Author Topic: a view of LC's deteriorating investor returns  (Read 24022 times)

Fred93

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a view of LC's deteriorating investor returns
« on: February 19, 2017, 04:45:11 AM »
We've all looked at the deterioration in LC loan performance over 2015 & 2016 in a variety of ways.  We've charted delinquencies, chargeoffs, by time, by vintage, used different return measures, etc.  Here's something really simple.

I used numbers from LC's chart with all those dots, https://www.lendingclub.com/info/statistics-performance.action

This chart shows the performance of INVESTORS rather than performance of loans, so is therefore close to investor's hearts.  One downside is that this chart uses ANAR to measure investor performance.  I won't detail all the characteristics of ANAR here, but one is important enough that I have to say it.  ANAR measures your performance since you opened your account.  Those of us who have been investing with LC for a long time, have higher ANARs, just because ANAR averages over all the time our accounts have been open, and returns were higher in past years than they are now.  My account is 9 years old, so this is painfully clear to me.  I suspect that many accounts have been open just a few years, so perhaps this effect isn't so bad on the average.  Just be aware.  If Joe's ANAR is 7%, he may be earning only 4% now, for example.

This chart has been changing vs time.  Lets look at what this chart NOW says. 

I made the following selections...
Adjustment for past-due notes: ON
Min number of notes per account: 500  (Lets look at well diversified accounts, so we know the numbers are not noise)
Max note size less than 0.5%  (Same thing, ie well diversified accounts)
Now, there's one more selection, the weighted-average-interest-rate WAIR.  This, like credit grade, is just a measure of the riskiness of the loan, as LC sees it. 

In the middle of the graph, LC highlights accounts with average age of loans in the portfolio of 12 to 18 months.  This is a reasonable definition of a steady-state account, so lets use that selection.  LC displays 10th percentile, median, and 90th percentile ANAR for accounts in this range.

Finally, here's how the median ANAR varies with WAIR.
Code: [Select]
  WAIR     10%   Median    90%
 0- 9%    4.8%    5.3%    6.0%
 9-12%    4.2%    5.2%    6.4%
12-15%    3.4%    4.7%    6.3%
15-18%    2.2%    3.6%    6.5%
  18+%    0.5%    3.6%    6.5%
  ALL     2.7%    4.8%    6.3%

A lot of numbers.  Just look at the Median column.  This shows ANAR for the median account in the selected group.  As you can see, as WAIR goes up, ANAR goes down.  Its monotonic!  The best performing accounts TODAY are those who invested over the past few years in the low interest rate (ie safest) loans.  The worst performing accounts are those who invested in the riskiest loans. 

Among today's accounts, you can see that investing in higher risk loans did not give most investors any advantage.  This is true for the median account, and also true (within one tenth of a percent) at the 10 percentile and 90 percentile account! 

The median LC investor today holds an account with an ANAR of 4.8% .  My account's ANAR is much higher, and yours probably is too, but I opened that account about 10 years ago, so my ANAR averages over times when returns were considerably higher.  Doesn't mean I'm doing better than average lately.  In fact, I have very little idea how I'm doing relative to other LC investors lately.

Meanwhile, the facts for today are that accounts TODAY have a median ANAR of 4.8%, and accounts TODAY show higher ANAR if they have portfolios of lower interest rate loans.  (Those accounts picked those loans over the last few years, so this result tells us about the performance of those vintages.  Unfortunately doesn't tell us what loans picked today will do.)

This is consistent with facts we know about loan performance degradation during the past two years.  Performance and returns on the higher risk grades have gone to crap.

Historically, we have a name to categorize times when loans perform this way (ie when investing in the safest loans was the best strategy, and investing in the risky loans was the worst strategy).  We call those times recessions, or credit crises, or some such name.  We haven't been in either a recession or a credit crisis during 2015/2016, so the explanation is elsewhere. 

I blame LC.  I believe they made considerable changes to their loan underwriting in 2015 to accept more loans, in order to drive volume.  Also possible of course that they just screwed up.  Although they have (multiple times) given lip service to improving loan quality, I see no evidence of same.  I will continue to look.

