LC FICO vs Loan Grade

[Fred]

For the secondary market, IMO, loan "Status" is a more significant measure of risk than FICO score or trend.

[Fred93]

Suppose Joe's score was 750 when he took out the loan.  Now, a year or two later, his FICO score drops by say 50 points, and suddenly you think you need more interest?  Maybe you do.

Yes, I do.

I compare FICO score of a borrower to credit agency's (S&P, Moody's, Fitch) rating of a company.   When, say, Moody's downgrades the rating of a company, the company's existing bond price decreases, causing the yield to go up, thus "more interest."

In the bond situation, interest rates are very tightly coupled to credit ratings, therefore this is a very clear relationship.

In the case of LC loans, the relationship between FICO score and the interest rates at the start of a loan is very weak.  Extremely weak.  Shockingly weak.  See the curves above.

That's a big difference.

Another difference, and I think this is central to the whole thing ... At the start of a loan, we have a lot of other information in addition to the FICO score.  Later we have nothing but the FICO score (for a current & neverlate loan).  Thus the FICO score has different value to us in these two situations.

Any quantitative evaluation of the value of the FICO score has to take into account the difference in these two situations.

[fliphusker]

Rob I have a Citi too and if they want to give me cash for using their card and not carry a balance I am solid with that.  I have numerous CC that do the same thing and I use them for different reasons during the year.  Citi is very good about upping my limit when I do not ask for it.  My credit is what is called in the garden and just growing.  I have nothing that I am going to use my credit for anytime soon.  So I am ok with whatever monthly hits I take.  If you are taking a monthly hit and utilizing that much you need to be asking for an increase.  They bumped me out of the blue to 5500 and not asking for it.  But ya see where buying on the FOLIO market is crazy as your own FICO swings. 
Ya sell on FOLIO you know it is not easy. 

My overall utilization did not change but because I had such a high utilization on just one card it made my FICO go nuts.  The crazy thing here though that when I made a $25 payment to take the utilization under 80% my FICO jumped over 20 points.  How silly is that?

FWIW - similar story; about a year ago we got a Citibank MasterCard that pays 2% cash back on everything. The down side is that the credit limit on the Citibank card is maybe 1/3 that of several other high limit cards we have. So, we use the Citibank card for every purchase possible (we don't carry a month to month balance). In a typical month our charges are 50% of the card limit (minimum) and often 80%+. Depending on the time of the month and balance on that one card our FICO (per Credit Karma) swings up or down 30 points or more. As a percent of our total card limits the amount charged each month is gotta be 5%-10% max, but because it's all on a single card FICO goes bananas. (I know; we should get the limit upped on the Citibank card but haven't gotten around to it.)

[Fred93]

Depending on the time of the month and balance on that one card our FICO (per Credit Karma) swings up or down 30 points or more.

This is the thing we must learn to tame. 

Are you a worse credit risk on those 30 point downswings?

[nonattender]

Depending on the time of the month and balance on that one card our FICO (per Credit Karma) swings up or down 30 points or more.

This is the thing we must learn to tame. 

Are you a worse credit risk on those 30 point downswings?

I'm a "deadbeat", like Rob, who PIF every month on CC's...  I don't think I'm to be tamed, I think I'm (and so's Rob, probably) an edgecase/anomaly who would never consider borrowing money at online lender rates, so, probably very few of these in the mix.

[rawraw]

Suppose Joe's score was 750 when he took out the loan.  Now, a year or two later, his FICO score drops by say 50 points, and suddenly you think you need more interest?  Maybe you do.

Yes, I do.

I compare FICO score of a borrower to credit agency's (S&P, Moody's, Fitch) rating of a company.   When, say, Moody's downgrades the rating of a company, the company's existing bond price decreases, causing the yield to go up, thus "more interest."

In the case of LC loans, the relationship between FICO score and the interest rates at the start of a loan is very weak.  Extremely weak.  Shockingly weak.  See the curves above.

Your curves make no attestation to the relationship between FICO scores and interest rates.  You've just shown that various FICOs can fall into various grades, which is largely due to other note characteristics.  This is far from showing is it shockingly weak connection to interest rates.

[Fred]

Perhaps it would be better if the Y-axis is % rather than $ (i.e., for each grade, show % of population of loans having the FICO score in x-axis -- the area under the curve for each grade should sum to 100%)?

[Rob L]

I put considerably more work into the problem and feel somewhat more confident in my results.
Hypothesis; sudden drop in monthly Fico score of a NeverLate suggests a potential sale on Folio to limit losses from
probable charge off is a smart move. My analysis of 2013 Q1 Grade D loans does not bear this out.
One is never better off to sell, even if a "sucker" is found to buy.

