Transplant Athlete
Tuesday, December 21, 2010
  The Underbelly Of Lending Club...FOLIOfn

I promised not to write about Lending Club, but I've been harping on my dad to start an account and he lives in New Jersey and he can only buy notes on the trading platform. So this post will be some quick observations about the trading platform.

I JUST signed up for an account to see how it worked, so I don't have a lot of time on it yet. My first impression, there are far fewer filters available, so few that it's shocking. You can search by interest rate, Loan status (never late, current, late 16-30, late 31 - 120) and the number of payments remaining. As of today there are over 9000 loans for sale on the trading platform. Sellers set their own price and buyers can only buy at that fixed price (a bid/offer system might be better). Lending Club/FOLIOfn gives very little guidance to sellers (basically, if your note doesn't sell lower the price). This apparently results in some seriously insane pricing.

Before I go into how insane the pricing is, I wanted to say what I thought would be normal pricing. In most cases, I would expect a CURRENT loan to sell for the Principal + Accrued Interest (P+I) or Par Value. It looks like FOLIOfn recommends this as well.

If the Loan is late, I would expect it to be discounted to account for the possibility of it defaulting. If the loan has already been charged off, meaning Lending Club has exhausted all attempts at getting the money back and Lending Club has declared it a COMPLETE LOSS, I wouldn't expect those loans to sell at all. If on the other hand, the loan has never been late, I would expect it to sell at slightly higher premium to the P+I to account for it being more of a sure thing.

As an example, If I initially lend $25 for a 3 year term at an F2 grade with an interest rate of 18.67% and the borrower has made 4 payments, The outstanding principal would be $23.96 and the accrued interest would depend on when the last payment was received, but for the sake of this example let's say it's $0.33. The borrower has only made 4 payments, so this note still has a risk of default. If I were looking to purchase this note from someone else, it would need to have a Yield To Maturity (YTM) that reflected this risk (which would be pretty close to the initial interest rate of 18.67%). Obviously, the closer you are to maturity the lower the risk drops and the interest rate can drop accordingly. So, given this same loan where the borrower has faithfully made 30 of the 36 payments, I don't know what I would price it at (yet*), but it would be less than the 18.67%. Does that make sense?

Now, looking at the loans for sale, why is a similar loan (18.67%, 3 year term, 9 of 36 payments made) with $40 outstanding principal selling for $10,000. That's insane. The next 15 loans have outstanding principal between $15 and $20 and are listed at $1,000. That would be like me putting my $450K house on the market for $26 Million. Of course this is America and I'm free to put my house up for sale for $26 million, but who is going to buy it?

So, if we are serious about searching for loans on FOLIOfn, we need to look for serious sellers and that means looking at the YTM. There are simply too many loans to parse through, so I'm going to use the Never late and Now current filter that gets it down to 6500 loans.
I'm going to use the 24 payments remaining filter to get the number down to 650 loans. 340 of these loans have negative YTM (meaning if the buyer holds the note to maturity, they lose money). Another 220 loans have YTM below 7.7% (which may be appropriate if it's an A grade loan and/or it has very few payments remaining). That might only leave 10% or 20% that are worth taking a look at.

It just occurred to me that in some of these cases, the sellers are probably looking to capture the outstanding principal AND ALL the remaining interest. Given my F2 loan example above, the remaining payments total $36.06. It looks like these sellers are pricing their loans at that remaining payments figure or greater. Which doesn't make sense, The buyer assumes all the risk AND loses money on the deal.

So, why is the pricing so out of whack with reality? Well, there are probably a lot of unsophisticated sellers out there who don't know how to price their loans. There might be some who are sophisticated and hoping someone is stupid enough to buy the loan. When you attempt to sell a loan, Lending Club recommends the P+I and if you click on that it automatically fills it into the asking price box. The listing is active for 1 month. Maybe they should shorten the time frame to 2 weeks instead. That way people putting these ridiculous selling prices on their notes have to enter them more frequently. Maybe they need to attach a listing fee of something like 0.1% of the listed value whenever the listing price is x% higher than the par value. Then, someone listing a $25 loan at $10,000 would be charged $10, but someone listing that same $25 loan near par wouldn't pay anything extra.

I wonder if sellers are putting these crazy numbers to inflate the value of their portfolio (my portfolio is not worth $40 it's worth $10,000) or maybe there is a bit of money laundering going on...Who knows. All I know is that digging through all that crap lowers the utility for me.
Filters I'd like to see added:
Yield To Maturity (high and low range) I'd like to be able to search between 0% and say 25% (or 30%). Anything below 0% means you cannot make money on the note, you are paying more than you will receive in P&I. I don't need to see the loans with a YTM of 10,000% or even 50%. Yes, there is always the chance you could get lucky in this space, but let's be serious here, this is an unsecured loan.
In the absence of more filters, the ability to download the data in CSV format would help.