Among other things, these changes have invalidated all the wonderful historical data.  A lot of back-testing is now simply misleading.  This is quite a loss.  We now have nothing to guide us.  Most of us still use filters we derived from back-testing.  I do.  However, over the past year I've changed how I think about back-testing quite a lot.  I'm suspect this change in attitude is widespread.  In past years, careful attention to historical data gave me an edge of several percent.  Now it looks like that edge is gone.  That's just the way it is.


rawraw

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Re: a view of LC's deteriorating investor returns
« Reply #1 on: February 19, 2017, 07:16:39 AM »
I blame LC.  I believe they made considerable changes to their loan underwriting in 2015 to accept more loans, in order to drive volume.  Also possible of course that they just screwed up.  Although they have (multiple times) given lip service to improving loan quality, I see no evidence of same.  I will continue to look.

Among other things, these changes have invalidated all the wonderful historical data.  A lot of back-testing is now simply misleading.  This is quite a loss.  We now have nothing to guide us.  Most of us still use filters we derived from back-testing.  I do.  However, over the past year I've changed how I think about back-testing quite a lot.  I'm suspect this change in attitude is widespread.  In past years, careful attention to historical data gave me an edge of several percent.  Now it looks like that edge is gone.  That's just the way it is.
I really think you are overstating this position.  Of course trying to use backtests on loans simply by grade and filter is not a good idea and has never been a good idea.  I have posted before that even backtesting then, the number to pay attention to was the charge-offs and not the return, given the change in interest rates over the years.  When LC started underwriting loans with looser standards, there was no reason to believe that the backtest would approximate the performance of those loans, since they didn't exist in the historical sample.  This does not mean that ALL backtest data is useful, because there are still loans being made that are similar to those loans made in the past.   Unfortunately good backtesting isn't simple as saying what is my return on A grade notes going to be.

If anything, I think this forum is learning very basics of credit.  The market looks great until it doesn't, so terms can get looser and the credit box expands because risk is no longer salient.  Then all of the sudden, people start to realize the risk they were actually taking (this risk didn't change, just the awareness paid to it).  And then lenders leave the asset class, funding dries up, and that's exactly the point in which a lender can make the best loans at the most conservative credit metrics.  Smart lenders observe this cycle and use it to make those loans.  Dumb lenders just chase the other high flying asset class that doesn't have salient risk.   

There is an extra variable in our case, given that LC chooses to expand the credit box and not us.  LC chooses the price and not us.  But luckily, we still choose which of these offerings by LC is appropriate.  Based on this forum over the years, if it was up to a retail vote, I suspect LC would have had to expand the credit box even more.  There was at one point people were upset LC made majority loans to ABC.  We used to constantly complain about the lack of high grade notes.  Now we complain about the charge offs that come with high risk notes.   I personally have little sympathy for this.  The consumer market as a whole got ahead of itself.  Now we get to see the weakness in auto ABS, LC loans, and elsewhere.  A lot of the people on this forum don't have as much experience in the lending arena, but it seems like they are getting the experience now.  Luckily the economy hasn't soured, because the loosening of credit combined with a bad economy is when people really start to lose lots of money

Rob L

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Re: a view of LC's deteriorating investor returns
« Reply #2 on: February 19, 2017, 10:46:59 AM »
Nice work as always! In Nov 2015 jheizer provided a web based tool used by those who contribute to the "Understanding Your Returns" thread (after P2P Quant discontinued the tool). His tool makes use of the "dots" data set and he may have archived some of this data over time. If so and if he could provide you a few historic samples it would be interesting to see how the numbers you've provided have changed over time. Even one sample in Jan 2015 would be neat. Of course he may not have data sets by WAIR so all you could compute would be the "all" numbers.
« Last Edit: February 19, 2017, 10:49:18 AM by Rob L »

smihaila

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Re: a view of LC's deteriorating investor returns
« Reply #3 on: February 19, 2017, 11:05:28 AM »
If anything, I think this forum is learning very basics of credit.  The market looks great until it doesn't [...]

