain
« Reply #21 on: February 06, 2015, 10:31:25 AM »
LC benefits from lower rates because there will be more borrower interest. 97% of their revenue today comes from origination fees and the rest from payment servicing fees. They're lowering rates as their risk models show that default rates are declining. They can also do this because they have an imbalance of investors-to-borrower ratio. Effectively, LC is adjusting their interest rates so that investors are experiencing the same modeled net returns while stimulating borrower demand. They're not necessarily taking away from one place to another. This is a results of the consumer credit market is improving, which you can expect the contrary occurs.

The bolded part is incorrect.  Lending Club is INCREASING their expected default rates in all grades.

I agree that they are trying to stimulate demand, but investors are taking the hit.  I agree with their decision to do it, but I don't think we can say that investors aren't getting hit.  Lower interest rates and higher default rates = lower return.

lascott

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Re: LC lowers rates gain
« Reply #22 on: February 06, 2015, 11:13:32 AM »
LC benefits from lower rates because there will be more borrower interest. 97% of their revenue today comes from origination fees and the rest from payment servicing fees. They're lowering rates as their risk models show that default rates are declining. They can also do this because they have an imbalance of investors-to-borrower ratio. Effectively, LC is adjusting their interest rates so that investors are experiencing the same modeled net returns while stimulating borrower demand. They're not necessarily taking away from one place to another. This is a results of the consumer credit market is improving, which you can expect the contrary occurs.
The bolded part is incorrect.  Lending Club is INCREASING their expected default rates in all grades.

I agree that they are trying to stimulate demand, but investors are taking the hit.  I agree with their decision to do it, but I don't think we can say that investors aren't getting hit.  Lower interest rates and higher default rates = lower return.
Re: INCREASING
http://kb.lendingclub.com/siteupdates/articles/Site_Updates/Updates-to-Interest-Rates-and-Expected-Charge-Off-Rates-Effective-Feb-4-2015
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

DLIFVOIP

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Re: LC lowers rates gain
« Reply #23 on: February 06, 2015, 01:17:43 PM »
LC benefits from lower rates because there will be more borrower interest. 97% of their revenue today comes from origination fees and the rest from payment servicing fees. They're lowering rates as their risk models show that default rates are declining. They can also do this because they have an imbalance of investors-to-borrower ratio. Effectively, LC is adjusting their interest rates so that investors are experiencing the same modeled net returns while stimulating borrower demand. They're not necessarily taking away from one place to another. This is a results of the consumer credit market is improving, which you can expect the contrary occurs.
The bolded part is incorrect.  Lending Club is INCREASING their expected default rates in all grades.

I agree that they are trying to stimulate demand, but investors are taking the hit.  I agree with their decision to do it, but I don't think we can say that investors aren't getting hit.  Lower interest rates and higher default rates = lower return.
Re: INCREASING

http://kb.lendingclub.com/siteupdates/articles/Site_Updates/Updates-to-Interest-Rates-and-Expected-Charge-Off-Rates-Effective-Feb-4-2015


My thoughts exactly.  Charge off rates are increasing and interest rates decreasing.  Lose lose for the investor.  Same/more risk with less return. 

As someone who has been investing in LC for over 5 years now, the last 6-9 months have been nothing like the first 4.25-4.5 years.  Quality of loans is decreasing (I understand that is subjective), interest rates have been lowered 3 times, charge off rates are increasing.  Hopefully this trend will slow or stop, but I have seen my IRR go from 10.xx% to just over 9%.  That is a pretty big swing when you consider how many notes I hold and that I have basically been able to purchase every single loan that I want over that 5+ year period.

Maybe if the Fed increases rates LC may do the same, but otherwise I fear this is going to turn into an investment that has a lot higher risks than fixed income but returns the same as fixed income.  I understand we are a long way away from that, but it is a fear of mine.

avid investor

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Re: LC lowers rates gain
« Reply #24 on: February 06, 2015, 01:26:36 PM »
I get the complaint about lower rates and lower yields for the retail investor.  Still, LC is in a sweet spot for me between low-return CD's (don't have any) and my wild ride in equities (which lost 5-digits in January and already made back 5-digits in February).  At least LC is not that volatile and still produces a respectable return.