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Friday, December 17, 2010

I went to the Nephrologist's office on Wednesday and got a clean bill of health. My blood pressure was 110/76. A far cry from the blood pressures that used to put me in the hospital when I was on diaysis. Everything else was within a normal range (including liver numbers which sometimes spike from the meds). The one troubling part for me was my weight.
191.5 pounds...
The last time I was this heavy was December 2000 after several months on prednisone. The fat pants I bought back then don't seem to fit so I've been walking around in sweat pants. The kitchen remodel started me down this path, I gained 20 pounds in 2 weeks.
I bought a box of KASHI GO LEAN Crunch. The protein and fiber helps me feel full until lunch. I've been riding on the trainer, I'm trying to get up to 3 hours a week.

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Sunday, December 12, 2010
  My Not So Secret Lending Club Loan Criteria

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 wanted to put all my thoughts in one spot. As always, your mileage may vary, seek professional help, past performance is no guarantee of future performance.

First some stats:
A) My oldest loan is from early 2009, but the majority of my loans were made in 2010 and the filters and the analysis that I reference were added late in the year, so those loans with the new filters have a very short history.
B) My Net Annualized Return according to Lending Club is roughly 15% as of today (this number takes into account the charge-offs). My weighted average rate is closer to 16%. I reinvest all the proceeds as quickly as possible, so my interest is compounding almost monthly
C) My average note amount is between $30 and $40 and I have 273 loans. 1 is charged off. 6 are Late 31 - 120 days. 4 are fully paid. 257 current. 5 in funding. roughly half are 3 year loans and half are 5 year.
D) 6% B grade, 13% C Grade, 23% D grade, 49% E grade, 7% F grade, 2% G Grade.

Here are the standard filters I use:
1) Min length of employment 5 years. I can't prove this one because although LC knows job tenure, they don't include it in their loanstats.csv file, but it allows me to sleep better at night.
2) Exclude Loans already invested in: I only want to loan $25 at a time until I've reached 800 loans, then I'll bump it up to $50 for 800 loans.
3) Loan Purpose: Refinancing Credit Card/Consolidate Debt (4.95% DR), Home Improvement (6.86% DR), Renewable Energy (0% DR), Car Financing(4.68%), Wedding Expenses(3.73% DR), Paying for dream vacation(1.97% DR), Major Purchase(3.37% DR), Other(2.91% DR). Most of my loans are Refinancing and Consolidating. The purpose with the highest default rate (DR)? Small Business (13.37% DR). I wish all the bad loans were as easy to spot as most of the small business loans. Most of the loans I've looked at have no business plan or experience and only a vague idea of how they're going to make money. Shipping used school buses from the US to Africa, spending $25k on a radio advertising campaign for a genre of music...
4) Interest rates D,E,F,G. My A loan paid back so quickly I only earned 17 cents in interest. My only charge-off was a D grade loan. After sweating over the riskier loans one day, I happened on a D grade loan for a very small amount ($3600 - 5 years $87/month) the borrower had good credit and I thought he/she could easily make the payments. A gimme. XXX (insert family feud buzzer sound) Survey says: charge-off. The borrower took the money and ran, no payments. The collection log says a lot of things like "phone number out of service" and "Borrower not located (skip trace)"
5) Delinquencies in the past two years: I set this to 0 (5.44% DR). 1- 3 defaults in the last two years (6.33% DR) and 4+ (8.82% DR). If I was going to use the "Months since last delinquency" filter, I would set it to either 24 or 60, but in conjunction with this filter it eliminates all the loans.
6) Revolving credit balance: I set it to less than $15k (5.13% DR). Frankly, when I pull up a credit report and it shows $100k (6.98% DR) or even $50k (5.94% DR) in revolving credit, I think my little $25 unsecured loan is at the back of a very long line of creditors.
7) Earliest Credit Line: The longer the better, but I have this set to 5 years or more. The default rate inside 5 years is 8.1%
8) I exclude relisted loans. No data here, but there might have been a reason why it didn't fund the first time.
9) Revolving balance Utilization: I set this filter to under 80%. Just above 80 to 85% is 8.9% DR, 85 - 90% 7.76% DR, 100% utilization is 8.2% DR.
* Some people give preference to homeowners, but my research says they default at the same rate as renters.
* When I first browse notes, I go to E3 and look for any 3 year notes, they had a very low default rate before the 5 year loans were introduced. Then I apply these filters and I sort the loans so that the highest interest rate appears first.
* Loan amounts: Some people swear by loans under $10k, I look for $12,001 - $13,000 (2.45% DR) and $21,001 to $22,000 (2.9% DR). I avoid $22,001 to $25,000 (DR over 8% for each $1000 increment). I avoid $20,001 to $21,000 (10% DR) and 0 - $1,000 (9% DR). Everything else is on a case by case basis. (for a better look at the other amounts, go here and compare the charge-offs to the current and fully paid.

