Author Topic: Recoveries of Charge-Offs  (Read 10814 times)

jpildis

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Recoveries of Charge-Offs
« on: August 27, 2016, 11:06:02 AM »
I've been consistently selling my Late loans once it's clear they are going to charge-off (days since last payment >100).  I generally price them right at the edge of the market to ensure they sell and this is usually a 90% discount of principal + accrued interest.

They always sell very quickly (even when the FICO is <500) which got me thinking... someone is out there mopping-up these soon-to-charge-off loans and I assume they are not doing it as a charity.  Has anyone recently ran the numbers on recoveries based on grade, FICO, etc.?

Thanks

Larry321

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Re: Recoveries of Charge-Offs
« Reply #1 on: August 27, 2016, 04:03:46 PM »
jpildis,

90% discount?!?!

Are you operating under the theory that late notes are likely to default and that at least 10% is better than nothing?

I might borrow your strategy.

This past month, my adjusted net value has not gone up.
I have to find a way to recoup form the increased defaults.

LC notes investor for 3 years

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rawraw

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Re: Recoveries of Charge-Offs
« Reply #2 on: August 27, 2016, 08:41:30 PM »
Seems like your behavioral bias from avoiding defaults is costing you money.

Fred

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Re: Recoveries of Charge-Offs
« Reply #3 on: August 28, 2016, 12:04:16 AM »
I might borrow your strategy.

Don't borrow somebody's strategy just because it "makes sense."

late notes are likely to default and that at least 10% is better than nothing?

This is generally  not true -- there are a lot of nuance.  Recovery rates are not a single-variable risk factor.  You need to include at least Grades, Terms, and Vintages.

rj2

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Re: Recoveries of Charge-Offs
« Reply #4 on: August 28, 2016, 02:21:39 AM »
It would be nice to have some hard data, but we only have pseudo answers. LC is not transparent enough about recoveries for us to be able to price defaults properly.

90% seems about right for something about to default.  Any future payments have to be discounted by a very high interest rate to reflect time value of money at the appropriate (very high) level of risk.

 What LC calls a recovery of 12% for defaulted loans is actually both principal and interest lumped together. The amount of principal recovered is less as you have to adjust it for interest, likely running 30% or more annual, or so. So if it takes 6 months to recover 12%, about 2% of the 12% is interest and about 10% is actually recovered capital.

So 90% discount on loans about to default seems close, but this is just guessing unless somebody has hard data.

I'm not convinced grade and term matter here, but vintage probably does. The grade is by definition subprime, it's distressed debt. It's"H" grade and lower, below G, regardless of what it was before it defaulted it's subprime now. CURRENT credit score is relevant though.

The term is the expected recovery timeline, under 9 months. It's no longer relevant to think about the original term. The vintage on the other hand may matter as it may be correlated with fraud or other factors.
« Last Edit: August 28, 2016, 02:36:49 AM by rj2 »

Fred

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Re: Recoveries of Charge-Offs
« Reply #5 on: August 28, 2016, 03:20:04 AM »
It would be nice to have some hard data, but we only have pseudo answers. LC is not transparent enough about recoveries for us to be able to price defaults properly.

This is available, if you know where to look.

As a first step, you will need to download the payment history files.

jpildis

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Re: Recoveries of Charge-Offs
« Reply #6 on: August 28, 2016, 08:06:06 AM »
I downloaded the 2014 & 2015 loan file (not the payment data) and crunched some numbers.  I had to make some assumptions to determine the date of charge-off but, after that, the data is pretty straightforward.

A few findings:

- After a loan being charged off for 12 months, about 60-70% of them have some recovery
- I'm seeing recovery rates of 8 to 14% (including the ones with no recovery)
- If you can screen for those loans most likely to get a recovery, I guess there's money to be made but the economy is very strong and interest rates are very low.  Not sure if this is a durable strategy if the economy softens.

jpildis

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Re: Recoveries of Charge-Offs
« Reply #7 on: August 28, 2016, 08:27:35 AM »
Seems like your behavioral bias from avoiding defaults is costing you money.