Who is this "market"?? I really appreciate the OP's input - great, precise and meaningful research. Your reply on the other hand, sorry to say, seems condescending and arrogant.

The OP is making super-valid points: we've been risking our skins in this game more than we should've been, and the reward is no longer matching this risk. A very good indication that LC's not doing its job as they've been doing it in the past.

Thanks.

rawraw

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Re: a view of LC's deteriorating investor returns
« Reply #4 on: February 19, 2017, 11:25:25 AM »
If anything, I think this forum is learning very basics of credit.  The market looks great until it doesn't [...]

Who is this "market"?? I really appreciate the OP's input - great, precise and meaningful research. Your reply on the other hand, sorry to say, seems condescending and arrogant.

The OP is making super-valid points: we've been risking our skins in this game more than we should've been, and the reward is no longer matching this risk. A very good indication that LC's not doing its job as they've been doing it in the past.

Thanks.
It has a negative tone because it's getting really old just hearing people taking no responsibility and blaming LC. In terms of your question, please refer to the second and third paragraph. The market is any place where there are buyers and sellers of money

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jheizer

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Re: a view of LC's deteriorating investor returns
« Reply #5 on: February 19, 2017, 11:37:07 AM »
Nice work as always! In Nov 2015 jheizer provided a web based tool used by those who contribute to the "Understanding Your Returns" thread (after P2P Quant discontinued the tool). His tool makes use of the "dots" data set and he may have archived some of this data over time. If so and if he could provide you a few historic samples it would be interesting to see how the numbers you've provided have changed over time. Even one sample in Jan 2015 would be neat. Of course he may not have data sets by WAIR so all you could compute would be the "all" numbers.

I did not track or log anything. The thread where we talked about me making it will probably have some sample data from that month though.  I could start recording it if we feel it would be worth while.

I think I've decided ANAR is just worthless at this point. Especially for those that have been around a while (which I'm not in that club). Just a 6 or 12 month trailing XIRR seems like the only reasonable metric now to me.  Along with knowing the acount age, not just the current loan average age.

FWiW, I've personally tried to not be as anal about all of this lately. I use to check it every night asap to see the payments and fees for the day. At first it was a great hobby but for me personally the amount of time vs the amount of money I have in my account started to just be crazy.  If I would get off my butt and automate selling late notes on folio I could be even more hands off.

So if you all see a value to me logging the compare data just let me know and I'll add that and give a page to reference it some how.  And maybe finally do the larger scatter plot I said I'd do weeks ago...
Replacement to P2P Quant's Percentile Tool http://lc.geekminute.com

Fred93

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Re: a view of LC's deteriorating investor returns
« Reply #6 on: February 19, 2017, 05:19:34 PM »
... it's getting really old just hearing people taking no responsibility and blaming LC.

To be clear... I don't blame LC for defaults.  Never have. 

I do however blame LC for shifting the baseline, in other words changing the underwriting so significantly without telling us they were doing it.

Rob L

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Re: a view of LC's deteriorating investor returns
« Reply #7 on: February 19, 2017, 05:34:03 PM »
So if you all see a value to me logging the compare data just let me know and I'll add that and give a page to reference it some how.  And maybe finally do the larger scatter plot I said I'd do weeks ago...

It's pretty easy from the bleachers to say why not try this or that. That's what you call lazy. If I do that someone ought to smack me around. I do not plan to log the "dot data" so it would be more than presumptuous to suggest you do. Similarly it's inappropriate for me to suggest Fred93 look at any historical data that you might have. Much better for me to post original items I think might be interesting to others and say simply FWIW.  :)

fliphusker

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Re: a view of LC's deteriorating investor returns
« Reply #8 on: February 19, 2017, 06:16:25 PM »
It has a negative tone because it's getting really old just hearing people taking no responsibility and blaming LC. In terms of your question, please refer to the second and third paragraph. The market is any place where there are buyers and sellers of money

