LC FICO vs Loan Grade

[Rob L]

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

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



Not what I would expect... Go figure...

[rawraw]

Is this analysis assuming you sell and hold cash vs holding notes to maturity or default?  It seems like from your methodology that is the case.  And these are no longer month-to-month changes in FICO, right?  Thanks for posting

[Rob L]

Is this analysis assuming you sell and hold cash vs holding notes to maturity or default?  It seems like from your methodology that is the case.  And these are no longer month-to-month changes in FICO, right?  Thanks for posting

Yes, once you have sold or the loan matured (Paid Full or Charged Off) the proceeds go to cash. End game for that investment.
Yes, the new chart is Fico change from origination to either a sell event or to maturity.

[rawraw]

Is this analysis assuming you sell and hold cash vs holding notes to maturity or default?  It seems like from your methodology that is the case.  And these are no longer month-to-month changes in FICO, right?  Thanks for posting

Yes, once you have sold or the loan matured (Paid Full or Charged Off) the proceeds go to cash. End game for that investment.
Yes, the new chart is Fico change from origination to either a sell event or to maturity.

Does that make sense? I think everyone reinvents the proceeds back into new notes.

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[Rob L]

Is this analysis assuming you sell and hold cash vs holding notes to maturity or default?  It seems like from your methodology that is the case.  And these are no longer month-to-month changes in FICO, right?  Thanks for posting

Yes, once you have sold or the loan matured (Paid Full or Charged Off) the proceeds go to cash. End game for that investment.
Yes, the new chart is Fico change from origination to either a sell event or to maturity.

Does that make sense? I think everyone reinvents the proceeds back into new notes.

Sounds like a fair point.
However, if proceeds were reinvested in similar loans using the same sell/hold strategy I don't think it would change the results.
It would just make the game go on longer (assuming I have started with a large enough sample size of loans to begin with). No?
Anyway, I'll leave proof / disproof of that up to the reader. Really a guess on my part, but I get your point.

[rawraw]

Is this analysis assuming you sell and hold cash vs holding notes to maturity or default?  It seems like from your methodology that is the case.  And these are no longer month-to-month changes in FICO, right?  Thanks for posting

Yes, once you have sold or the loan matured (Paid Full or Charged Off) the proceeds go to cash. End game for that investment.
Yes, the new chart is Fico change from origination to either a sell event or to maturity.

Does that make sense? I think everyone reinvents the proceeds back into new notes.

Sounds like a fair point.
However, if proceeds were reinvested in similar loans using the same sell/hold strategy I don't think it would change the results.
It would just make the game go on longer (assuming I have started with a large enough sample size of loans to begin with). No?
Anyway, I'll leave proof / disproof of that up to the reader. Really a guess on my part, but I get your point.

But the game going longer results in more cash flow, which is what your comparing.

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[Rob L]

Is this analysis assuming you sell and hold cash vs holding notes to maturity or default?  It seems like from your methodology that is the case.  And these are no longer month-to-month changes in FICO, right?  Thanks for posting

Yes, once you have sold or the loan matured (Paid Full or Charged Off) the proceeds go to cash. End game for that investment.
Yes, the new chart is Fico change from origination to either a sell event or to maturity.

Does that make sense? I think everyone reinvents the proceeds back into new notes.

Sounds like a fair point.
However, if proceeds were reinvested in similar loans using the same sell/hold strategy I don't think it would change the results.
It would just make the game go on longer (assuming I have started with a large enough sample size of loans to begin with). No?
Anyway, I'll leave proof / disproof of that up to the reader. Really a guess on my part, but I get your point.

But the game going longer results in more cash flow, which is what your comparing.

Yeah, I know. Why did you have to mess with my mind on this! I do value my sleep!
Maybe better way would be XIRR on all buy and hold and second XIRR on sell Fico change strategy.
Or, perhaps what would be the required returns for idle money that equaled buy and hold.
Head hurts and I'm outa gas here. This has gone way beyond my pay grade.
However, I will stick with long term, no change in investment strategy, equals results I provided.
If that is wrong I'll be happy to concede the point.

