Author Topic: LC raises rates 10/2016 and updates loss forecast #s  (Read 16424 times)


nonattender

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #1 on: October 14, 2016, 05:38:59 PM »
It's a big, imprecise-looking cut - gonna impact volume - but at least they're acting.  Hopefully will optimize cut to better target ONLY the problem population, not cut off an entire arm because one finger gangrenous...  In general, a step in the right direction, but just a start.

ETA:  Unless it *was* a very precise cut and that much origination volume was actually affected/properly in scope for these changes. :o
« Last Edit: October 14, 2016, 06:02:29 PM by nonattender »
A little nonsense now and then is relished by the wisest men.

Fred93

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #2 on: October 14, 2016, 06:46:22 PM »
It's a big, imprecise-looking cut - gonna impact volume - but at least they're acting.

Whoa ... I think my normally skeptical friend nonattender accidentally had his skeptical circuits turned off when he read the 8K.  Today's 8K first rehashes changes made many months ago, and only THEN tells you what changes were made today, and today's changes seem very small.  Were you reading about the old changes and thinking they were the new changes?

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1. Increasing Interest Rates. As disclosed in the Form 8-K we filed today, effective October 14, 2016, interest rates on the Lending Club platform will increase by a weighted average of 26 bps. Rate increases are concentrated in Grades F and G with marginal changes in other grades. Increased interest rates enable Lending Club to continue to provide borrowers with competitive interest rates and investors with solid risk-adjusted returns. (See further detail in the Form 8-K and below.)

A 26 bps increase ain't gonna fix what is wrong.  Even this little change is concentrated in F & G, which I do not invest in, so these changes aren't going to help me at all.

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2. Tightening Credit. In line with actions taken throughout 2016, the thresholds on borrower leverage were tightened on October 12, 2016. The platform will no longer approve loans for certain sub-segments of borrowers who meet a combination of several risk factors such as high revolving debt, multiple recently opened installment loans, and higher risk scores on our proprietary scorecard. Accordingly, approximately 1% of borrowers who previously would have been able to obtain a loan under prior underwriting criteria will no longer be approved.

Credit filtering changes that remove 1% of borrowers ain't gonna fix what is going wrong.

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3. Supplementing Collections Efforts. Lending Club utilizes a multifaceted servicing strategy and makes enhancements regularly. Over the past several months, we have invested in additional tools to drive collections effectiveness, added new recovery strategies, added a new agency partner and expanded our internal collections team capacity. The early signs of all of these changes are positive and are allowing us to help our borrowers be more successful while driving better recovery rates.

This may help.  We know we've got bad stuff in the portfolio, and about the only way they can improve performance of loans already issued is by intensifying collections.  Sadly, the news here is completely nonspecific.  I'm glad they "use a multifaceted servicing strategy", but those words mean nothing.  "adding new recovery strategies" sounds good, but what does did they actually do?  Are the new strategies "call in the afternoon, instead of morning", or are they substantive?  Frankly, I don't care for such generalities masquerading as information.

SeanMCA

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #3 on: October 14, 2016, 07:10:10 PM »
Am I reading this right?

Projected investor returns on G-grade loans have dropped 313 basis points between April and today...
I'm a merchant cash advance veteran exploring the p2p lending waters.

Fred93

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #4 on: October 14, 2016, 07:20:34 PM »
Am I reading this right?

Projected investor returns on G-grade loans have dropped 313 basis points between April and today...

Yea, I think so, and that's for NEW loans, at the new interest rates. 

G-grade loans you bought a few months ago at lower interest rates will have even lower returns.

SeanMCA

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #5 on: October 14, 2016, 07:21:22 PM »
that's terrible! that's a huge shift.
I'm a merchant cash advance veteran exploring the p2p lending waters.

Fred93

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #6 on: October 14, 2016, 11:03:17 PM »
The 8-K that LC published today, contains a letter to investors, signed by LC's Chief Investment Officer Siddhartha Jajodin.  I was pretty disappointed by this announcement.  The letter is heavy on spin.  Unfortunately, it doesn't contain anything that would reassure us that he actually knows what is going on.

It does make two serious admissions tho.  At least that's progress.

He writes
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Consistent with observations earlier this year, we have continued to observe higher delinquencies in populations characterized by high indebtedness, an increased propensity to accumulate debt, and lower credit scores.

Bah, that's all stuff they've told us before.

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Although the trend can now be observed across grades,

This is an important admission.  You will recall that earlier they had dismissed credit deterioration by saying it was "pockets of underperformance".  Them's fancy words for "not widespread", ie "contained" so "don't panic". 

Now they have admitted what you and I already knew, that the problem is widespread.  Admitting you have a problem is an important step, which it appears we have finally taken.

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it is less notable in lower risk grade and more notable in higher risk grades...

A true statement.  See the delinquency curves by grade in the other thread about recent credit quality.
http://www.lendacademy.com/forum/index.php?topic=4113.msg37921#msg37921

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Higher delinquencies are more evident in 2015 and early 2016 vintages, which coincides with an uptick in consumer indebtedness in the U.S.

