LC is the Next Internet Bubble

[rawraw]

Credit card default rates were 3.2x higher from peak through trough, and it was only for a temporary period. If the weighted default rate is 4.29% and the average rate being 11.38%, then the worst performance given another 2008-like financial crisis would yield -2.3% during peak charge-off periods. Relatively speaking, that's not bad given that -2.3% would have probably been the best performing fixed income asset class during that time period. Also, portfolios that actively avoid certain risks (example: purposes such as small business and home improvement, or higher income) would probably not see a negative year.

Historical Credit Card composite default rates


Lending Alpha's Balanced Strategy expected to remain positive at 3.2x default environments


Currently modeled date from LendingClub: 11.38% interest rate, 4.29% default rate

Really good article and concerns about Lending Club along with other hype cycle darlings. I believe a few others on the board has expressed similar sentiments. It is given that default rates will shoot up and the lenders will take all of the brunt. How many lenders will still be continuing to lend in that environment?

Lending Club is another one -- an online loan broker now valued at about $7.95 billion. Lending Club is supposedly exploiting a new community model of lending, providing borrowers and lenders a new direct, community-based market place. But Lending Club is brokering unsecured, consumer loans. Has anyone thought what might happen to unsecured loans in the next recession? Well you can be pretty sure default rates will shoot up and lenders will be stung -- then said lenders will just stop making these consumer loans. So the likelihood is that sooner or later, Lending Club's volumes will actually decrease, not rise. And yet it is only massive future rises in Lending Club's volumes that can justify the current stock price.

http://www.thestreet.com/story/13040401/1/amazon-twitter-uber-lending-club-and-the-next-internet-bubble.html?puc=TSMKTWATCH&cm_ven=TSMKTWATCH

Bubblicious!

While the credit card data is interesting, a default on a credit card is different than a default on an installment loan given the amortization. There is more money to have to pay back on a LC note, so I expect this will influence the default rates vs credit card. Also, that credit card data is an average and we don't know what the average borrower for that compares to LC. But it is a good starting point

[Fred93]

While the credit card data is interesting, a default on a credit card is different than a default on an installment loan given the amortization. There is more money to have to pay back on a LC note, so I expect this will influence the default rates vs credit card. Also, that credit card data is an average and we don't know what the average borrower for that compares to LC. But it is a good starting point

The federal reserve has many data series for different kinds of loans.  They all have the same shape, showing something like a 3x increase in the 2009/10 crisis.  It doesn't seem to matter what kind of loan.  The absolute default rates are different, but they all have the bump.  I therefore use 3x as a rule of thumb.  I choose my strategy under the presumption that default rates will increase by 3x some time in the future.

Here's a chart I posted a few months ago.  It shows two of these data series.  There are many more.

[rawraw]

Yes, I'm familiar with the Federal Reserve.  Although they don't gather the data themselves, they just index.  I have some free time avoiding Mardi Gras this weekend, perhaps I'll pull some of this data in a little more detail and create some series for the forum since I've been meaning to anyway for personal reasons.   I'm skeptical though, that the balance strategy still makes money but don't know what it actually invests in.  I built a rough stress test in Excel a while back and been meaning to revisit it, but my portfolio barely broke even or lost a little and I'm more than 60% in ABC.

[Fred93]

I'm skeptical though, that the balance strategy still makes money but don't know what it actually invests in.

I also have no idea what lendingalpha is doing, so I have no opinion about their approach.  Their numbers look a little odd.  For my own strategy, I made sure that I'd be ok if defaults went up by 3x, and I suggest that for others.  Sounds like LA was trying to do something similar.

I built a rough stress test in Excel a while back and been meaning to revisit it, but my portfolio barely broke even or lost a little and I'm more than 60% in ABC.

If you mean that your calculation showed you'd "barely break even" after something like a 3x increase in defaults, or whatever level you chose, that's good.  I believe that there are a lot of people who have not bothered to do this sort of calculation.

I adjusted my strategy to break even at a 3x increase in defaults.  That's the amount of risk I want to take.  My strategy (at least by my calculations) does it without investing in A grade loans at all.

[rawraw]

I'm skeptical though, that the balance strategy still makes money but don't know what it actually invests in.

I also have no idea what lendingalpha is doing, so I have no opinion about their approach.  Their numbers look a little odd.  For my own strategy, I made sure that I'd be ok if defaults went up by 3x, and I suggest that for others.  Sounds like LA was trying to do something similar.

I built a rough stress test in Excel a while back and been meaning to revisit it, but my portfolio barely broke even or lost a little and I'm more than 60% in ABC.

If you mean that your calculation showed you'd "barely break even" after something like a 3x increase in defaults, or whatever level you chose, that's good.  I believe that there are a lot of people who have not bothered to do this sort of calculation.

I adjusted my strategy to break even at a 3x increase in defaults.  That's the amount of risk I want to take.  My strategy (at least by my calculations) does it without investing in A grade loans at all.

