Author Topic: I'm thinking of pulling the plug on this experiment  (Read 23055 times)

nonattender

  • Hero Member
  • *****
  • Posts: 713
  • I am not here.
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #15 on: February 12, 2017, 06:54:41 PM »
Yes, I know some have argued (nonattender) that perhaps the fed's stats represent a broader segment of consumers than the segment LC lends to, so maybe this isn't the best data series to use for comparison.  Perhaps.

Speak of the guy who isn't here - and he shall appear. ;)

So, yes and no - I believe I brought up that subprime auto was tanking (and that Jamie Dimon had called it, almost a year ago now) and that the fed's stats were too wide to show that signal deterioration in a such a small frequency band.  I also bitched and moaned, a bit, regarding prepayments (and thereby reinvestment risk) being very high in the lower LC grades (and SeanMCA is still probably looking for smoking gun that says "LC is refinancing these borrowers out from under you!")... and I toyed with, as well, the notion that FICO is "bad" at picking up on CC refinances that go into an installment tradeline, thereby not sufficiently dinging and/or even raising the score of a borrower who does CC->installment debtcon...  All of that aside, I think Anil then chimed in with a comment that the fed stuff has to be taken with a huge grain of salt, anyway, as it doesn't capture credit inflation (the same thing that buying a bunch of new loans will do to one's NAR) and that new credit being extended is probably making the fed stats mostly useless/overbroad, at least for picking up signal that there's any deterioration in particular sectors/segments/niches (and I think MPL is probably still at niche scale, in fed stats).

Then, maybe, the last thing I said was that LC's 6% target expectation (worded in a way that made it sound like they'd controlled a lot for "selection" and had levelled not only a mixed grade portfolio, but ANY grade portfolio down to an expected return of ~6% wasn't an encouraging sign for retails, but it was probably good for LC (you can have - and we can sell - any package over a certain minimum size and it will yield ~6% - no thoughts of "grade" necessary: "you can have the car made in any color you want as long as it's ~6% yield").

Bottom line being, I think - and I read LC's recent 8K to state this (though I may be reading it wrong?) - that ~6% is "expected return".

That's not gonna be appealing to a lot of people who have enjoyed selection/notepicking/underwriting-arb - whatever you want to call that - but it's gonna be very appealing to the majority of insty players and a (probably the majority) bunch of retails who are not 'picky' (or pick by "gut instinct" - read: "I ain't paying for nobody's vacation when I ain't had one in years - screw those guys!"  And screw *that* guy, says I).

That said, flocking to "the next big thing" and pulling out of LC where you've got a near-certainty of not losing money - versus chasing yield in any untested, johnny-come-lately real estate platform where the underwriting is not just wet behind the ears but also still in a diaper - seems to me to be a gross over-reaction and very, very bad form - and I will not feel bad at all for anyone who loses money...

You've been warned.

Going full-bore from LC into any of the new "crowd RE" stuff is like saying:  "I feel uncomfortable in this stagecoach because one of the wheels is wobbly and there are occasionally bumps.  To mitigate that, I'm getting into the brand new coach with smoother wheels - it's designed to carry nitroglycerine, sure, but the seats are nicer, and their new suspension system should make the ride a lot smoother!"

Trim tabs... go into wind-down... sell all your notes and run screaming that you're not making ~10% anymore - but don't get blown up!
« Last Edit: February 12, 2017, 07:55:51 PM by nonattender »
A little nonsense now and then is relished by the wisest men.

Fred93

  • Hero Member
  • *****
  • Posts: 2136
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #16 on: February 12, 2017, 07:00:54 PM »
On this question of whether the degradation in delinquency & charge-off is due to LC or the consumer...

A few months ago I was searching vigorously for more data on the web.  Of course I look for free data first.  Having exhausted the free resources, I subscribed to a very expensive quarterly publication from the American Banker's Association called the "Consumer Credit Delinquency Bulletin".  Cost $280 for the year.  Way above my usual subscription fee pain limit.  I had such angst about the deterioration in the LC data that I paid the money.

Well the first issue arrived.  Full of lots of charts and numbers.  They all show that the consumer is good.  For example, they have charts for 30 days past due stats on 12 categories of loans.

Personal loans... 2012 thru 2016 data is in order, 2016 better than 2015, which is better than 2014, which is better than 2013, which is better than 2012. !!!  There's no sign here of anything getting worse.

Recreational vehicle... same thing.

Home equity... same thing.

Some of the categories don't go precisely in this same year by year order, such as mobile home or auto, but in each case, 2016 is better than most recent years.  Definitely no deteriorating trend to be found.