What do I look for in a borrower?
Lenders see a very condensed credit report, not really much to base an investment decision on, so I ask questions. If the borrower cops an attitude with me or any other borrower, I skip them. It's my money, I have a very limited amount, and I need to invest it wisely. If they don't respect that by being courteous and answering questions it makes it easy to skip them and move on to the next loan. If they walked into a bank, they'd face much tougher questions, so if they can't be bothered to answer my questions, it makes me think they might cop an attitude later when it comes time to pay back the loan.
I avoid any loan where the borrower asks anything like, "How fast can I get the money?" or "I need the money yesterday for an overdue bill." These people are either going to take the money and run or they are so drowning in debt they'll say anything to get the loan.
For debt consolidation/refinancing, I want to see their debts, interest rates, and the amount they pay every month. I try to avoid people paying off a 5% loan with a 15% loan. They're just digging themselves deeper into debt. These people are just trying to get a little breathing room by lowering their payments, which tells me they're barely keeping their heads above water. I add up the amounts they pay every month to see if it is greater than the monthly payment for the loan they are applying for, that tells me if they have room in their monthly budget.
If they own a home, I want to know how much they owe and how much it's worth. Sure there are some people who will stay in a home when they owe $100,000 more than it's worth, but most people in that situation are going to hand in the keys. If they have equity in a home, they'll be easy to find by the collections agency.
In the past, I didn't really care as much about occupation, but I think I'm starting to care. Another lender, "USMC RETIRED" posted his preferred professions to lend to awhile back. I hope he doesn't mind, but I'm going to reprint it here:
Borrowers should be employed (or retired w/pensions) in federal-state-municipal civil service and military; or active health care professionals (MD, Dentist, Chiropractor, Veternarian, Phramacist, Psychologist, Psychiatrist, RN, et al); Highly trained medical technicans, i.e., ultrasound, x-ray, laboratory, chemotheray, physical therapy, et al); College and university employees (very recession proof industry), Law Enforcement, Courts, Judicial and Corrections (The IDEAL no risk whatsoever borrower is Department of Justice, Federal Bureau of Prisons employee) and Licensed professionals, i.e., Engineers, Attorneys, CPA's, RLS (Registered Land Surveyor), et al. Those borrowers have extremely low loan delinquency and default (chargeoff) rates so what risk there is remains very minimal. Avoid like the bubonic plague that swept through Eurpoe in Middle Ages borrowers employed in construction (extremely recession prone), in cyclical industries (auto manufacturing and auto sales are classic examples). in certain retail lines- especially womens clothes and accessories (first items women stop shopping for and eliminate buying in a recession), sit-down restaurants (again, first discretionary item consumers eliminate in recession because much cheaper to fix meals at home and eat them). On flip-side I do actively invest in discount retail employees, i.e., Wal-Mart, Target, Dollar Tree, Dollar General, Family Dollar, and deep-discounters, i.e., Fred's and national fast-food chains store location managers, i.e., McDonalds, Chick-Fila-A, et al.
Since defaults are supposed to be rare, I can't be sure my success rate is based on luck or these filters. Since it's possible that my success is based on luck, I think it's more instructive to look at my failures.
"Christys" D4 Loan Grade $3600 amount 5 year term. Status Charged Off. On paper this should have been a winner. The monthly payments were just $87. Gross verified income was $3,167. He/She had been employed for 5 years with Verizon Wireless. Revolving credit balance was just $2697. The loan was so small $3600 that it found funding quickly and the borrower didn't have to answer any questions. Here is the loan description they posted:Borrower added on 05/19/10 > i will be paying off the 3 credit cards i have balances on. i will also be making an additional car payment with the extra money to get me ahead on the 2nd largest bill i have, rent being the first. I am an excellent borrower because although i have some debt, all my payments are always made on time and i have great history with all the companys i do business with. i have been emplyed at the same place for 5 years.. it is a secure job in customer service and there are no plans of shipping my job overseas within the visible future. on top of that i work for a cellular company, and the way of the world these days is all about mobile communications, so i am confident my job will continue to be secure for years to come.
Borrower added on 05/19/10 > i will be using this loan to pay off the full balances on my credit cards, i also will be making a car payment with it for the following month to get me a month ahead with my auto loan. I have been at the same place of employment for 5 years, working for the largest cellular company in the US, doing customer service. there are no visible plans of moving my job overseas and being the world we are in today is so dependent on wireless communications, i am confident that my job will remain secure for years to come. i am a good borrower because, as you can see in my credit history, although there may be several open accounts, i always pay them on time and there are no written off credit acts in my history.
