Worst Month Yet

[lascott]

Simply taking the numbers from the 2015 monthly statements and computing charge offs as a percent of principal invested and as a percent of interest received I came up with the following (easy stuff; no NAR, IRR, XIRR, etc.)

Rob L,
You made me curious what mine looks like.
Here it is but note that I only started this account in 03/2014 and it currently has an avg age of 8.6 mos.

Charged Off as a % of Interest
Image: http://i.imgur.com/YS66vtg.png

(I multiplied the Principle % by 100 to scale it)

[Rob L]

Can I ask you what is your current adjusted net annualized return?
Once your portfolio is over 18-24 months, the returns really start slipping to between 6-8% and with the tax consequences of so many write-offs you may even have a negative return.

My ANAR has slipped to 9.65% from 10.65% a couple of months ago and my account is IRA. I understand the tax inefficiency of investing in LC notes in a non-tax deferred account and would  sure hate to have the headaches associated with preparing the return. The drop off over time is something I expect as average age increases. I'm just surprised at the suddenness and magnitude of the recent two months charge offs. With so many notes I did not expect the volatility.

[Rob L]

Rob, why did you choose to invest in the D and E notes?  Were you swayed by LC's projections that you would earn over 12%?

No, I never expected 12%-15% returns and I didn't start with the D's and E's. I started more conservatively and increased the riskiness of my portfolio over the first year or so as I learned more about this P2P (whatever) stuff. Thought I would get a better return if I took on more risk but only 1% - 2%. When all is said and done if I make 8% I'm delighted, 6% to 8% happy, less than 6% not happy.

[Rob L]

Based on RaymondG, Bryce, Lascott and me there does seem to have been a surge of charge offs the past couple of months.
Nonattender suggested seasonality. Maybe. Trouble in the oil patch? That's been discussed. Other theories?
Once again I am very surprised at the volatility here. Something that simply owning a lot of notes doesn't ameliorate.

[avid investor]

I wouldn't sweat it.  I have had poor months and great months (just coming off a great one, FYI). and there is a certain "luck of the draw" all of the time.  Keep in mind that I invest electronically through the API, so there are "no poor choices" made manually in my investments.  The software looks at the filters and model and makes the choices.  As a result, I can say that these things do occur as a part of the random selection, but let's face it.  Investing in LC notes is for the long haul.  Anybody that invests $1000 in hopes of having an extra $100 a year later and not reinvesting it would have to be crazy.  The real return is in compounding your returns.  Have a glass of holiday cheer and let it ride.  I've been in for 5 years now - very happy with my returns.

[nonattender]

Nonattender suggested seasonality. Maybe.

Q3 traditionally shows very strong demand; after Q3 comes Q4.

Q3 of year 0="we need money"; Q4 of year 1="check's in mail".

*shrug*

[AnilG]

In 2015, three months with highest charge offs

October	0.4429%
January	0.4376%
September	0.4327%

For All Lending Club loans issued between June 2007 and Sept 2015,

Three months with highest charge offs

October	0.4163%
March	0.4078%
January	0.4076%

Three months with lowest charge offs

June	0.3617%
May	0.3566%
November	0.3561%

Based on RaymondG, Bryce, Lascott and me there does seem to have been a surge of charge offs the past couple of months.
Nonattender suggested seasonality. Maybe. Trouble in the oil patch? That's been discussed. Other theories?
Once again I am very surprised at the volatility here. Something that simply owning a lot of notes doesn't ameliorate.

[Rob L]

In 2015, three months with highest charge offs

October	0.4429%
January	0.4376%
September	0.4327%

For All Lending Club loans issued between June 2007 and Sept 2015,

Three months with highest charge offs

October	0.4163%
March	0.4078%
January	0.4076%

Three months with lowest charge offs

June	0.3617%
May	0.3566%
November	0.3561%

Based on RaymondG, Bryce, Lascott and me there does seem to have been a surge of charge offs the past couple of months.
Nonattender suggested seasonality. Maybe. Trouble in the oil patch? That's been discussed. Other theories?
Once again I am very surprised at the volatility here. Something that simply owning a lot of notes doesn't ameliorate.

