Transplant Athlete
Tuesday, August 31, 2010
  Lending Club 4 - Can Statistical Analysis Show The Way To Higher Yields?

My computer is stretched pretty thin analyzing the data from 14,000 loans. The first thing I tried to do was a correlation analysis to see if there were any one variable (DTI, Income, Home Ownership) that could predict loan performance. None of the variables had a strong correlation to loan performance. Gee what next?
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Thursday, August 26, 2010
  Lending Club 3

Update: Now that Lending Club has raised their loan limit, these numbers have all changed. So, please don't rely on these results. You can follow the methodology to perform your own analysis on the new data.

Before I start, let me say, I am doing my best to provide accurate information, but it's possible that I might have missed something, so perform your own analysis before you invest your money with Lending Club (or consult a professional). I am providing the following to illustrate how I look at the data.

If we take a look at the G1 Loan grade (remember from the Lending Club Part 1 post it had a low 10% default rate versus the G2 grade at 32%), we have approximately 49 loans (I didn't count removed or expired). That is a very small number, so it is hard to draw accurate conclusions. Also, the data covers a span from 9/07 to the present and as we all are painfully aware, the economy TANKED during that time period and may not be representative of future performance.

I copied and pasted the G1 loans to their own sheet. I looked over the data for anything obvious. If we look at Home Ownership versus Renting, we had one renter charged off. The loan was made in 2007 and the borrower made roughly 14 payments. Since then, there have been 5 other charge offs by homeowners (5/6=83%). Renters account for 38% of the fully paid loans and about half of the current loans. Can we infer from this data that it is safer to loan money to a renter in the G1 loan grade?

If we look at Average Monthly Income, borrowers who've fully paid their loans on AVERAGE have higher incomes. I would not use this as a decision point. There are two charged off loans where the borrowers make less than $1200 per month (I might avoid borrowers in the G1 Grade that make less than $1500 per month, but I wouldn't necessarily look for the highest earners - If you saw the income distribution you would see why. Averages can be misleading).

How about Debt To Income Ratio (DTI)? ON AVERAGE, borrowers who have paid their loans off have lower DTIs. The average DTI for charge off was 21.2% and for fully paid was 18.7%

Surprisingly, there were no public records in the Charge-off group, but there was one in the fully paid group. I've been under the impression that you should never invest in someone who has had a public record (it's usually bankruptcy or divorce, both of which decimate a person's finances). How about delinquencies? This is interesting. The fully paid group had no delinquencies in the past two years. How about credit Inquiries? On average the Fully paid group had more inquiries (3.63) versus the charge off group (1.67).

How about Loan Purpose?

PurposeDebt RefiBusinessMedicalHome ImproveOther (Car/move/Educ.)
Charged Off32100

If we look at the medical category, 1 loan fully paid off and 1 got charged off. In the Business category: 2 loans paid off, 2 loans charged off, 6 current. Debt Consolidation (and credit card refinance): 3 charged off, 4 paid off, 17 current.

Based on this LIMITED data, If I were investing in G1 loans, I would only look at debt refinance loans, with low DTI ratios (4 or 5%), with monthly income above $1500, and zero delinquencies in the past 24 months, I would eliminate anyone with zero credit inquiries in the last 6 months, and I would give preference to renters, but I would not eliminate homeowners.

That's a good start, but you have to check over the credit report for things that might skew your results. Someone could have zero delinquencies in the past two years because they've only had credit for one year. Their credit report may show a very low revolving credit balance and consequently a very low DTI, but they are asking for the maximum because they've got debts that haven't been reported to the credit agencies.

One more thing, If you look at the charged off loans, Borrowers on AVERAGE made 13 payments before calling it quits. On a $25 loan, you'd be paid on average $11.64 in principal + interest, in other words not a total loss (yes, I'm a cup half full kinda guy). Also: Of the fully paid loans, all of them were paid off significantly sooner than the 36 month term (on average around 15 months). The earliest of the CURRENT portfolio should start reaching maturity early next year, which means we should have better data then. Later today, I will add the loans that are close to maturity to this analysis to give us a few more data points.

