Author Topic: Reasonable Way to Price In Grace Period Notes?  (Read 3720 times)

mo

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Reasonable Way to Price In Grace Period Notes?
« on: January 09, 2013, 08:18:48 PM »
I have a note that is listed as "In Grace Period" and On Payment Plan with 0 payments so far.  What is a reasonable way to price that loan for sale on FolioFN?  Should I even bother to try selling it or hope the payment plan works out?

https://www.lendingclub.com/account/loanDetail.action?loan_id=2285418

New Jersey Guy

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Re: Reasonable Way to Price In Grace Period Notes?
« Reply #1 on: January 09, 2013, 08:59:01 PM »
Interest Radar Results.

Note ID   Principal   Accrual   Asking Price   Markup/Discount    YTM   Days Listed
16089324    $300.00    $5.71    $259.75    -13.42%    30.52%    0 day
16087073    $50.00    $0.95    $45.00    -10.00%    26.97%    0 day
16081798    $25.00    $0.48    $25.26    +1.04%    17.19%    0 day

In the business of hustling notes more than most, I always try to make my prices more attractive than the next.  So I'm always checking to make sure the next guy isn't offering a better deal than me!

Forget the stats on the note for $259.  High price notes are harder to sell.  Normal people in the $25 and $50 note business will normally skip buy those regardless the discount.

I would discount my note 10.25% to 10.5% in order to offer a better deal than the guy at 10%.  However, I can tell you than even discounting a single penny less than the other guy will normally guarantee you the sale first.

Monitor your note closely over the course of the next week.  As more investors see it's going into grace, chances are you'll see more appear in the listings.  Somebody is bound to undercut you, so watch out.  You need to dump that note quickly for the reasons outlined below.

From a speculative view, I wouldn't touch that note for anything less than a 30% discount only because there is no payment history.  Grace notes only stay in Grace for a few days.  Once it goes 16-30 then I'd be looking to buy that note for 35% to 50% off.
 
Return over deposits:   66.82%
IRR:   86.54%
As of April 30, 2014

New Jersey Guy

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Re: Reasonable Way to Price In Grace Period Notes?
« Reply #2 on: January 09, 2013, 10:12:31 PM »
".....or hope the payment plan works out?"

Oh, I forgot about that part!  I've had fairly good luck with payment plans!  What I look for is communication between LC and the borrower in the notes.  It's much more encouraging when a borrower makes a promise rather than seeing a half-dozen notations where LC is unable to contact the borrower. I've picked up several "Payment Plan" notes for my regular portfolio at discounts just to have them continue to pay!

Frankly, you're kinda stuck between a rock and a hard place on that particular note.  Personally, I'd hold it just to see what happens.  If the person comes through and pays, then that note will be worth more as "Current" on the secondary market.  I've sold notes similar to this situation for as little as 50-cents to $1 under par (for a profit, of course!)  Heck, if that happens, it might even be worth holding onto for another month or two before re-evaluating it.  It could end up to be a good payer.  However, if this borrower fails to keep their promise on the payment plan, dump it fast.......and cheap!
Return over deposits:   66.82%
IRR:   86.54%
As of April 30, 2014

AnilG

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Re: Reasonable Way to Price In Grace Period Notes?
« Reply #3 on: January 09, 2013, 10:18:02 PM »
This is the reason I advise people to stay away from FolioFN. It's state is no different than Prosper 1.0 where lenders were stepping over each other and driving interest rate lower in hopes to attract the borrower. In the end, lenders landed up getting burnt and Prosper reputation was tarnished because of lenders' own greed.

Using comparable to price the note is not a good idea unless market was efficient which FolioFn is not. I will encourage you to read Freakonomics where authors discuss use of comparable in real estate market.

The key with listing notes in the secondary market is to determine intrinsic value of notes at the time of listing notes on Foliofn. Use Time Value of Money and Discounted Cash Flow concepts to price the notes. Spend more time figuring out what will be default probability of your note and accordingly discount the note. If note doesn't sell at that price, eat the note. Don't start reducing the price until someone bites, it is only race to the bottom.

Also, you will come out ahead by eating some notes than sell all notes at deep discount. Remember not all troubled notes will default. Instead of getting rid of all troubled notes at any cost, try to do some math to figure out whether you will come out ahead as a whole by eating a few notes.


