Value of P2P Lending Sector Diversification

[AnilG]

Interesting conversation. In the absence of track record, I expect more transparency and disclosures from platforms. I have stayed away from most P2P lending platform, except Lending Club and Prosper, because none of them want to be transparent in disclosing information about their past and current deals. No opening the loan/deal book, no interest from me.

You never know when someone is running a "ponzi" scheme. Trust but verify.

[SLCPaladin]

You never know when someone is running a "ponzi" scheme. Trust but verify.

The Ezubao peer-to-peer scheme in China and the staggering amount that was lost is enough to make anyone skittish about investing in P2P funds of any sort, especially when attractive returns are floated around as if they were a given. The amount of credibility that Ezubao had and the implicit backing that state-owned media seemed to give it led many Chinese investors to believe if was much safer than it actually was. Then the whole house of cards came tumbling down. Over $7 billion lost.

[Ran]

You never know when someone is running a "ponzi" scheme. Trust but verify.

The Ezubao peer-to-peer scheme in China and the staggering amount that was lost is enough to make anyone skittish about investing in P2P funds of any sort, especially when attractive returns are floated around as if they were a given. The amount of credibility that Ezubao had and the implicit backing that state-owned media seemed to give it led many Chinese investors to believe if was much safer than it actually was. Then the whole house of cards came tumbling down. Over $7 billion lost.

P2P corps in China can operate without proper auditing, which cannot happen for US public companies. Remember that (1) LC's auditing firm is Deloitte and (2) LC went through a wave of scrutiny by IPO underwriters. Now to speak of trustworthiness of auditing firms, Andersen went bankrupt because of Enron scandal, Madoff used a one man auditing firm no one heard of before. To push LC fraud case, one has to really push Deloitte's bankruptcy case

[Half Right]

Interesting conversation. In the absence of track record, I expect more transparency and disclosures from platforms. I have stayed away from most P2P lending platform, except Lending Club and Prosper, because none of them want to be transparent in disclosing information about their past and current deals. No opening the loan/deal book, no interest from me.

You never know when someone is running a "ponzi" scheme. Trust but verify.

What transparency are you looking for? Lending Home or Peerstreet list almost all the details on every loan they made and are in the process of making. With lending Home surpassing $750 million in loans I think a track record has been started for sure and possibly established. I look at these loans the same way I look at Lending Club. Diversify with 800 loans and your return will hit the projected return on the bell curve. only difference is their is an asset backing up your loan. If you don't go above 70% LTV someone else will lose ALL their money before you lose the first nickel

[AnilG]

Lending Club and Prosper has set the benchmark for P2P lending disclosures and transparency. At minimum, I expect historical loan information with detailed attributes considered during due diligence at the time of loan issuance, information on loans in progress, payment file for each loan, and details on the due diligence methodology, collection and payment distribution process.

What transparency are you looking for? Lending Home or Peerstreet list almost all the details on every loan they made and are in the process of making. With lending Home surpassing $750 million in loans I think a track record has been started for sure and possibly established. I look at these loans the same way I look at Lending Club. Diversify with 800 loans and your return will hit the projected return on the bell curve. only difference is their is an asset backing up your loan. If you don't go above 70% LTV someone else will lose ALL their money before you lose the first nickel

[Half Right]

Since they are available only to Accredited investors all the transparency you are looking for is right there in the PPM. Just sign up and prove Accreditation and the info is there in black and white.

For example hypothetically it might read like this:

Our portfolio currently includes over 3,700 loans of which 3.2% have ever hit the 120+ day delinquency stage. Once a borrower is 30 days late on their monthly payment or their maturity date, we consider that loan to be default, and our servicing team works closely with borrowers to bring them back to current. Delinquent loans may, but do not necessarily, produce a loss. Of four foreclosures and two short sales to date, only one resulted in a loss of principal.