Are there any clues there that might have let me know this person was going to take the money and run? Who gives up a 6 year credit history and 5 years of employment for $3600?
Of my six loans Late 31 - 120 days.
"Debt Consolidation" D2 Grade 3 year $15,000 amount. He is in the Air Force and looking to pay off some bills and take a vacation. His responses were initially cagey when asked about his debts, but he eventually came through with answers. He claimed he had been a victim of identity fraud and was afraid of a repeat ordeal. He said he was halfway through a remote deployment and wanted to take his family on a vacation. The vacation part was the hiccup (for many lenders). He has been struggling to make the payments since. Since he's in the military, I'm pretty confident this loan will be paid off, but it's still late.
"Consolidate bills" E4 Grade Loan, $10,000 amount 3 year term. This person's credit score has dipped down to the lowest level. He/She is on a payment plan and stuck to it, but I don't think this loan will ever be paid off. There was a public record on file 92 months ago from a bad car accident and the borrower has been struggling with surgeries since then. This might be my only clue to why the loan is late. Somewhere Lending Club mentioned that the majority of loan charge-offs were due to medical issues and divorce.
"Wedding/Vacation" D5 grade, 3 year term, $14,500 loan amount. This one should have been easier to spot. He had a decent credit report, 9 years of job tenure, the only downside was his job in construction. The description said he was taking his girlfriend on vacation and then they were going to plan their wedding. Fine, I can live with that, I proposed to my wife when we were on vacation at Disney in 1996. One of his answers said that he and his GF got engaged ALREADY and they were going on vacation. This seemed a bit backwards to me. You go on vacation after you get married, it's called a honeymoon... In retrospect, the monthly loan payment ($510) was a large percentage of his monthly gross income ($2,333). His gross income was highly variable being in construction.
"Debt Consolidation Loan" D5 Grade, 5 years, $18,250 requested they only received $13,075. Once again a decent credit report. He has been a member of the Richmond PD for 7 years, the wife is also a Police Officer. They claimed their main problem was an $18,000 citibank debt that had jumped to a 19% rate. The revolving credit balance was a bit high at $48,028, but they were doing some things right. They lowered their spending and increased their income by picking up extra work. They had zero equity in their home, but that's better than negative equity. Borrower made 3 payments then filed for Chapter 13 Bankruptcy. I suspect that this loan will eventually be paid back, but could I have seen this one coming? I don't think so.
"Miracle Loan" E3 5 years, $11,500 loan amount. They made 1 payment. This was the inspiration for the "Exclude Loans already invested in" filter. I unfortunately didn't pay attention and made two separate investments in this loan. So, both borrowers have been teachers in the same school district for 15 years. They were making decent money and the monthly payments were very small in comparison. They weren't carrying a huge debt burden, their revolving balance was under $2,000. In retrospect, they weren't always forthcoming with their answers. When asked why they had a late payment on their record 13 months ago, we kept getting "I don't know, I'll check." When asked how much equity they had in their home, they replied, "Just moved in to home last July." They needed the loan for medical bills and car maintenance. Apparently the wife and son had surgeries. The borrower claimed that because they had tenure it would take 2 - 3 years of paperwork to lose their job and they had money socked away in a retirement fund in case of emergency. The collections log shows that they had to skip trace the borrower, so I'm guessing they lost the house and possibly their jobs. What clues were there that this might not pay off? Frankly major medical bills. Evading certain questions. The prolific use of the word "MIRACLE" throughout the listing.
I think this will be my last post about Lending Club.


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Saturday, December 11, 2010
  Great Tree Hunt Of 2010

We went west in search of the perfect Christmas tree. When we first moved out here, we went to Snickers Gap, but they ran low on trees. Then we started going to Ticonderoga, but it got really crowded. Last year we went to Oakland Plantation, This year we tried Moose Apple Christmas Tree Farm. It's quite small. Oakland was 500 acres Moose Apple is just 33. All the trees were shaped really well and most were really tall. ABL wanted a tall one this year.

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Thursday, December 09, 2010
  PacTour Ridge Of The Rockies

I'm sending in my application for the Ridge Of The Rockies Tour. I am pretty fat and out of shape right now, but this will give me a goal to work towards.

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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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