In the business of hustling notes more than most, I always try to make my prices more attractive than the next.  So I'm always checking to make sure the next guy isn't offering a better deal than me!

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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
PeerCube https://www.peercube.com

rev

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Re: Reasonable Way to Price In Grace Period Notes?
« Reply #4 on: January 09, 2013, 10:56:11 PM »
In Grace Period notes are tough to price, because we have little data about them. The payment history skips that status almost completely: the billing cycle of the note ends 29 days after it's due date, so it captures either the Late 16-30 days in its final day, or already Late 31-120 days.
I have put together a rollover report in Interest Radar for late and defaulted notes, but there isn't much more we can do other than trust Lending Club's 84% recovery rate for "once in Grace Period" notes (https://www.lendingclub.com/info/statistics-performance.action).
So, based only in that figure, I'd say the rule of thumb is to price your note at 16% discount or less. Like Anil said, if it sells, statistics are on your side, if it doesn't, then don't lower the price because you're, in average, better off keeping it.

(Unless of course you're going to risk your health and have a heart attack if one of your notes becomes late or defaults. Some people are so averse to loss that they prefer not to play the game. In that case, do what NJ Guy said, let the rule of the free market price it and offer it for lower than the competition is offering.)

New Jersey Guy

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Re: Reasonable Way to Price In Grace Period Notes?
« Reply #5 on: January 10, 2013, 08:14:36 AM »
"It's state is no different than Prosper 1.0 where lenders were stepping over each other and driving interest rate lower in hopes to attract the borrower."

I'm not sure how Prosper works, but I'm pretty sure about Folio.  The interest rates are locked regardless of how many lenders are selling and how low the price goes.  In the case of the note in question, there are going to be several other investors with the same note asking the same questions.  Conservative investors will begin listing the same note at different prices, so there will be competition.  It's not unusual to see the same note listed on Folio 3, 4 or even 6 times once it goes Grace.  If getting rid of the note is a priority, then he needs to list it attractively. 
Return over deposits:   66.82%
IRR:   86.54%
As of April 30, 2014

Keltset

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Re: Reasonable Way to Price In Grace Period Notes?
« Reply #6 on: January 10, 2013, 10:44:57 AM »
"It's state is no different than Prosper 1.0 where lenders were stepping over each other and driving interest rate lower in hopes to attract the borrower."

.... If getting rid of the note is a priority, then he needs to list it attractively.

I think the point the others were trying to make is that getting rid of the note shouldn't be a priority. A proper sale price that keeps you on the up side of the stats should always be the priority unless this is a firesale and you are getting out for some reason. A late note doesn't always -need- to be sold if the sale price is cutting into the cream of the recovery percentages.

Also note that the rate on the note itself is not locked in folio, there are situations where the percentage will change (active duty military anyone?) but in addition to the actual written rate changing, anytime a note is priced or repriced you are changing the rate of return on the note. Just because a note says it's @ 10% doesn't mean it is for you at that price as the buyer. I frequently make more money on notes now than the rate indicates via selling on folio. And there was that one time I typo'd the decimal in the sale price and sold a note for 1.18 instead of 11.80 :( oops...

There is also a great point being made here, FolioFN is not an efficient market. (Freakonomics great book!) In addition not all of those parsing through FolioFN are using third party tools to compare the price of potential purchases against any other note there. In general the non tech savvy are looking at the note they see in front of them. If it's priced right by their terms they will look to purchase the note, if it's not then they won't. Most people aren't going to say, "Oh I want to buy this note let me go see if I can find a better deal on it somewhere else"...

SeanMcD

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Re: Reasonable Way to Price In Grace Period Notes?
« Reply #7 on: January 10, 2013, 03:23:31 PM »
There is also a great point being made here, FolioFN is not an efficient market. (Freakonomics great book!) In addition not all of those parsing through FolioFN are using third party tools to compare the price of potential purchases against any other note there. In general the non tech savvy are looking at the note they see in front of them. If it's priced right by their terms they will look to purchase the note, if it's not then they won't. Most people aren't going to say, "Oh I want to buy this note let me go see if I can find a better deal on it somewhere else"...

They may not be going through that exact process, but I'll bet that a lot of buyers are sorting by discount after setting the pitifully minimal parameters FolioFn provides, and working their way down the list.  If that's the case, then pricing your note lower than others for that loan means that your note is more likely to be seen and purchased first, even if the buyer has no desire to sort by LoanID and compare all the notes.