Thanks for the ground truth! I can certainly vouch for this October. You looked at all loans, not just D & E's, so mine will be much higher.
Wonder why 2015 charge offs are above the long term average that includes the great recession?
Looking at my 2015 numbers and assuming a normal distribution my November charge offs were a tad under 2 sigma.
I guess a 20 to one shot can be expected after about 32 months but that's way over simplifying it.
Note there are 30 days in June and November; two of the three overall lowest charge off months. I did not account for that. Makes my current November result that much more askew. All in all though well within the expected uncertainties of marketplace lending.

Meanwhile the beers have helped enormously!

[Lovinglifestyle]

Reading all of this prompted me to at least look at last month, November.  Charge offs reported on the LC statement + sale losses (of graces) as reported by Interest Radar add up to a simple 40% of interest earned.  That's a hefty investment fee.

[AnilG]

F & G grade charge offs seems to have taken off since May this year. Overall 2015 charge-offs are within the median +/- 95% CI for past 8 years on annual basis. The charge offs bottomed out in 2012 and have been rising since then. We are back to 2010 level in 2015.

January, March, October and December tend to be outside median +/- 95% CI on monthly basis.

Thanks for the ground truth! I can certainly vouch for this October. You looked at all loans, not just D & E's, so mine will be much higher.
Wonder why 2015 charge offs are above the long term average that includes the great recession?
Looking at my 2015 numbers and assuming a normal distribution my November charge offs were a tad under 2 sigma.
I guess a 20 to one shot can be expected after about 32 months but that's way over simplifying it.
Note there are 30 days in June and November; two of the three overall lowest charge off months. I did not account for that. Makes my current November result that much more askew. All in all though well within the expected uncertainties of marketplace lending.

Meanwhile the beers have helped enormously!

[rawraw]

Are many of you guys involved in watching the credit markets?   There has been signs of weakness.  Of course there is consumer weakness in some parts of Texas, North Dakota, Oklahoma, etc.  But the fall in oil combined with the rising dollar is really pressuring the industrial economy -- some are claiming we are in an industrial recession.   And then the leveraged loan market recently seemed to freeze briefly before the banks had to make concessions to get the deals done.  Weakness in the securitization market. Etc. I just think there are some credit cracks starting to show.

And like I've said many times on this forum, people need to realize where we are at in the consumer cycle.  Things are not going to get much better from here, only worse.  I've been recently cleaning my account out of high grade notes I suspect have weakness due to their locations and job titles in anticipation of these credit trends that started a few months ago.

[RaymondG]

Peter had a post recently about eREIT, link: http://www.lendacademy.com/fundrise-launches-first-ever-ereit-to-invest-in-commercial-real-estate/. Is anyone going to try it? I signed up but I do not know when it's available to me. It would most likely have much less charge-offs. The chargeoff rates published by Federal Reserve: http://www.federalreserve.gov/releases/chargeoff/chgallsa.htm

[RaymondG]

Rob, why did you choose to invest in the D and E notes?  Were you swayed by LC's projections that you would earn over 12%?

No, I never expected 12%-15% returns and I didn't start with the D's and E's. I started more conservatively and increased the riskiness of my portfolio over the first year or so as I learned more about this P2P (whatever) stuff. Thought I would get a better return if I took on more risk but only 1% - 2%. When all is said and done if I make 8% I'm delighted, 6% to 8% happy, less than 6% not happy.

Given your risk profile and satisfied with 8% return, I would choose to diversify on loan grades too.

It is not guaranteed that the return will always correlate to the risks you take, especially when the risks are not clear. Someone in AIG felt happy to collect money from selling CDS in good time. They under estimated the risk and had no hedge in place and have to bite the consequence.

[CircleT009]

I think that most people have experienced lower returns over the last quarter, but I do not think it is an issue just with the last quarter.