RazzleDazzle

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Re: LC lowers rates gain
« Reply #25 on: February 06, 2015, 01:44:34 PM »
Circle your fear is not unfounded.

After all in the 80's thirty year treasury bills were paying 20+%...

Fred93

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Re: LC lowers rates gain
« Reply #26 on: February 06, 2015, 02:04:35 PM »
Quality of loans is decreasing (I understand that is subjective), interest rates have been lowered 3 times, charge off rates are increasing.  Hopefully this trend will slow or stop, but I have seen my IRR go from 10.xx% to just over 9%.

You are not alone.  LC's own broad-based fund (essentially an index fund of loans) has dropped from around 8.5% to around 7.5% .

The magic is (slowly) evaporating.

avid investor

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Re: LC lowers rates gain
« Reply #27 on: February 06, 2015, 02:12:37 PM »
Quality of loans is decreasing (I understand that is subjective), interest rates have been lowered 3 times, charge off rates are increasing.  Hopefully this trend will slow or stop, but I have seen my IRR go from 10.xx% to just over 9%.

You are not alone.  LC's own broad-based fund (essentially an index fund of loans) has dropped from around 8.5% to around 7.5% .

The magic is (slowly) evaporating.

Fred, I still say that before you heard about P2P, you would have been excited to hear about how you can get 8% returns.  We've been spoiled with 10+.  Even after all these years in LC, I am still getting over 8.5%, and have to work a lot harder to get the same amount out of real estate investments.  I only had to develop the API front-end and the rest is on auto-pilot.  I just monitor the results.  I may be in the minority here, but my write-offs have not increased significantly over the past year.

Unfolder

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Re: LC lowers rates gain
« Reply #28 on: February 06, 2015, 02:39:31 PM »
Yep. Usury laws and default rates rise proportionally.

Damn it.

Unfolder is the reason why I've long said this will end up getting regulated away from retail investors.  People like that

Don't hate yield mad fools. Yield mad fools built America and run it. Also vote Republican to make sure it stays that way.


You are not alone.  LC's own broad-based fund (essentially an index fund of loans) has dropped from around 8.5% to around 7.5% .

The magic is (slowly) evaporating.

Still clocking 17% after about a year with a pure G fund *shrugs*

Edit: To add something somewhat constructive, I HAVE noticed that the folio liquidity is seizing up in the last few months. G Notes that could be passed for $20-$18 now cannot get a bid at $13. I've stopped selling them and are just letting the collectors deal with them. The number of waywards is piling up which explains a loss of interest from 20% to 17% but I don't foresee the bottom falling out unless the whole economy starts sucking.
« Last Edit: February 06, 2015, 02:42:09 PM by Unfolder »

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Re: LC lowers rates gain
« Reply #29 on: February 06, 2015, 03:00:37 PM »
I stand correctly on the lower rates and higher default rates (as modeled by LC). Upon further review of the new interest rates and LC's blog posts of expected charge off rates, it's clear that the move was an investor returns squeeze. Granted, they can do this since they continue to have an imbalance of investor-to-borrower ratio.

https://lendingalpha.com/blog/2015-02-06-lending-clubs-investor-returns-squeeze/



http://ir.lendingclub.com/Cache/c27458795.html
http://kb.lendingclub.com/siteupdates/articles/Site_Updates/Updates-to-Interest-Rates-and-Expected-Charge-Off-Rates-Effective-Feb-4-2015

The biggest relative impact was for the A and B grade investors. The weighted-net return is now at 7.10%, down from 7.46%  according to LC's models. If I have to guess, the trend of squeezing returns from investors will continue until they have a balance between investor vs. borrower dollars. In addition, changing market interest rates (Fed) and default rates (economic change) will also adjust the loan interest rates in the future. For now, changes due to the investor squeeze is still on the table, especially given how quickly they made the change since the last time (October 29, 2014).

Also a comment on this lose-lose situation for the investors: The attractiveness of this investment vehicle is confirmed by the high investor imbalance relative to borrowers. This is because investors continue to acknowledge the high returns relative to the risks (and free diversification of risk). Though the future expected net returns are lower, it is still an attractive investment vehicle for investors.
« Last Edit: February 06, 2015, 03:05:27 PM by LendingAlpha.com »
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