The bank card delinquency curves show a little blip up during 2016, but its a very small blip, one tenth of a percent.  I can't show you the chart from the ABA document, but the federal reserve's card delinquency data series, tho more crude, has the same general shape.
https://fred.stlouisfed.org/series/DRCCLACBN

We can argue, anticipate, fear whether it will go up or down from here, but there's nothing in any of this data that looks anything like the LC loan performance data.

So far no data source I have found says the consumer is deteriorating.  They might all say so tomorrow, but so far, no.

GS

  • Sr. Member
  • ****
  • Posts: 413
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #17 on: February 12, 2017, 07:48:56 PM »
Chasing return is never a recipe for success with your investment portfolio. You will always be behind the curve and chasing high fliers of today to be disappointed tomorrow. History is full of such examples. If you solely got into Lending Club because of high return, you might be better off re-evaluating your whole investment philosophy and whether you have the mindset to be an investor instead of a trend-chaser.

I got into Lending Club and Prosper from diversification perspective and for direct access to an asset class (consumer lending) that is not typically available to retail investors. Once I reached the level of exposure I wanted to this asset class in 2014, I stopped adding any new funds to the accounts. Since then I stop reinvesting and withdraw cash when account levels get too far ahead of my desired allocation.

I echo the cautious approach of rawraw when considering other alternative lending options. You need to consider, beyond returns, what is different about these other new options, what do you know about the sectors these options are involved in, and why could you do better with these newish options versus tried and true options in same sector, if any.

I've always had the mind set of a long term investor.  I don't really equate periodically examining my portfolio to determine if conditions have changed, something is underperforming, or if I Made a mistake, to "trend chasing".  But I can't ignore the returns trailing off.  We get into investing for the returns, it is a big factor.

I got in here, too, for the diversification, and because the returns were comparable to long term stock market returns, and because I thought if I stick with mostly B C notes it wouldn't tank too bad in a recession.  Now, Im not too sure.  There is big difference from starting at 9-10% to 5-6%, when the economy goes south. 

I haven't decided if I'm getting out, maybe just start scaling back .... If I were to get out, I'd probably just send the money back to my vanguard account, not do something crazy with it.

dr.everett

  • Full Member
  • ***
  • Posts: 234
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #18 on: February 12, 2017, 08:29:30 PM »
Chasing return is never a recipe for success with your investment portfolio. You will always be behind the curve and chasing high fliers of today to be disappointed tomorrow. History is full of such examples. If you solely got into Lending Club because of high return, you might be better off re-evaluating your whole investment philosophy and whether you have the mindset to be an investor instead of a trend-chaser.

I got into Lending Club and Prosper from diversification perspective and for direct access to an asset class (consumer lending) that is not typically available to retail investors. Once I reached the level of exposure I wanted to this asset class in 2014, I stopped adding any new funds to the accounts. Since then I stop reinvesting and withdraw cash when account levels get too far ahead of my desired allocation.

I echo the cautious approach of rawraw when considering other alternative lending options. You need to consider, beyond returns, what is different about these other new options, what do you know about the sectors these options are involved in, and why could you do better with these newish options versus tried and true options in same sector, if any.

I've always had the mind set of a long term investor.  I don't really equate periodically examining my portfolio to determine if conditions have changed, something is underperforming, or if I Made a mistake, to "trend chasing".  But I can't ignore the returns trailing off.  We get into investing for the returns, it is a big factor.

I got in here, too, for the diversification, and because the returns were comparable to long term stock market returns, and because I thought if I stick with mostly B C notes it wouldn't tank too bad in a recession.  Now, Im not too sure.  There is big difference from starting at 9-10% to 5-6%, when the economy goes south. 

I haven't decided if I'm getting out, maybe just start scaling back .... If I were to get out, I'd probably just send the money back to my vanguard account, not do something crazy with it.

This really summarizes my current feelings well.

Rob L

  • Hero Member
  • *****
  • Posts: 2039
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #19 on: February 12, 2017, 09:10:52 PM »
So far no data source I have found says the consumer is deteriorating.  They might all say so tomorrow, but so far, no.

I was of the same opinion until rawraw argued deterioration is occurring now. I had thought the problem was LC specific.
Guess I'll keep an open mind and await more data.

SLCPaladin

  • Full Member
  • ***
  • Posts: 202
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #20 on: February 12, 2017, 11:57:19 PM »
Chasing return is never a recipe for success with your investment portfolio. You will always be behind the curve and chasing high fliers of today to be disappointed tomorrow. History is full of such examples. If you solely got into Lending Club because of high return, you might be better off re-evaluating your whole investment philosophy and whether you have the mindset to be an investor instead of a trend-chaser.