I think the biggest reason for the decreasing returns is a result of LC lowering interest rates at least 3-4 times in the last 18 months.  It is really hard to maintain our current risk appetite, not modify our filters and expect to maintain our old returns.  We take the same risk for a lower average interest rate, it is simple math.

I also think supply has severely decreased over the last 12-18 months (at least for my filters).  2-3 years ago I was able to reinvest payments + $20k of new cash a month at $25 per loan without an issue.  I have been forced to expand my filter criteria as well as my per loan investment.  I now take more risk at a lower interest rate than I would have received had I taken that level of risk in the past.  What I am finding is I am investing an increasing % of funds at a lower interest rate to simply get funds invested. 

I am not saying cash drag is a result of decreased returns, I am simply not adding the level of new funds to the account that I would have in the past.  As we all know, the returns are higher on "younger" funds, so the less "younger" funds and the increase in "aged" funds results in lower returns as well.

I am sure some will disagree, but I have a different strategy/objective than most.  I am not worried about investing $10-20k and making 15%.  My strategy needs to be able to invest $30k+ a month and maintain a consistent return.  My personal IRA account has under $30k in it and makes 11.3%, but this account only gets $5.5k a year of new funds and I do not care if it takes 2 months to invest that $5.5k.  So waiting for the right higher interest rate loans is easy. Dealing with accounts that have over $25k of monthly payments is a different beast.

I could go on forever, but will leave it at that.  I think P2P provides great returns compared to all other fixed income style investments.  Yes returns are going down, but I do believe just in the last 2 weeks or so, LC actually increased rates on some loans. 

[Rob L]

I think the biggest reason for the decreasing returns is a result of LC lowering interest rates at least 3-4 times in the last 18 months.  It is really hard to maintain our current risk appetite, not modify our filters and expect to maintain our old returns.  We take the same risk for a lower average interest rate, it is simple math.

I also think supply has severely decreased over the last 12-18 months (at least for my filters).  2-3 years ago I was able to reinvest payments + $20k of new cash a month at $25 per loan without an issue.  I have been forced to expand my filter criteria as well as my per loan investment.  I now take more risk at a lower interest rate than I would have received had I taken that level of risk in the past.  What I am finding is I am investing an increasing % of funds at a lower interest rate to simply get funds invested. 

I was beginning to write a post and you took the words out of my mouth. I'll admit I have loosened my loan standards over the past year too. Bottom line is that it takes a lot more notes to produce the same amount of interest than it used to. More notes, more charge offs. I'm not saying your comments imply a direct cause and effect for my two crummy months but address the big picture. For backup:

The charge offs bottomed out in 2012 and have been rising since then. We are back to 2010 level in 2015.

And like I've said many times on this forum, people need to realize where we are at in the consumer cycle.  Things are not going to get much better from here, only worse.  I've been recently cleaning my account out of high grade notes I suspect have weakness due to their locations and job titles in anticipation of these credit trends that started a few months ago.

This leads me back to the thread I started Oct 6 this year suggesting LC should begin to raise interest rates.
http://www.lendacademy.com/forum/index.php?topic=3435.0

Don't think the idea garnered much support but I'll suggest it again. I freely admit I don't know how to quantify my risk and count on LC to do that job for me. I've heard Prosper 1.0 didn't work out very well; primarily because they left this job up to lenders. It is in LC's vital interest to get this right over the long term and stay ahead of the curve. Sure the world is awash in lenders today, but once burned lenders don't typically come back (institutional ones too). There will always be borrowers and they won't always have the upper hand. It appears financial repression and the end of ZIRP are at hand. Very slowly back to a more normal world where chasing yield may be somewhat less necessary.

Yes returns are going down, but I do believe just in the last 2 weeks or so, LC actually increased rates on some loans.

This I hadn't heard but is most welcome news. I just took a look at the interest rate chart on the LC web site. Except for G grade a few months ago I can't see any appreciable change. If you have a link or something please share it.