That remains to be seen.  I generally wait until the note is over 100 days late and I can generally get my 10% recoup (regardless of vintage, term and grade).  I'm not seeing recovery rates exceeding 14% on any durable basis so, yes, I may be leaving a few percentage points on the table.

rawraw

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Recoveries of Charge-Offs
« Reply #8 on: August 28, 2016, 08:32:18 AM »
LendingClub recovery rates for that bucket would suggest that 90 percent is awfully high. Unless you're worse than average on risk, seems that's a big difference. Isn't charged off notes recovery rate like 5 percent?

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jpildis

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Re: Recoveries of Charge-Offs
« Reply #9 on: August 28, 2016, 08:44:19 AM »
LendingClub recovery rates for that bucket would suggest that 90 percent is awfully high. Unless you're worse than average on risk, seems that's a big difference. Isn't charged off notes recovery rate like 5 percent?

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Well, 90% is where the Folio 'ask' meets the invisible 'bid'.  There's lots of inventory between 85-90% discounts that don't move so I guess the people "who have figured it out" don't have the capital to snap-up the under-priced inventory?  I've watched the extremes of the folio pricing for quite awhile and 31+ Lates have the most consistent pricing.  It's been 89-91% discounts for 2 years.

rawraw

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Re: Recoveries of Charge-Offs
« Reply #10 on: August 28, 2016, 08:50:27 AM »
LendingClub recovery rates for that bucket would suggest that 90 percent is awfully high. Unless you're worse than average on risk, seems that's a big difference. Isn't charged off notes recovery rate like 5 percent?

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Well, 90% is where the Folio 'ask' meets the invisible 'bid'.  There's lots of inventory between 85-90% discounts that don't move so I guess the people "who have figured it out" don't have the capital to snap-up the under-priced inventory?  I've watched the extremes of the folio pricing for quite awhile and 31+ Lates have the most consistent pricing.  It's been 89-91% discounts for 2 years.
Well for anyone purchasing a note, they need a positive return plus buffer for uncertainty. So who knows what the market "hurdle rate"  is. I think Anil has published some analysis on this

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AnilG

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Re: Recoveries of Charge-Offs
« Reply #11 on: August 28, 2016, 12:26:16 PM »
Selling Delinquent Notes on Lending Club Folio Secondary Market, Part 1: Loss Aversion
https://www.peercube.com/blog/post/selling-delinquent-notes-on-lending-club-folio-secondary-market-part-1-loss-aversion
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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
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Fred

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Re: Recoveries of Charge-Offs
« Reply #12 on: August 28, 2016, 01:24:13 PM »
Below is a table of Folio price statistics this morning:



As you can see, you don't have to go all the way to 90% discount to sell your "Late (31-120 days) - A - FLAT - 60" note.  A discount of 58% is enough to make it more desirable than its peers.

rj2

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Re: Recoveries of Charge-Offs
« Reply #13 on: August 28, 2016, 02:47:58 PM »
I downloaded the 2014 & 2015 loan file (not the payment data) and crunched some numbers.  I had to make some assumptions to determine the date of charge-off but, after that, the data is pretty straightforward.

A few findings:

- After a loan being charged off for 12 months, about 60-70% of them have some recovery
- I'm seeing recovery rates of 8 to 14% (including the ones with no recovery)
- If you can screen for those loans most likely to get a recovery, I guess there's money to be made but the economy is very strong and interest rates are very low.  Not sure if this is a durable strategy if the economy softens.

Are you able to calculate the present value of these recoveries at the time of default? So is a payment is received one year later discount it by one year's interest. What rate to use is s good question, but 30% or something similar to the highest interest rate LC charges seems reasonable.

If the math results in something close to price where late notes sell in folio I think we have an answer.

AnilG

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Re: Recoveries of Charge-Offs
« Reply #14 on: August 28, 2016, 07:35:45 PM »
Just because you listed a 31+ days delinquent note for sale at 58% discount doesn't mean it will sell at that discount.

In general, you have much better chance of selling 31+ days delinquent note at ~86+% discount, about the point when post sale gains approach zero, not accounting for time value of money.

Below is a table of Folio price statistics this morning:

http://i.imgur.com/i2mxouX.png

As you can see, you don't have to go all the way to 90% discount to sell your "Late (31-120 days) - A - FLAT - 60" note.  A discount of 58% is enough to make it more desirable than its peers.
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PeerCube Thoughts blog https://www.peercube.com/blog
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