[rawraw]

The interesting question, that I never thought of fully, is the assumption the game continues. So this has been helpful to my thinking. My returns always decline when I stop selling fico drops and I used to track it a few years ago to see if I was avoiding more defaults. But I always implicitly assumed the game continues forever. So appreciate the conversation

[Rob L]

Okay, so I slept. There is a part of my mind that works "in the background"; not a conscious process, but solutions to problems seem to just pop out from nowhere. Thus it was this morning when I woke up and instantly knew I'd made an awful mistake in this analysis and I even knew exactly what it was. It was plainly a stupid error and I'd just as soon not tell the world how dumb I'd been. Let me instead correct the charts I've posted and provide replacements. They certainly seem more reasonable to me; not to say there's no more dumb stuff in there! Once again Caveat Emptor! None of the revised charts addresses the "time value of money" after loans are sold which "rawraw" has quite validly suggested as a factor that should (possibly) be part of the analysis. LOL! if my analysis continues to screw thing up so badly that will be small potatoes.












Good the Patriots had a bye week or I'd never had an opportunity to correct my mistake.

[SLCPaladin]

This is awesome work. I'm not sure I fully understand the data though. It seems like your first chart, from the most recent set of charts, shows that a FICO change of -90 to -100 which are sold for 1) a 5% discount 2) at par or 3) a 5% premium all have a 0% difference in return when compared to buy and hold. I don't see how that would be possible. It seems the return for selling the note at a 5% premium should be at least 5% higher than a note sold at par. Maybe I simply am not understanding the data you're presenting.

[Rob L]

This is awesome work. I'm not sure I fully understand the data though. It seems like your first chart, from the most recent set of charts, shows that a FICO change of -90 to -100 which are sold for 1) a 5% discount 2) at par or 3) a 5% premium all have a 0% difference in return when compared to buy and hold. I don't see how that would be possible. It seems the return for selling the note at a 5% premium should be at least 5% higher than a note sold at par. Maybe I simply am not understanding the data you're presenting.

The first chart is sales based on month to month FICO change.
There are so few loans with a month to month FICO change of -90 or -100 they don't add up to any meaningful % of the total no matter what they do. A -90 drop month over month results in 96 loans sold and 2241 loans held. For a -100 drop the numbers are 45 sold and 2292 held. (For simplicity I'm using number of loans as a proxy for $ amount in this reply. Dollar value computations were used to create the charts.)

[SLCPaladin]

Am I to understand a note with -20 month-to-month change in FICO sold at a a 5% discount would result in a -2.2% return vs. simply holding the note? Likewise, a -20 month-to-month change in FICO that is sold at a 5% premium would net a 1.5% increase in yield vs. selling the note on Folio? Of course, we're tlaking about 2013 Q1 36-term D notes that you analyzed. I just want to make sure I'm understanding the chart. If I understand correctly, your data -- at least for this subset -- implies that it is almost always better to sell a dip in FICO score as long as you are selling for par or at a premium, is this an accurate summary?

[Rob L]

Yes, exactly; you got it. Breakeven at 0% Mkup/Disc (including 1% service fee) appears to be a 25 point FICO drop. Who woulda thought ...
Now all we have to worry about is that I wake up tomorrow with another epiphany invalidating my results published to date. Caveat Emptor!

Don't necessarily think I screw up more than most (certainly not much less), but I freely admit when I do.
Think that's been an important contributor to whatever success I've had in my other endeavors.

However, I'm sleeping better and don't have anything rattling around in the back of the head except "rawraw's" time value of money.
That would argue the results are even somewhat pessimistic.

Keep in mind we are talking about D grade notes here! I'm sure the results for less risky loans (lower interest rate) would be quite different.

[rawraw]

I've never tracked it, but it seems anecdotally that you are correct.  I'm not as concerned with a FICO drop from 800 to 750 but I am extremely concerned with a 660 to 610.

[Rob L]

Yeah, I think you're exactly right.
It's not often mentioned but odds versus FICO score is not a straight linear relationship.
Actually the log of odds (i.e. fully paid's / charge off's) is very close to linear FICO scores.
Straight line on a log graph and all that. Or so I've heard ...

BTW: I chose D grade loans to analyze simply because they make up 65% of my portfolio.
Maybe I should be doing a bit of Folio selling again.