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Lending Club Discussion => Investors - LC => Topic started by: Fred93 on October 09, 2016, 11:00:00 PM

Title: 2015 & recent loan quality
Post by: Fred93 on October 09, 2016, 11:00:00 PM
Here's a chart showing delinquency (gross dollars delinquent divided by originally funded amount) for recent (the last 14 quarters) of LC loans.  (The legend is on the right.  Some of you will need to scroll to see it.)  This is plotted from data LC produced and distributed.  I've shown only 60 month loans.  I chose to do this because the curves get more smeared out if you include both 36 and 60 month loans in the same chart.  People normally chart this all the way out to 60 months, but I want to draw your attention to the left side of the chart.

By this measure, the last 4 vintages (2015Q3 thru 2016Q2) are each the worst among all their recent peers at their current age.  In other words, the four arrows point to dots that are each the highest so far.



This situation is much easier to see in delinquency curves than in chargeoffs.  I believe that is because delinquency precedes chargeoff, so we're seeing the early warning here.  If that is right, chargeoffs for these vintages will be getting worse in coming months.

LC has acknowledged "pockets of underperformance" recently.  It is discussed in their Q2 earnings call slides.  They describe changes in underwriting designed to address this, and predict that Q3 loans will perform better.  They have not told us when these underwriting changes occurred, but looking at the data, I'd say they didn't arrive in time to improve the Q2 vintage.

 I hope to hear more on loan performance from them during the Q3 earnings call a few weeks from now.
Title: 2015 & recent loan quality
Post by: storm on October 09, 2016, 11:00:00 PM
This chart certainly has me recontemplating my strategy.  Thanks for putting it together.
Title: 2015 & recent loan quality
Post by: Rob L on October 09, 2016, 11:00:00 PM
Wow!. Very nicely done. I especially like that you have segregated 36 and 60 month loans. It's a pet peeve of mine when they are lumped together as you may know from comments I've made many times before. But accolades aside, delinquencies rather than charge offs are with out a doubt a canary in the coal mine. 16Q2 is specially disappointing. The $64k question is simply what is going on here? Can't see where things for average borrower has changed much the past year or two, yet we are all being handed our heads on a platter so to speak; from delinquencies through charge offs. "Something is rotten in Denmark" ... What could it be?
Title: 2015 & recent loan quality
Post by: jennrod12 on October 09, 2016, 11:00:00 PM
Thanks for the great chart!  What is included in "delinquent"?  Is that IGP + both late statuses + defaults?

Thanks,

Jenn
Title: 2015 & recent loan quality
Post by: PhilGD on October 09, 2016, 11:00:00 PM
That chart is great but I think we need more clarity into the underlying borrowers. Have the loans written so far in 2016, on average, been assigned higher interest rates that would compensate investors for the higher delinquency performance?
Title: 2015 & recent loan quality
Post by: AnilG on October 09, 2016, 11:00:00 PM
Average Interest Rate has been declining since 2013. https://www.peercube.com/histperf/index

from: PhilGD on October 10, 2016, 11:02:54 PM
Title: 2015 & recent loan quality
Post by: twigster on October 09, 2016, 11:00:00 PM
Quote
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 10, 2016, 11:00:00 PM
from: jennrod12 on October 10, 2016, 10:08:50 PM
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 10, 2016, 11:00:00 PM
from: twigster on October 10, 2016, 11:40:53 PM
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 10, 2016, 11:00:00 PM
from: PhilGD on October 10, 2016, 11:02:54 PM
Title: 2015 & recent loan quality
Post by: rawraw on October 10, 2016, 11:00:00 PM
Is this true across all grades or is this masking mixed performance by grade? Thanks for sharing, you continue to be one of the most valuable contributors

Sent from my SAMSUNG-SM-G935A using Tapatalk

Title: 2015 & recent loan quality
Post by: SLCPaladin on October 10, 2016, 11:00:00 PM
This is perhaps the most detailed and understandable explanation of forecasting returns I have read on this thread. I am quite grateful for your insight. I kind of feel like a big wild card right now is the political climate we're in. We need some clarity on how policy might affect broader economic trends and how those might contribute to better, or worse, macro environment.
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 10, 2016, 11:00:00 PM
from: rawraw on October 11, 2016, 08:28:12 AM
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 11, 2016, 11:00:00 PM
Sometimes my memory is imperfect.  I went back and looked at what was in LC's slides from the Aug 8 2016 second quarter results presentation.



Here he does actually say what they changed and when they changed it.  Its the little list on the bottom left.

There's also something amazing at the top of this slide.  I thought I was going out on a limb a few messages ago when I projected that the last few quarters loans might end up at an all-LC average around 5% return.  Well, son of a gun, a similar statement is right there on slide 8.  He says "Portfolio level returns expected to increase from 4-5% to 6+% for vintages after June."  In other words, they seem to admit that recent vintages are headed toward around 5% returns (all-LC average).