What I am wondering is are you looking for all the attributes available to LC, such as FICO scores, inquiries, etc? 
If so you are in the wrong business. I have been lending hard money on real estate for 30 years. as long as the LTV is appropriate and the rate meeting my parameters I will usually make the loan as long as the borrower hasn't filed cha 7 or 11 , and has some other minimal attributes. But my primary security is the property. I am more concerned if its a judicial or non judicial foreclosure state.

What i have learned over the years is that when a borrower has 25% or more of the properties value on the line, he would much rather default on his Lending Club loan than on his property.

[rawraw]

Since they are available only to Accredited investors all the transparency you are looking for is right there in the PPM. Just sign up and prove Accreditation and the info is there in black and white.

For example hypothetically it might read like this:

Our portfolio currently includes over 3,700 loans of which 3.2% have ever hit the 120+ day delinquency stage. Once a borrower is 30 days late on their monthly payment or their maturity date, we consider that loan to be default, and our servicing team works closely with borrowers to bring them back to current. Delinquent loans may, but do not necessarily, produce a loss. Of four foreclosures and two short sales to date, only one resulted in a loss of principal.

What I am wondering is are you looking for all the attributes available to LC, such as FICO scores, inquiries, etc? 
If so you are in the wrong business. I have been lending hard money on real estate for 30 years. as long as the LTV is appropriate and the rate meeting my parameters I will usually make the loan as long as the borrower hasn't filed cha 7 or 11 , and has some other minimal attributes. But my primary security is the property. I am more concerned if its a judicial or non judicial foreclosure state.

What i have learned over the years is that when a borrower has 25% or more of the properties value on the line, he would much rather default on his Lending Club loan than on his property.

Attributes that I would expect

1) Date of last appraisal.
2) Appraisal assumptions for each of the three methods along with the values
3) global DSCR
4) Project DSCR given certain metrics changing (occupancy, rent/sqft, this depends on type of property)
5) Guarantor information, such as liquidity and income
6) Yield on debt (this is not the cost of the debt paid)

I'm sure there are other metrics, but those are top of mind.  To me, that example paragraph is meaningless.

[Fred93]

...I have been lending hard money on real estate for 30 years. as long as the LTV is appropriate and the rate meeting my parameters I will usually make the loan as long as the borrower hasn't filed cha 7 or 11 , and ... What i have learned over the years is that when a borrower has 25% or more of the properties value on the line, he would much rather default on his Lending Club loan than on his property.

With the web sites lending to flippers, LTV doesn't mean the same thing as it does for an ordinary owner-occupied mortgage.  The "V" in the LTV is often the supposed future value of the property AFTER intended upgrades are made.  If the flipper fails in mid-project, then the upgrades are not made, and the value of the property isn't the "V" in the formula.

I'm still waiting for good historical data. 

[Ran]

http://www.bloomberg.com/news/features/2016-08-18/how-lending-club-s-biggest-fanboy-uncovered-shady-loans
Let me throw today's Bloomeberg news article into the discussion. To be clear, Bloomberg journalists are extremely good at generating clicks by exploring public's emotion, be it greed or fear. And this article is negative as usual on LC, but it does open a window into how LC has transformed in the past a few years

[Rob L]

If you don't go above 70% LTV someone else will lose ALL their money before you lose the first nickel

Just beginning to take a look at this. Maybe a new "home" for some of the funds I recently withdrew from LC. Sorry for the bad pun.
Concern one is loaning money to "I flip homes.llc" and would want to see their track record. Concern two is "LTV"; who supplies the "V"?
Haven't made any direct inquiries but probably will.
Since I'd like to invest IRA funds and LendingHome is set up with SDIRA (same as LC) this it simplifies things for me.

[Half Right]

http://www.bloomberg.com/news/features/2016-08-18/how-lending-club-s-biggest-fanboy-uncovered-shady-loans
Let me throw today's Bloomeberg news article into the discussion. To be clear, Bloomberg journalists are extremely good at generating clicks by exploring public's emotion, be it greed or fear. And this article is negative as usual on LC, but it does open a window into how LC has transformed in the past a few years

I guess you can never have "enough transparency". I agree with the article writer in that I am letting my account wind down over time by not reinvesting and withdrawing my collections daily. It will take a while to see if LC can turn this around.

