I've never bought a note on folio, but I want to. The thing that scares me away is that I feel like I'm at a competitive disadvantage on the platform for a number of reasons. First off, I'm not a developer, so I can't auto-buy with scripts. But more than that, I feel like if a note is up for sale, I might be the sucker vacuuming up something that someone doesn't want, only I'm not clever enough to figure out what some in-house quant has cracked the code on. In other words, I am suspicious about the quality of the notes on the platform. My line of thinking is, "If these notes are being sold, maybe there's a reason that I should think twice about buying them." Call me cynical, conservative, or naive, that's just the way I think.
I'd be curious as to how other people buy notes and tackle the issue I struggle with. It's not obvious to me that simply buying a note at x% discount results in a better purchase than buying a fresh note off the regular LC platform. Of course I understand buying notes for individuals who live in restricted states, that's a whole other ball of wax. But I feel like if you're going to buy a note off of Folio, you have to figure out (a) whether the interest rate is better than what can be had on the retail LC platform (b) what the probability of default looks like for the note you are buying. Then, you have to come to some conclusion that justifies why buying a note on the secondary market is better than buying a newly issued note. Don't forget to factor in taxes!
I sat down one Sunday evening and came up with a fairly complex Excel formula that attempted to take into account interest rate differentials (e.g., notes issued recently have a higher interest rate, so even if one does manage to buy a discounted note on folio, it may not necessarily result in a higher return) and probability of charge-offs based on the vintage curve (using data from Insikt) and remaining life of the loan. I also made subjective adjustments such as, "What is the value (to me) of reducing my portfolio duration by buying a secondary note?" and "What about the prospect of rising interest rates?" Basically the question I was trying to answer was this: Is it better to buy a note on the secondary platform or just buy fresh loans. The end result? It was super complicated and time consuming. I took a handful of notes and plugged them into my formula and found that some were better deals, but many were't. The sheer time this took, along with the nagging feeling that I might be missing something--possibly something big--has proved to be a significant barrier to making my first Folio trade. Maybe if this were a full-time thing for me I'd spend more time, but for now I'm just buying notes with basic filters on LC.