Here he's trying to make excuses for LC's bad credit performance, based on the notion that things are bad for the consumer.  This is completely wrong.  Yes, consumers are taking on more debt.  However, every measure of consumer loan PERFORMANCE you can find shows that overall performance of consumer loans, credit cards, etc is continuing to get better month by month.  I show Federal Reserve and American Bankers Association data in the other thread.
http://www.lendacademy.com/forum/index.php?topic=4113.msg37947#msg37947
http://www.lendacademy.com/forum/index.php?topic=4113.msg37948#msg37948

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[Fed of NY] reported that the median respondent to its monthly survey reported an increase in the probability of missing a minimum debt payment over the next three months to be the highest level since February 2014.

Its interesting data, so I plotted it.  For those looking for credit stats, I had previously been using Fed Reserve of St Louis (FRED system), but Fed Reserve of NY has consumer credit data that looks at loans different ways, all of which is interesting.


“Source: Survey of Consumer Expectations, © 2013-2015 Federal Reserve Bank of New York (FRBNY). The SCE data are available without charge at /microeconomics/sceIndex and may be used subject to license terms posted below. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.”

That's interesting, but note that this survey reports how people are thinking about the future, ie their feelings, and these feelings apply to the borrowers at banks as well as LC.  At the banks, payment delinquency is going down.  At LC delinquency is going up.  Bzzt.  The excuse doesn't fit the data.

Also, if the consumer is getting stressed now, that would result in decreasing performance for payments due now for loans of all vintages.  That's not what we see.  Its the recent vintages that are performing poorly.  Bzzt.  The excuse doesn't fit the data. 

And, the timing doesn't really fit.  Sure there is an uptrend in that curve at the right end, but it begins in 2016, and the bad vintages started in early 2015.  Bzzt.  The excuse doesn't fit the data.

More likely something went wrong with LC's underwriting, eh?

Finally, they have updated their estimated credit loss numbers, admitting that loans are performing worse than previous models. 

C loan annual loss went from 4.76% in Nov2015 to 6.49% now, a 1.73% increase. 

E loan annual loss went from 8.94% in Nov2015 to 13.35% now, a 4.41% increase. 

From watching them adjust these numbers over a few years, I believe they have a model which averages over many past years, so does not adapt to rapid change.  Something changed rapidly in 2015, and the model is slowly seeing it.  I expect another adjustment (up) a month or two from now.

So what do they say they're doing about it?  The letter begins by talking about the changes they made 6 months ago.  Don't be dazzled by this.  That's not news!  Read past it to the news in the section titled "additional enhancements", which describes the changes actually made today...

They are...
1. Increasing rates today an average of 0.26%

2. Tightening credit filters, which will exclude 1% of previously eligible borrowers.

3. Supplementing Collections Efforts.  Sadly on this item they give us only generalities, such as "Lending Club utilizes a multifaceted servicing strategy".  Ho hum.  What did they actually change?  We don't know.  "we have invested in additional tools".  Like what?  "added new recovery strategies"  Like what exactly?  More phone calls?  I applaud improved collections efforts, if they actually have substance.  No way to tell.

Did he convince you that he understands the problem and has implemented the solution and we're done?

We now know that loans issued from early-2015 forward perform significantly worse than loans prior to that time, and we know that each quarter since then, delinquency performance is worse than the quarter before.  Something broke at LC, and needs to get fixed.  Slowly jacking up rates and tightening the DTI filter just don't seem to be likely attacks on the fundamental cause. 

What is the fundamental cause?  We don't know.

After reading the announcement, I don't think Mr Jajodin views us investors as members of the team.  I vote for less spin and generalities,  more openness and transparency.

« Last Edit: October 15, 2016, 04:55:25 AM by Fred93 »

SLCPaladin

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #7 on: October 15, 2016, 12:33:49 AM »
Okay Fred93, I buy, and follow, every bit of your analysis. I think you're correct on all fronts, which is worrying for me as an investor. I expect another rate bump up in a couple of months, either due to the Fed increasing interest rates or higher-than-predicted delinquencies, possibly both.

But I suppose what I'm most interested in is what you plan to do? Are you on the sidelines, are you continuing to reinvest, or are you liquidating your portfolio? This question, of course, is open to anyone really. As for myself, I started reinvesting about 2 months ago. But I'm now thinking I need to hit the pause button and wait to see how much rot is in the system.

SeanMCA

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #8 on: October 15, 2016, 12:38:32 AM »
I hate to say this but the first time I ever saw Scott Sanborn speak in person was a few weeks ago at a conference and my impression was that he is in way over his head. Compared to the confidence that Laplanche used to exude, I don't think Sanborn has what it takes to even pretend that there is a bright future. I walked away thinking the company's best days were well behind it.
I'm a merchant cash advance veteran exploring the p2p lending waters.

SeanMCA

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #9 on: October 15, 2016, 12:47:27 AM »
After reading the announcement, I don't think Mr Jajodin views us investors as members of the team.  I vote for less spin and generalities,  more openness and transparency.

My gut tells me that they want to phase out individual retail investing altogether and that they've been thinking about it for awhile.
I'm a merchant cash advance veteran exploring the p2p lending waters.