I got into Lending Club and Prosper from diversification perspective and for direct access to an asset class (consumer lending) that is not typically available to retail investors. Once I reached the level of exposure I wanted to this asset class in 2014, I stopped adding any new funds to the accounts. Since then I stop reinvesting and withdraw cash when account levels get too far ahead of my desired allocation.

I echo the cautious approach of rawraw when considering other alternative lending options. You need to consider, beyond returns, what is different about these other new options, what do you know about the sectors these options are involved in, and why could you do better with these newish options versus tried and true options in same sector, if any.

I've always had the mind set of a long term investor.  I don't really equate periodically examining my portfolio to determine if conditions have changed, something is underperforming, or if I Made a mistake, to "trend chasing".  But I can't ignore the returns trailing off.  We get into investing for the returns, it is a big factor.

I got in here, too, for the diversification, and because the returns were comparable to long term stock market returns, and because I thought if I stick with mostly B C notes it wouldn't tank too bad in a recession.  Now, Im not too sure.  There is big difference from starting at 9-10% to 5-6%, when the economy goes south. 

I haven't decided if I'm getting out, maybe just start scaling back .... If I were to get out, I'd probably just send the money back to my vanguard account, not do something crazy with it.

This really summarizes my current feelings well.

This is pretty much where I am too. Over the past 6-9 months I have migrated to predominantly A, B, and a few C grade notes. I'll continue to hang out there with my LC investment unless I see degradation at the front end of the spectrum. I'm kind of at a loss as to where to park funds right now. I want evidence that LC has things under control and that we won't see continued degradation. But I am cash heavy now and and I feel leery about stocks, bonds, and real estate. I feel all three are frothy and due for a correction. When (and if) that will be is anyone's guess. I certainly have no crystal ball.

rawraw

  • Hero Member
  • *****
  • Posts: 2759
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #21 on: February 13, 2017, 07:25:56 AM »


In any case, I will stick by my guns on the concept that you can't make judgements about "consumer behavior" by looking at LC's loan data in isolation.  You can fool yourself, because the same degradation vs time could be a result of changes in underwriting at LC without any change at all in consumer behavior.
Those first vintage graphs he posted aren't from LC.  The Fed data you use is noisy, because you can have delinquency rising but growth outpacing it. The credit reports have the best insight we have into vintages and they show weakness (compared to very low rates previously by historical standards)

The diversification argument really does not matter. These are not stocks with systemic and nonsystemic risks. Suppose for a moment someone said oh well I'm investing in five ponzi schemes instead of one, for diversification. We'd all agree that makes zero sense. The problem is our current situation isn't as clear. Let's group all these guys as market place lenders. Do you think diversification among Subprime lenders really mattered all that much? (I'm only using this example because I'm young and haven't seen plenty of crises) 

When we use the word diversification, we have to be meaningful about it. It's not inherently good if we aren't actually diversifying the types of risk that occur in equities.

We all should not view the returns of an asset class by the maximum value experienced.  Going back to absurd theoretical examples, we'd all laugh if someone made their investing decisions around the stock market always going up 50 percent. What matters is the long run returns. 

Unsecured consumer is easy. We focus on their ability to pay. Adding collateral makes it much easier to make loans they can't pay hoping for the flip. Time and time again, inexperienced lenders get hosed in this market. And while I'm not calling this peak real estate, four percent cap rates are certainly not the trough. And some of the things the online lenders are claiming are eerily similar to no equity down real estate lending from just a few years ago.

I'm all for diversification. But spreading bets isn't always the optimal strategy







Sent from my SAMSUNG-SM-G935A using Tapatalk
« Last Edit: February 13, 2017, 07:41:02 AM by rawraw »

Half Right

  • Jr. Member
  • **
  • Posts: 89
    • View Profile
    • Email
How can LC compete with this?
« Reply #22 on: February 13, 2017, 01:27:52 PM »
"Finally, for the most glaring example of how technology impacts new Goldman product lines, consider that Goldman’s new consumer lending platform, Marcus, aimed at consolidation of credit card balances, is entirely run by software, with no human intervention, according to the CFO. It was nurtured like a small startup within the firm and launched in just 12 months, he said. "

GS

  • Sr. Member
  • ****
  • Posts: 413
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #23 on: February 13, 2017, 01:34:59 PM »
Yes, I know some have argued (nonattender) that perhaps the fed's stats represent a broader segment of consumers than the segment LC lends to, so maybe this isn't the best data series to use for comparison.  Perhaps.