[JustTryinToMakeABuck]

Since they are available only to Accredited investors all the transparency you are looking for is right there in the PPM. Just sign up and prove Accreditation and the info is there in black and white.

For example hypothetically it might read like this:

Our portfolio currently includes over 3,700 loans of which 3.2% have ever hit the 120+ day delinquency stage. Once a borrower is 30 days late on their monthly payment or their maturity date, we consider that loan to be default, and our servicing team works closely with borrowers to bring them back to current. Delinquent loans may, but do not necessarily, produce a loss. Of four foreclosures and two short sales to date, only one resulted in a loss of principal.

I started this thread, and I have PPMs for six funds in front of me, though only two deal with real estate.  (The two are from http://www.alphaflow.com/ and http://www.pmifunds.com/funds-2/real-estate-lending-fund/, and if you are aware of other funds that invest only in marketplace real estate debt, I'd appreciate it if you'd point me to them.) None of the PPMs (and neither of the PPMs for the real estate funds) include anywhere near this kind of detail. 

As a general rule, all the PPMs I've read run more or less like this:

• A page or two summarizing why you're likely to make money with the fund.
• A few pages covering the administrative structure of the fund and its general policies, including free structures, constraints on withdrawals, etc.
• Many, many pages explaining all the things that could go wrong, how you could lose your entire investment, and, in general, how only a fool would consider this kind of investment.

PPMs do have useful information, but they don't contain anywhere near as much as their length and serious-looking print would lead you to expect. Furthermore, virtually all contain wording like this (from one of the PPMs I have):

THIS MEMORANDUM IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE LIMITED PARTNERSHIP AGREEMENT OF THE FUND AND THE SUBSCRIPTION AGREEMENT RELATING THERETO, COPIES OF WHICH WILL BE MADE AVAILABLE UPON REQUEST AND SHOULD BE REVIEWED PRIOR TO PURCHASING AN INTEREST. IN THE EVENT THAT THE DESCRIPTION IN OR TERMS OF THIS MEMORANDUM ARE INCONSISTENT WITH OR CONTRARY TO THE LIMITED PARTNERSHIP AGREEMENT OR THE SUBSCRIPTION AGREEMENT, THE LIMITED PARTNERSHIP AGREEMENT AND THE SUBSCRIPTION AGREEMENT SHALL CONTROL.

In other words, the fact that the PPM says something about the fund doesn't mean it's true. You have to check the partnership and subscription agreements, which are different long, serious-looking documents, the primary distinguishing feature being that they actually mean something.

The kind of information you seem to expect a PPM to contain is more likely to show up in a monthly investor newsletter that describes the current state of the fund's investments. In my experience, the most recent such newsletter is generally delivered prior to or at the same time as the PPM when you contact the fund and ask for information.

[Fred93]

None of the PPMs (and neither of the PPMs for the real estate funds) include anywhere near this kind of detail. 

That is typical.  Funds put as little detail as possible in the PPM.  Anything they put in writing either could restrict them later, or someone could argue wasn't quite correct.

This is another reason for not investing thru the funds.

Why aren't you investing directly?

[JustTryinToMakeABuck]

Why aren't you investing directly?

To quote myself from a couple of days ago:

Two reasons:

• I don't want to choose the investments myself. I have no experience in loan evaluation, and I don't want to acquire the necessary expertise. Just as I pay somebody to prepare my income tax returns, I'm happy to pay somebody to evaluate and select loans and lending platforms for me.
• I don't want to be limited to the loans available on a single platform. Places like LendingHome and PeerStreet offer auto-investing options (which I use with LC), but they can choose only from the loans available on their platform. 

Fundamentally,  I believe somebody who does loan selection for a living will do a better job at it than I could myself.

[scotty0318]

Fred93...... What is your experience so far with Groundfloor? I'm interested but am clearly a little hesitant with this being such a young company. Are you seeing decent return? They advertise 12% average.