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First off, I find this thread extremely interesting.  And want to go back and read more of it.  My first year will be up next month here.  I have made many mistakes.  Not even sure I am on the right track yet. 
Now rawraw, you were one of the first people that started giving me great feedback when I first started.  It will always be appreciated.  Think you got jaded about 6 months ago with people complaining here.  Absolutely too many people saw the gravy train and thought they could ride it with having very little knowledge.  (I did a lot of research, and I absolutely was one who still lacked the knowledge.  Still might.)
Stay positive though, you have so much to offer.  :)

jasondhsd

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Re: a view of LC's deteriorating investor returns
« Reply #9 on: February 20, 2017, 01:47:26 AM »
It's simple common sense that something just ain't right anymore.  The economy is a lot better then it was 5-10 yrs ago but now D-G loans are performing worse. Makes no sense.

smihaila

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Re: a view of LC's deteriorating investor returns
« Reply #10 on: February 20, 2017, 10:28:08 AM »
It's simple common sense that something just ain't right anymore.  The economy is a lot better then it was 5-10 yrs ago but now D-G loans are performing worse. Makes no sense.

Precisely, couldn't agree more!  (Sick of condescending and arrogant "experts" arguing that we are too greedy or not doing our homework right). My returns are now a measly 2.05% after about 1 year - only 3-year loans, 180 notes originally, 30 defaults already. I'm no longer putting new money into LC...

newstreet

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Re: a view of LC's deteriorating investor returns
« Reply #11 on: February 20, 2017, 10:45:14 AM »
It's simple common sense that something just ain't right anymore.  The economy is a lot better then it was 5-10 yrs ago but now D-G loans are performing worse. Makes no sense.

Precisely, couldn't agree more!  (Sick of condescending and arrogant "experts" arguing that we are too greedy or not doing our homework right). My returns are now a measly 2.05% after about 1 year - only 3-year loans, 180 notes originally, 30 defaults already. I'm no longer putting new money into LC...

The "real experts"- have been telling you to not to invest in LC notes for the past year. :)

Fred93

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Re: a view of LC's deteriorating investor returns
« Reply #12 on: February 20, 2017, 05:57:30 PM »
It's simple common sense that something just ain't right anymore.

Well put.  Sometimes I get the feeling that I use more words than necessary.

Quote
The economy is a lot better then it was 5-10 yrs ago but now D-G loans are performing worse. Makes no sense.

There is some debate on this point.  The Federal reserve consumer loan delinquency series says everything is good.  The federal reserve credit card delinquency series says everything is good.  (All consistent with what you're saying.)  However, there are some data series which show some degradation in recent months.  Several people here have cited stories that say "subprime auto" is degrading.  Here's a chart with some data about auto loans.  I don't remember where I got this chart.  Might have been from an Equifax publication.



IMHO nothing is obvious here.  Yes, this clearly shows some subprime auto loans have increased delinquency thru 2014/5/6, but that blue curve is for FICO<620 which is way below where LC loans happen.  Even the red curve is below LC loans.  When you get up to 660, ie the brown curve, things look pretty good.

NB: These are "Equifax Risk Score 3.0" whatever that means, rather than FICO numbers, but I suspect they are intended to be similar.

So some have argued that even tho FICO doesn't match, but there's "something" about LC borrowers which make them act like the subprime auto borrowers, so what we're seeing at LC is the same thing we're seeing in the blue curve.  To my mind, that's a giant stretch.  I am open to the notion that this is partially correct however, and continue to look for more data.

I think it's more likely that LC just greatly lowered their underwriting criteria during 2015.
« Last Edit: February 20, 2017, 06:03:28 PM by Fred93 »

M0lina

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Re: a view of LC's deteriorating investor returns
« Reply #13 on: February 20, 2017, 08:02:40 PM »

yojoakak

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Re: a view of LC's deteriorating investor returns
« Reply #14 on: February 20, 2017, 09:42:14 PM »
I don't remember where I got this chart.  Might have been from an Equifax publication.


Google Image Search suggests this:

http://libertystreeteconomics.newyorkfed.org/2016/11/just-released-subprime-auto-debt-grows-despite-rising-delinquencies.html