Addendum: It is important to note that this analysis ONLY pertains to a G1 loan with a 36 month term. There are a couple of issues with the 5 year loans:
1) LC just started issuing them a couple of months ago, so there is no data on how they'll perform. As we have seen, G1 borrowers who default do so on average 13 months into the loan. It will likely be July of next year before we see how well the 5 year loans will perform.
2) G1 borrowers who choose a 3 year term are different than G1 borrowers who've chosen a 5 year term.
3) Payments on a 5 year loan are lower than the 3 year loan, this may help, but we don't know yet.

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Wednesday, August 25, 2010
  Lending Club 2

Update: Now that Lending Club has raised their loan limit, these numbers have all changed. So, please don't rely on these results. You can follow the methodology to perform your own analysis on the new data.

If you're looking for the highest yields at the lowest risk on Lending Club, you really have to work at it. Let's say you have a hunch that homeowners are the safest bet on LC, how do you go about checking that? You look at the data. Go to Lending Club's Statistics Page and then ignore all the fancy charts you see. Click on Download data. Choose to "Download Loan Data" (not In-Funding or Declined).

It's kind of a large file, because it contains every loan that's ever been initiated on LC. That means, Prepaid, Paid, current, not so current, defaults, charge-offs, and removed. When a loan has been in default for a long period and LC doesn't think it will ever be paid, it is "Charged-off". As far as I can tell, Loans that are "Removed" were listed, may have received some funding, and then were "Removed" prior to funding. This may have been at the Borrowers request or at Lending Clubs.

What can we learn from this data? A true Math Geek could do a statistical analysis and tell which factors (income, location, home ownership, DTI, etc) CORRELATE to better loan performance. I just barely passed Statistics at business school (and that was 6 years ago), so I'll give what observations I can.

First of all, there are almost 26,000 records in this file. So, I sort the data by Status, and then by Loan Grade. This allows me to see all the Charged-offs together, all the defaults, all the paid, etc.

Let's get back to our guess that homeowners are better at paying off their loans. The computer doesn't understand "RENT" and "MORTGAGE", so I change those into numerical values using Find and Replace. Rent=0, Mortgage=1. When you crunch the numbers, here's what you get:

Home Ownership Percentages By Loan Status
Charged Off48.7%
Late (16-30)45.8%
Late (30+)46.4%

I think that busts our hypothesis that homeowners are more likely to pay their loans. What's our next hunch to check? Low DTI = High Performance? Low Loan Amount = High Performance? Monthly Income? Loan Purpose? Open Credit Lines? Total Credit Lines? Revolving Credit Balance? Revolving Line Utilization?

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Tuesday, August 24, 2010
  Lending Club Part 1

Update: Now that Lending Club has raised their loan limit, these numbers have all changed. So, please don't rely on these results. You can follow the methodology to perform your own analysis on the new data.

I've been meaning to write about my experiences with Lending Club for a long time now. I'm not an affiliate, so I don't have anything to gain financially by writing this. Recently, I saw a blog post over at Frugal Dad titled "Investing With Lending Club: Six Secrets to Higher Yields".

Six Secrets...Those are powerful words... If you were looking for those six secrets to higher yields, you'd be disappointed.

I guess the best place to begin is Lending Club's prospectus. They publish a new one every couple of months. Read it very carefully. There's a table in there that describes the historical default percentage by loan grade. It's on page 56 of the current version. Back when I started and Lending club was only putting out 3 year loans, E3 loans had a very low default rate, a rate that was in the same range as a couple of the B grade loans. So, I initially only invested in E3 loans. I got the high interest rate and the default rate of a B grade loan.

Things got mucked up a bit when LC started doing 5 year loans. A loan that would have been in the D level got bumped up to an E level if the borrower opted for a 5 year loan. Someone who would have been an E3 at a 3 year loan is now bumped up a couple grades as a 5 year loan.

