Well, here's another way to look at the situation. We usually look at returns. Many of us calculate returns different ways, but all of them involve interest rates, chargeoffs, fees, and sometimes other factors. Tonite I'm going to look at just one factor. Its the factor that has the little problem ... chargeoffs.

I've calculated a chargeoff rate for two portfolios. These happen to be two portfolios that I have access to. The first is my own Fred93 portfolio. The second is Lending Club's Broad-Based Consumer Credit Fund (which I refer to as BBQ).

For my own account, each month I take the net chargeoff $ (which means chargeoffs minus recoveries) and divide by the account balance at the beginning of the month. This produces a monthly chargeoff rate. I then multiply it by 12 to get an annual rate. Nothing fancy. No freaky math like IRR or ANAR. Everybody can follow along.

Since the beginning of 2016, the BBQ fund has published their monthly net chargeoff rate. I've multipled this by 12 and plotted it on the same chart as the Fred93 chargeoff rate.

I'm very happy that my chargeoff rate is lower than LC's, but that's not the main point of this note.

You can see that both of these curves used to run along sorta flat, and then in mid 2016, they both started climbing. That's the cause of the degradation of loan performance that I've often talked about.

The first thing I notice is that the net chargeoff rate for both these portfolios are moving up together. That gives me some confidence that it isn't my bad loan selection that made the bend in the red curve. I don't have the data for all of your portfolios, but I suspect that if you plotted net chargeoff rate vs time, you'd get a similar looking curve, with a bend up.

You can see that neither of these curves looks like it is leveling off. I hope they're leveling off! I suspect that they're leveling off. But... there just isn't data yet to demonstrate that. So far its a wish and a supposition.

One nice thing about this annualized net chargeoff rate is that you can compare it directly to the average interest rate of your portfolio. They have the same denominator. Each month interest comes in, and chargeoffs go out. You can subtract one from the other. Lets try that...

Lets do it for the LC fund. LC's BBQ fund has an average interest rate of 12.96%, and in March had a net chargeoff rate of -13.68%. Oops. They're losing money. They also charged a fee of -0.09%/month, which annualizes to -1.08%. (The fund charges different size customers different sized fees, and this is their published number for the fund average.) The result was that they lost money on a cash basis. Annualized cash basis performance in March was 12.96% - 13.68% -1.08% = -1.8%

I say "cash basis", because when LC calculates returns on their fund, they throw in an additional term, which they call "adjustment". In accounting lingo this adjustment is a "non cash item". The adjustment marks the portfolio down when market interest rates go up and vice versa, when credit quality goes down, and vice versa, and they also adjust for loan age. They have this scheme where loans are given a haircut at birth because some of them are expected to default later in life. As life goes on, there is less life left in which to default, so the value goes up. This may be a perfectly rational system of accounting for some, but it isn't the way most of us value our own portfolios, so I've removed the adjustment, leaving the terms which actually measure movement of cash. Their adjustment for March was +0.59% which annualizes to +7.08%, so when you add that in, that makes the return they report come out positive.

The adjustments are big, and kinda random looking. Now let me be clear: I'm not accusing them of anything. These adjustments are calculated by an outside firm so that we won't have to worry about insiders making up positive adjustments to hide bad stuff. I do think that outside firm might employ too many guys with green eyeshades and not enough people with common sense, but that's just my opinion. I should also mention that the adjustments are negative in some months and positive in others. I just prefer to ignore the adjustment. Its hilarious... I charted the BBQ fund returns and the curve jumps up and down like crazy. Looks ridiculously noisy. I took out all their adjustments, and got a nice smooth curve!

The BBQ fund is losing money on a cash basis. We have every reason to believe that it will continue to do so. Unless some magical thing makes the net chargeoff rate go down, it will continue to exceed the interest rate, and the fund will lose money. ...no matter what the adjustments say.

But enough about the BBQ fund. Back to the shape of the curves.

Both of these portfolios have seen an increase in chargeoff of around +6% over the period we observe here. That's huuuge!

You hear LC from time to time say they've increased interest rates so everything is fine, but the increases in interest rates have been very small compared to the increases in chargeoffs. I haven't done the math, but you know LC took interest rates down and then up again, and the net change isn't much. Yea, I know they made some larger increases in the high risk grades, but both these portfolios are similarly middle-grade, centered on "C" grade.

I've charted vintage chargeoff rates various ways in the past. These show that recent vintages are performing worse than older vintages, which is nice to know, but doesn't relate directly to cash going in and out of our accounts. Many of us have published charts of the ratio of monthly chargeoffs to interest received. That does something similar to what I've done here, but it's a ratio, which doesn't so easily combine with interest rates. If you compute the chargeoff rate, you can directly subtract it from your portfolio average interest rate, which seems a little more intuitive.

Portfolio chargeoff rate is my new favorite thing to track.