EDIT: THIS CHART IS IN ERROR AND CONTAINS A MAJOR FLAW. IGNORE IT AND SEE CORRECTION BELOW

[Rob L]

Depending on the time of the month and balance on that one card our FICO (per Credit Karma) swings up or down 30 points or more.

This is the thing we must learn to tame. 

Are you a worse credit risk on those 30 point downswings?

For the foreseeable future I am zero credit risk. Hopefully I will remain so.

[Fred93]

Hypothesis; sudden drop in monthly Fico score of a NeverLate suggests a potential sale on Folio to limit losses from
probable charge off is a smart move. My analysis of 2013 Q1 Grade D loans does not bear this out.
One is never better off to sell, even if a "sucker" is found to buy.

Good stuff!

I notice that you used FICO change from prior month.  Can you easily change your software to do the same calc for FICO change from loan-origination-time FICO?

[Rob L]

Hypothesis; sudden drop in monthly Fico score of a NeverLate suggests a potential sale on Folio to limit losses from
probable charge off is a smart move. My analysis of 2013 Q1 Grade D loans does not bear this out.
One is never better off to sell, even if a "sucker" is found to buy.

Good stuff!

I notice that you used FICO change from prior month.  Can you easily change your software to do the same calc for FICO change from loan-origination-time FICO?

Yeah, probably look at that tomorrow; but if it works you really don't expect me to post it do you? 

[rawraw]

I put considerably more work into the problem and feel somewhat more confident in my results.
Hypothesis; sudden drop in monthly Fico score of a NeverLate suggests a potential sale on Folio to limit losses from
probable charge off is a smart move. My analysis of 2013 Q1 Grade D loans does not bear this out.
One is never better off to sell, even if a "sucker" is found to buy.

I've rarely (perhaps never) in my 7 plus years had to sell a never late FICO drop at a 5 percent discount. Not sure where that came from

Sent from my SAMSUNG-SM-G935A using Tapatalk

[Rob L]

I've rarely (perhaps never) in my 7 plus years had to sell a never late FICO drop at a 5 percent discount. Not sure where that came from

Hypothesis; sudden drop in monthly Fico score of a NeverLate suggests a potential sale on Folio to limit losses from
probable charge off is a smart move. My analysis of 2013 Q1 Grade D loans does not bear this out.
Other Grades may perform differently.

Chart updated with spread of Folio Mkup/Disc sales values suggested by rawraw above.

EDIT: THIS CHART IS IN ERROR AND CONTAINS A MAJOR FLAW. IGNORE IT AND SEE CORRECTION BELOW

[rawraw]

I think that's way more useful, because it makes no assumption on price (the 0% line).  Is that still sequential change? 

How are you calculating return?  The problem is FICO drop loans have already paid interest and principal in most cases.  Not sure if you thought through how to address this

[Rob L]

I think that's way more useful, because it makes no assumption on price (the 0% line).  Is that still sequential change?

Don't understand the question regarding sequential change?
 

How are you calculating return?  The problem is FICO drop loans have already paid interest and principal in most cases.  Not sure if you thought through how to address this

Working with an extract of the latest pmthistall.csv file one monthly payment at a time. Five loans were removed from the extract as they appeared not fully matured (just data cleaning and the remaining loan total was 2337).

Buy and hold total $ received is the sum of the RECEIVED_AMT column plus sum of PCO_RECOVERY column minus sum of PCO_COLLECTION_FEE column. This total is a constant dollar value regardless of the numbers of loans sold and held.

For loans not sold the $ received is computed on a per loan basis as described above. Only NeverLate loans may be sold. For loans sold the proceeds is the sales price (remaining principal balance times 1+Mkup/Disc%) - 1% Sales Fee. There is no accrued interest and the sale is made the same month the Fico change trigger is observed.

Then I just add up the total for loans not sold and the total for loans sold to get total proceeds. Finally the percentage returns versus buy and hold is the sum of the ((proceeds from loans held and proceeds from loans sold) divided by the buy and hold total $ received) - 1.

As a sanity check setting the Fico change trigger to -500 results in no loans sold, $27,615,782.78 total proceeds from loans held which exactly matches the buy and hold total.

On the other hand setting the Fico change trigger to +500 results in 2284 loans sold AND 53 held. Who are these 53?Why did my software hold rather than sell.
Well 7 were rollers and made no payments, 16 were semi-rollers making only one payment, and 30 paid in full the first month. Since ya gotta get past month one to be Never Late these loans didn't make it. For the record if all 2284 were sold at a 5% markup it still  falls behind buy and hold by 8.71%.

Meanwhile I feel somewhat out here on a limb. The results are not what I would have expected, but they are what they are.
It would not bother me in the least for somebody out there to point out the errors of my ways. Would not be a first.