Still, there's important information in that table. FOR EXAMPLE: A G1 loan has a 10.46% default rate while a G2 has a 32.52% default rate. A G1 loan carries an interest rate of 20.16% and a G2 carries an interest rate of 20.53% but is much more likely to default. For the highest yield at the lowest risk, you choose the G1. If a 10.46% default rate scares you, drop down to the E grade loans and choose the highest yield with the lowest default risk. If that scares you, you keep working your way down the alphabet until you find a default rate you can live with.

The usual disclaimers apply: Your Mileage May Vary, Past performance is no guarantee of future performance, this is not a solicitation, consult a professional, etc. I should also add, that this table changes, so it's not a perfect indicator.

The table also shows percent prepaid, which is also important. Early payment lowers your return. First of all, it is work searching through listings, asking questions and deciding on which loans you want to fund. It is very time consuming. When loans are paid back early, you lose out on interest, you now have to find a new loan to invest in, and you lose interest while that money is not invested.

When you commit funding to a loan, you have a period of anywhere from 1 to 13 days where the money is not earning interest. If two loans pay back within the first payment, you have just lost approximately a month of interest between them and their replacements.

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Tuesday, August 10, 2010
  Got My Exercise This Weekend

Friday night, I drove up to the In-laws to pick up the wife and kids. We headed down to Luray, VA to camp at Jellystone. It was a 2 hour drive and we were about 10 minutes from the campground when TGL started screaming, then vomiting. We had to pull over and get her cleaned up, at which point ABL mentions that T was burning up when she woke her up from her nap...

I set up the tent in the headlights of our ESCAPE, then I put Q inside and had her pump up the air mattresses. After about 5 minutes, she called for backup and RJ trudged out.

In the morning, We walked down to watch Yogi at the flag raising. Then, ABL took T and went in search of an urgent care facility in Luray, while I took the kids to Laser Tag, Paddle boats, miniature golf. Whew I was exhausted and sweaty. We went back to the campsite and I fed them. ABL still wasn't back yet, so I convinced the kids we needed a little down time and I napped. ABL arrived about 30 minutes later and I continued napping while she took the two older ones to the craft time with Boo-boo. I slept in the tent with T. When they came back, I took RJ and Q to the water slide and pool, while ABL stayed with the sleeping baby.

Saturday, the Gornicki's moved in to the site next to ours, their daughter bragged about their pop-up having a bathroom, kitchen, and TV. At which point my daughter replied, "yeah but we have a tent..." Then the daughter asked why we didn't have a golf cart... ("cause we're not lazy?" I thought to myself) I'll concede that it is a bit of a hike uphill to get to the hiking trail and laser tag and it is a bit of a hike to get downhill to the miniature golf and paddle boats and pool, etc. But, the bathrooms were just 300 feet away.

Later that night, I tried to start a fire, and I burned through a bunch of paper and kindling and couldn't get these logs to light. So the Gornicki daughter came over and told me that to start a fire you really need Lighter fluid. She was getting really annoying and my pride was starting to take a hit but she brought over the lighter fluid and then a lighter when I ran out of matches...I swallowed my pride and used the lighter fluid because my kids really needed those Smores.

Sunday, we woke up early and packed camp. I finished while the kids went down to see Yogi raise the flag again. Then we went to Luray Caverns; which Q said she would not go into, but she really liked once we were inside. We found a brochure for a roller rink family fun center in Woodstock (directly on our route home) so we stopped there and had a picnic lunch in their parking lot. It wasn't going to open for another hour and the hours on Sunday are rather short, so we couldn't stick around to see the inside. We did however stop at James and Trish's on the way home and the kids played with her nieces (Ericka and Lacey) in the pool.

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I've gone through kidney failure twice. The first time in 2000, my mother donated a kidney; and again in 2008, I'm on dialysis waiting for a breakthrough in immuno-suppression medicines before seeking a new kidney.

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