Speak of the guy who isn't here - and he shall appear. ;)

So, yes and no - I believe I brought up that subprime auto was tanking (and that Jamie Dimon had called it, almost a year ago now) and that the fed's stats were too wide to show that signal deterioration in a such a small frequency band.  I also bitched and moaned, a bit, regarding prepayments (and thereby reinvestment risk) being very high in the lower LC grades (and SeanMCA is still probably looking for smoking gun that says "LC is refinancing these borrowers out from under you!")... and I toyed with, as well, the notion that FICO is "bad" at picking up on CC refinances that go into an installment tradeline, thereby not sufficiently dinging and/or even raising the score of a borrower who does CC->installment debtcon...  All of that aside, I think Anil then chimed in with a comment that the fed stuff has to be taken with a huge grain of salt, anyway, as it doesn't capture credit inflation (the same thing that buying a bunch of new loans will do to one's NAR) and that new credit being extended is probably making the fed stats mostly useless/overbroad, at least for picking up signal that there's any deterioration in particular sectors/segments/niches (and I think MPL is probably still at niche scale, in fed stats).

Then, maybe, the last thing I said was that LC's 6% target expectation (worded in a way that made it sound like they'd controlled a lot for "selection" and had levelled not only a mixed grade portfolio, but ANY grade portfolio down to an expected return of ~6% wasn't an encouraging sign for retails, but it was probably good for LC (you can have - and we can sell - any package over a certain minimum size and it will yield ~6% - no thoughts of "grade" necessary: "you can have the car made in any color you want as long as it's ~6% yield").

Bottom line being, I think - and I read LC's recent 8K to state this (though I may be reading it wrong?) - that ~6% is "expected return".

That's not gonna be appealing to a lot of people who have enjoyed selection/notepicking/underwriting-arb - whatever you want to call that - but it's gonna be very appealing to the majority of insty players and a (probably the majority) bunch of retails who are not 'picky' (or pick by "gut instinct" - read: "I ain't paying for nobody's vacation when I ain't had one in years - screw those guys!"  And screw *that* guy, says I).

That said, flocking to "the next big thing" and pulling out of LC where you've got a near-certainty of not losing money - versus chasing yield in any untested, johnny-come-lately real estate platform where the underwriting is not just wet behind the ears but also still in a diaper - seems to me to be a gross over-reaction and very, very bad form - and I will not feel bad at all for anyone who loses money...

You've been warned.

Going full-bore from LC into any of the new "crowd RE" stuff is like saying:  "I feel uncomfortable in this stagecoach because one of the wheels is wobbly and there are occasionally bumps.  To mitigate that, I'm getting into the brand new coach with smoother wheels - it's designed to carry nitroglycerine, sure, but the seats are nicer, and their new suspension system should make the ride a lot smoother!"

Trim tabs... go into wind-down... sell all your notes and run screaming that you're not making ~10% anymore - but don't get blown up!

I kind wonder how LC calculated that 6% ... My LC homepage still says 9.5% for my personal returns, 8% if I turn on folio sales.  My "Understanding Your Returns" page looks like I'm the Warren Buffet of peer to peer lending.  But the reality isn't so pretty.

Fred93

  • Hero Member
  • *****
  • Posts: 2136
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #24 on: February 13, 2017, 01:50:16 PM »
I kind wonder how LC calculated that 6% ...

Expected performance of new loans.


Quote
My LC homepage still says 9.5% for my personal returns, 8% if I turn on folio sales.

That's a calculation of all your history, including old loans that have been producing higher returns than the new loans.

apc3161

  • Newbie
  • *
  • Posts: 43
    • View Profile
    • Email
Re: I'm thinking of pulling the plug on this experiment
« Reply #25 on: February 13, 2017, 03:57:33 PM »
As much as I don't like low returns, what has been upsetting me more is the disconnect between LC's interests and investor interest. For me, the prime example is LC's own re-financing of high interest rate loans.

Basically, we took risk on these high interest rate loans, with the idea that some would default, but the interest rates from the those who don't will make up for this. However, LC then goes and sends emails to all these on-time borrowers and says "hey, want to refinance at a lower rate? No pre-payment fee!". They then collect another 6% processing fee, take away your performing loan (leaving you with non-performing loans), and then charge you a 1% fee just to get your principal back. This is why something like 10% of LC loans go to completion. Honestly, it's total bullshit. It's a total disconnect between your interests and theirs. They literally benefit at your expense.

Until they address this and fix it (prepayment fees, sharing the new origination fee, dropping the 1% fee altogether, etc.), I'm basically not investing any more money and am slowly withdrawing my money as it comes in.

Fred93

  • Hero Member
  • *****
  • Posts: 2136
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #26 on: February 13, 2017, 04:07:05 PM »
This is why something like 10% of LC loans go to completion.