Fred93

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #10 on: October 15, 2016, 02:09:06 AM »
Okay Fred93, I buy, and follow, every bit of your analysis. I think you're correct on all fronts, which is worrying for me as an investor.

I'm in shock that somebody read that all the way thru!


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But I suppose what I'm most interested in is what you plan to do? Are you on the sidelines, are you continuing to reinvest, or are you liquidating your portfolio? This question, of course, is open to anyone really. As for myself, I started reinvesting about 2 months ago. But I'm now thinking I need to hit the pause button...

My software is reinvesting every day.  However, I have changed my filters several times during 2016.  Some of these changes were adaptations which changed which variables were most important, as I observed 2015 loans behave differently.  Less emphasis on income, more on credit variables.  Some of the changes were simply shifts in my range of subgrades toward the safer end.  I used to be [b5..e3] then [b4..e1], etc, and today [b3...d3].

I'm searching for clarity.  If LC has indeed let the underwriting go to crap, that seems a much worse sin than the little stuff Laplanche was accused of. 

storm

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #11 on: October 15, 2016, 03:01:58 AM »
I will say I am impressed LC sent an e-mail to both my taxed and IRA account e-mail addresses pointing out that platform investors ought to read this.  I hope they continue doing this as well as separating the shareholder information from the platform data.  They could have just made another SEC filing and hope nobody noticed.

Thanks, as always, Fred93.  I'm not much of a numbers guy (or letters for that matter), but your charts speak volumes.

DLIFVOIP

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #12 on: October 15, 2016, 09:32:32 AM »
I know there are others posting in this topic that have been investing for years, so I am not the only one who has noticed the below.  I started investing on LC in Dec 2009. 

Everyone is correct and LC is finally starting to admit that defaults/charge offs are increasing across all grades.  While this is not a good thing, back in the "good ole days" say 2010-2011 (maybe even thru 2012), it was not as big a deal as it is today, because the interest rates were so much higher than they are today. 

2010 - A1 - 6.03%
2016 - A1 - 5.32% (and that is the new updated rate)  That is a 12% decrease and again that is the updated 5.32%.

2011 - B1 - 9.91%
2016 - B1 - 8.24% (again this is the new updated rate) 17% decrease

I am not saying those were the rates for the entire year, but just examples.  I used to make my bread and butter returns in the A and B grade loans because defaults were so low and interest rates were decent.  I am also not saying other grades have not seen increases, but as someone who preferred high quality loans, I have seen my net return decrease from low 10% to low 8%.

I have also noticed the "quality" of borrower who received these lower interest rates over the years has deteriorated.  So overall LC has decreased interest rates and lowered the quality of borrower who gets the lower rate loans.  As investors we have been forced to take more risk for less return. 



 

rawraw

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #13 on: October 15, 2016, 12:12:24 PM »
Fred93, I think you are asking the right questions but may be making a simple mistake.  You are right to compare LC to the industry, but unfortunately those industry data sets are not vintages.  I'm sure you understand the difference, so not so sure why you are alarmed they are diverging.  The vintages will show weakness way before an aggregate level will show weakness. 

Also, not so sure if lower grade LC notes are comparable to the industry metrics you are choosing.  The subprime ABS market is experiencing increases in delinquencies.  Surely LC falls in between the two, with the high grades being closer to subprime than bank credit IMO. 

And like I've posted about ad nasuem, consumer credit can't get much better.  These things go in cycles and everything isn't always the underwriters fault.  I follow these markets pretty closely given my job and there is a lot of concern about near-term trends in consumer credit, especially low FICO.  Which seems consistent with LC

« Last Edit: October 15, 2016, 12:14:54 PM by rawraw »

SLCPaladin

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Re: LC raises rates 10/2016 and updates loss forecast #s
« Reply #14 on: October 15, 2016, 04:40:54 PM »
Quote

I'm in shock that somebody read that all the way thru!


I always read your stuff, it's some of the best around! I'm mostly re-investing in B-C notes right now (all sub grades), though the composition of my total portfolio is heavier on the lower grade notes from several years back. I began shifting towards higher quality notes in an attempt to minimize the tax consequences of charge-offs because my larger account is not an IRA.

I was thinking today of the statistics that LC started posting on the login page a few months ago:

Solid Returns Since 2008

99.8% of investors who own 100+ Notes of relatively equal size have seen positive returns.

89.6% earn 5%+
10.2% earn between 0-5%
0.1% earn below

This may be stating the obvious, but investor returns are the golden egg that LC needs to be vigilant about protecting. As soon as investors decide that the risk/return proposition doesn't make sense, they will leave, and it will be difficult -- perhaps impossible -- to coax them back. The best way to continue to keep capital on the platform is to make sure interest rates are high enough (and underwriting standards tight enough) to keep investor returns sufficiently high. LC has two sets of customers: borrowers and lenders. Both need to be happy.

I hope with all the discussion and strategizing around attracting more capital that LC execs don't forget what keeps capital on the platform: returns. Returns have always been and will always be the key to keeping capital at work.
« Last Edit: October 15, 2016, 04:44:37 PM by SLCPaladin »