Of course we don't know how the 2015Q3 thru 2016Q2 loans' performance will evolve, ie how bad they will actually end up.  Our projections are tentative, because after something has changed, so can't reliably use history to guide us.

The big thing we want to know is - How will 2016Q3 loans perform?  LC made an adjustment, and it will take a few months before we know if they got it right.  We'll get our first glimpse when Q3 loans are added to the historical file a few weeks from now.  Early Nov I think.  I suspect we won't have enough data in that release to make a judgement.  By the end of the year we should have enough payments (either paid or not paid) on these loans to plot some nice delinquency curves like above, and see whether early performance of the Q3 loans "pokes out" like recent quarters have.

Here's a fact that hints that maybe they have not fixed the problem:  The two changes they list above were made in April and June.  We don't know when it actually took effect, so lets assume mid-April.  Second quarter is April, May, June, so 80% of Q2 is after that change!  And yet... We know (although not enough time has elapsed to have really good data), 2016Q2 delinquency numbers are looking bad.  That's a thumbs down.  Then they made another change in June, but pulling in the DTI limit from 40% to 35% doesn't seem like it would be a major fix.  Count me skeptical.

On a related note: A quick look at Prosper shows that their recent quarters have suffered a similar reduction in quality.  I haven't done any detailed crunching on Prosper data tho.



Title: 2015 & recent loan quality
Post by: TravelingPennies on October 11, 2016, 11:00:00 PM
I would think that if total portfolio returns stay in the 4-5% range for too long, LC is going to have a very difficult time attracting more capital to fund their loans, from whatever source. I don't think that is near enough of a risk premium for retail or institutional money. If they don't quickly bump their rates or get their underwriting back to where returns get back to around 7%, I won't matter that they hired a "Chief Capital Officer".
Title: 2015 & recent loan quality
Post by: .Ryan. on October 11, 2016, 11:00:00 PM
Quote"> from: SLCPaladin on October 12, 2016, 01:21:06 PM
Title: 2015 & recent loan quality
Post by: Booleans on October 12, 2016, 11:00:00 PM
from: .Ryan. on October 12, 2016, 03:36:27 PM
Title: 2015 & recent loan quality
Post by: justice42 on October 12, 2016, 11:00:00 PM
from: Booleans on October 13, 2016, 08:05:42 AM
Title: 2015 & recent loan quality
Post by: anabio on October 12, 2016, 11:00:00 PM
from: justice42 on October 13, 2016, 09:52:17 AM
Title: 2015 & recent loan quality
Post by: Peter on October 12, 2016, 11:00:00 PM
Quote"> from: Fred93 on October 11, 2016, 11:14:20 PM
Title: 2015 & recent loan quality
Post by: Fred93 on October 13, 2016, 11:00:00 PM
from: nonattender on October 13, 2016, 05:56:11 PM
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 13, 2016, 11:00:00 PM
If the Fed's data isn't good enough, the American Banker's Association does their own survey, and it says installment loan delinquency is at lowest point in the last 15 years. 

Something is different at Prosper and Lending Club vs the banks.
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 13, 2016, 11:00:00 PM
Ok, I warned you.
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 13, 2016, 11:00:00 PM
from: nonattender on October 14, 2016, 12:59:03 AM
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 13, 2016, 11:00:00 PM
Here's the chart that got me started on this quest to understand the recent changes in loan quality. 

I want to show you that LC's delinquency ratio is no longer tracking the delinquency ratio at banks.  I don't have LC's whole portfolio delinquency numbers vs time.  I suppose I could compute them, but its a big pain in the ass to do.  I do have what I think is an excellent proxy for same.  LC runs a fund called the "Lendingclub Advisors Broad Based Consumer Credit fund".  Sometimes LC documents refer to it as LCBBCCQ.  Its essentially an index fund holding all the grades etc of LC loans.  The fund's monthly reports show the $ late and current, so it was easy to compute the delinquency ratio each month.  I show data thru the August report.  The September report will be available in mid-November.   

I've plotted the all consumer loan "all banks" delinquency ratio computed by the Federal Reserve on the same chart.  This is computed quarterly.  The last point is 2015Q2.  Q3 number will come out in November.

You can see the two curves sorta undulate together, until something changed in April 2016.  The fed curve is drifting downward.  LC's curve is drifting slowly upward, but nothing dramatic until April 2016 when something changes.  Delinquency for my own portfolio took a similar turn at the same time.  (I haven't shown my portfolio here tho.)  When I saw that both my portfolio and LC's broad based portfolio both took a turn at the same time I knew it wasn't just something I'd done.  That's when I started looking more closely into delinquency by vintage, and picked up on the stuff I showed earlier in this thread.