Yeah that's what I meant. And I agree with your post. I was hoping to share my spreadsheet but haven't fine tuned it yet and made sure I agree with the short cuts it takes

[mchu168]

Consumers are saving like never before.  And given sluggish growth in the US and globally, we are facing a very prolonged credit cycle.  No need to worry...for now.

[bobeubanks]

Consumers are saving like never before. 

Never before? Data from the Fed doesn't back that up at all: https://research.stlouisfed.org/fred2/data/PSAVERT.txt

Better than 2005-7 but similar to other years since the late 1990s and it is now still lower than historical savings rates.

[Booleans]

Consumers are saving like never before.

[Unfolder]

Never before? Data from the Fed doesn't back that up at all: https://research.stlouisfed.org/fred2/data/PSAVERT.txt

Better than 2005-7 but similar to other years since the late 1990s and it is now still lower than historical savings rates.

I don't think that anyone that needs an LC loan (or any personal loan) has saving or budgeting skills, bar very specific circumstances like health crises or short term business loans resulting from some boom/bust. To me, anyone borrowing from LC is a deadly risk, from A to G, and separating radioactive slag from just normal slag is a fun but ultimately pointless thing when THE SHOCK^TM comes. As we saw during the mortgage meltdown, both the good and the bad were slain with pretty much equal abandon, and only those with liquidity (those already pretty well off) survived, indeed, prospered greatly. Those winners probably were never hitting up payday loans before or after the crunch.

Therefore I invest in all G's because those are the highest yields, and get me the most money. The G's will survive as well as the A's give or take a few percents barring no recession. If a recession comes, all these charts and modeling algorithms go up in smoke very quickly.  Needless to say, I am very bullish on the US economy, I don't see any shock that could destroy it, given how much liquidity the corps are sitting on. If I believed otherwise, I would definitely not be investing in consumer debt, any consumer debt. But yeah:

 

Consumers are saving like never before.  And given sluggish growth in the US and globally, we are facing a very prolonged credit cycle.  No need to worry...for now.

[Fred93]

I invest in all G's because those are the highest yields, and get me the most money. The G's will survive as well as the A's give or take a few percents barring no recession. If a recession comes, all these charts and modeling algorithms go up in smoke very quickly.

Ok.  We have a difference of opinion.  I believe all the grades will have their default rates roughly multiplied by the same amount, which will do great damage to returns on G loans.

[mchu168]

Consumers are saving like never before.

What a bullish chart!

[rawraw]

Never before? Data from the Fed doesn't back that up at all: https://research.stlouisfed.org/fred2/data/PSAVERT.txt

Better than 2005-7 but similar to other years since the late 1990s and it is now still lower than historical savings rates.

I don't think that anyone that needs an LC loan (or any personal loan) has saving or budgeting skills, bar very specific circumstances like health crises or short term business loans resulting from some boom/bust. To me, anyone borrowing from LC is a deadly risk, from A to G, and separating radioactive slag from just normal slag is a fun but ultimately pointless thing when THE SHOCK^TM comes. As we saw during the mortgage meltdown, both the good and the bad were slain with pretty much equal abandon, and only those with liquidity (those already pretty well off) survived, indeed, prospered greatly. Those winners probably were never hitting up payday loans before or after the crunch.

Therefore I invest in all G's because those are the highest yields, and get me the most money. The G's will survive as well as the A's give or take a few percents barring no recession. If a recession comes, all these charts and modeling algorithms go up in smoke very quickly.  Needless to say, I am very bullish on the US economy, I don't see any shock that could destroy it, given how much liquidity the corps are sitting on. If I believed otherwise, I would definitely not be investing in consumer debt, any consumer debt. But yeah:

 

Consumers are saving like never before.  And given sluggish growth in the US and globally, we are facing a very prolonged credit cycle.  No need to worry...for now.

What you are saying didn't happen and doesn't make much sense.  But the fact that you view the world as binary does explain your persona on this forum now lol

[yojoakak]

I invest in all G's because those are the highest yields, and get me the most money. The G's will survive as well as the A's give or take a few percents barring no recession. If a recession comes, all these charts and modeling algorithms go up in smoke very quickly.

Ok.  We have a difference of opinion.  I believe all the grades will have their default rates roughly multiplied by the same amount, which will do great damage to returns on G loans.

I dunno. He might have a point.

"More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist."

"Biggest Defaulters on Mortgages Are the Rich", July 8, 2010
http://www.nytimes.com/2010/07/09/business/economy/09rich.html?pagewanted=all&_r=0

[Fred93]

You seem to be confusing "people with expensive houses" with "people with good credit scores".

[kya]

having worked in consumer lending for 30 plus years I can tell you one thing.... fico scores matter when estimating loss! ... most of us in sr. mgmt at one time or another tried to argue they didnt... the static pools of loss fell right in line all the way down the chart....