Bzzt.  Where did you get that number?

rawraw

  • Hero Member
  • *****
  • Posts: 2759
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #27 on: February 13, 2017, 04:34:18 PM »
As much as I don't like low returns, what has been upsetting me more is the disconnect between LC's interests and investor interest. For me, the prime example is LC's own re-financing of high interest rate loans.

Basically, we took risk on these high interest rate loans, with the idea that some would default, but the interest rates from the those who don't will make up for this. However, LC then goes and sends emails to all these on-time borrowers and says "hey, want to refinance at a lower rate? No pre-payment fee!". They then collect another 6% processing fee, take away your performing loan (leaving you with non-performing loans), and then charge you a 1% fee just to get your principal back. This is why something like 10% of LC loans go to completion. Honestly, it's total bullshit. It's a total disconnect between your interests and theirs. They literally benefit at your expense.

Until they address this and fix it (prepayment fees, sharing the new origination fee, dropping the 1% fee altogether, etc.), I'm basically not investing any more money and am slowly withdrawing my money as it comes in.
I agree this is a valid concern. But its a hard one to quantify how big of a deal it is. I'm not aware of market place lenders not subject to this problem. Perhaps real estate has less likelihood given the nature of the transaction.

Sent from my SAMSUNG-SM-G935A using Tapatalk


Rob L

  • Hero Member
  • *****
  • Posts: 2039
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #28 on: February 13, 2017, 05:56:38 PM »
As much as I don't like low returns, what has been upsetting me more is the disconnect between LC's interests and investor interest. For me, the prime example is LC's own re-financing of high interest rate loans.

Basically, we took risk on these high interest rate loans, with the idea that some would default, but the interest rates from the those who don't will make up for this. However, LC then goes and sends emails to all these on-time borrowers and says "hey, want to refinance at a lower rate? No pre-payment fee!". They then collect another 6% processing fee, take away your performing loan (leaving you with non-performing loans), and then charge you a 1% fee just to get your principal back. This is why something like 10% of LC loans go to completion. Honestly, it's total bullshit. It's a total disconnect between your interests and theirs. They literally benefit at your expense.

Until they address this and fix it (prepayment fees, sharing the new origination fee, dropping the 1% fee altogether, etc.), I'm basically not investing any more money and am slowly withdrawing my money as it comes in.

I agree this is a valid concern. But its a hard one to quantify how big of a deal it is. I'm not aware of market place lenders not subject to this problem. Perhaps real estate has less likelihood given the nature of the transaction.

Let me point out that it's only hard to quantify since LC intentionally makes it difficult if not impossible to so. Each new loan has a new member ID, even if the loan is to the same party. Were this not the case we could easily determine the prevalence of this practice. What reason, other than its own self interest, does LC have to do this? If one is looking for transparency this is ain't it.

rawraw

  • Hero Member
  • *****
  • Posts: 2759
    • View Profile
Re: I'm thinking of pulling the plug on this experiment
« Reply #29 on: February 13, 2017, 06:00:24 PM »
As much as I don't like low returns, what has been upsetting me more is the disconnect between LC's interests and investor interest. For me, the prime example is LC's own re-financing of high interest rate loans.

Basically, we took risk on these high interest rate loans, with the idea that some would default, but the interest rates from the those who don't will make up for this. However, LC then goes and sends emails to all these on-time borrowers and says "hey, want to refinance at a lower rate? No pre-payment fee!". They then collect another 6% processing fee, take away your performing loan (leaving you with non-performing loans), and then charge you a 1% fee just to get your principal back. This is why something like 10% of LC loans go to completion. Honestly, it's total bullshit. It's a total disconnect between your interests and theirs. They literally benefit at your expense.

Until they address this and fix it (prepayment fees, sharing the new origination fee, dropping the 1% fee altogether, etc.), I'm basically not investing any more money and am slowly withdrawing my money as it comes in.

I agree this is a valid concern. But its a hard one to quantify how big of a deal it is. I'm not aware of market place lenders not subject to this problem. Perhaps real estate has less likelihood given the nature of the transaction.

Let me point out that it's only hard to quantify since LC intentionally makes it difficult if not impossible to so. Each new loan has a new member ID, even if the loan is to the same party. Were this not the case we could easily determine the prevalence of this practice. What reason, other than its own self interest, does LC have to do this? If one is looking for transparency this is ain't it.
I agree but it also could have been a decision made without much thought before they even had borrowers to begin with. I wish we had this data, as it's an important concern

Sent from my SAMSUNG-SM-G935A using Tapatalk