Man, look at that bend in the curve at 04/2016.  That's just dramatic.  You can stand back 10 feet and still see it. 
Title: 2015 & recent loan quality
Post by: jpildis on October 13, 2016, 11:00:00 PM
I believe all of the bad press about LC has, at the margins, impacted borrowers willingness to stay current on loans.  The vast majority of borrowers wouldn't change their behavior but it only takes a few percent to really move the dial. Furthermore, I'm guessing all of the turmoil has slowed down LC's responsiveness to deal with EFT issues and slow payers.
Title: 2015 & recent loan quality
Post by: Rob L on October 13, 2016, 11:00:00 PM
from: Fred93 on October 14, 2016, 01:51:14 AM
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 13, 2016, 11:00:00 PM
from: Rob L on October 14, 2016, 11:58:44 AM
Title: 2015 & recent loan quality
Post by: RT45 on October 13, 2016, 11:00:00 PM
Formerly a "Certified FICO Professional", whatever that means.

I agree with with nonattender that the movement of credit card debt into installment loans is a risk for FICO models.

Traditionally it was assumed that installment loans were more safe or beneficial for scoring, and generally accompanied some type of asset, be it a car, home or degree.

If borrower behavior remains the same and the credit card debt is simply transferred from revolving to installment resulting in a significant FICO increase, then the risk is mis-priced and those borrowers will appear more "safe" than they actually are as a result of refinancing their credit card debt with an installment loan.
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 13, 2016, 11:00:00 PM
from: Fred93 on October 14, 2016, 01:34:43 AM
Title: 2015 & recent loan quality
Post by: jheizer on October 21, 2016, 11:00:00 PM
Hmm interesting note on credit card applications.  I'm the opposite.  We never get them anymore.  Maybe one ever few weeks.  I wonder if our score is too high to care about now or what.
Title: 2015 & recent loan quality
Post by: Fred93 on October 24, 2016, 11:00:00 PM
Here's an interesting note (paywalled)...
http://blogs.wsj.com/moneybeat/2016/10/24/subprime-credit-card-surge-pushing-up-missed-payments/
Quote
Title: 2015 & recent loan quality
Post by: Rob L on October 24, 2016, 11:00:00 PM
from: Fred93 on October 25, 2016, 10:59:41 AM
Title: 2015 & recent loan quality
Post by: pclee37 on October 25, 2016, 11:00:00 PM
Do I look at something wrong here? The chart is checking the % of current outstanding by calendar month. The percentage drops significantly in the last few months. Even if I exclude the 2016 bookings, the chart does not change
Title: 2015 & recent loan quality
Post by: TravelingPennies on October 25, 2016, 11:00:00 PM
from: pclee37 on October 26, 2016, 12:29:23 AM
Title: 2015 & recent loan quality
Post by: TravelingPennies on November 11, 2016, 12:00:00 AM
Here's an update on my delinquency chart using LC's most recent data, which adds one more month data point on each curve.  As before, the last four quarters vintages are the worst performing in recent history at their age.  Arrows highlight the most recent data point on each, which you can see is out in the open, well above the rest of the pack.  Next month I think we'll begin to get data on 16Q3.


Those with narrow viewing windows may need to scroll the image to see the legend on the right.
Title: 2015 & recent loan quality
Post by: jennrod12 on November 11, 2016, 12:00:00 AM
Thanks, Fred,

Nice chart and the arrows really help.  What a bummer, because I joined in the last month of Q3 2015.  :-[

Would you be willing to do the same chart for 36 month loans?

Jenn
Title: 2015 & recent loan quality
Post by: TravelingPennies on November 11, 2016, 12:00:00 AM
Ok.  36 month chart...  Delinquencies are lower in general for 36 month loans than 60 month loans.  I think this is mostly because 36 month loans are more concentrated in the higher quality grades.  The degradation in recent vintages is also less visible in 36 month loans, probably for the same reason.  2016Q1 & Q2 are well above the pack, while 2015Q3 & Q4 skim the top but don't really poke up.
Title: 2015 & recent loan quality
Post by: TravelingPennies on November 12, 2016, 12:00:00 AM
Thanks for the great work!
Over the past several months LC has taken a couple of steps to address what one might call "declining borrower quality".

One step has been to tighten lending standards (like reducing max DTI) and reject applicants in greater numbers that they previously would have accepted. The graphs you've shown (and will hopefully continue in the coming months) should show the effects of these measures. We'll get our first look at 16Q3 within a week or two and that will be very interesting! Where will that first dot be?

The second step LC has taken has been to increase interest rates. These higher rates provide us lenders with compensation for acceptance of "lower quality" borrowers. I don't think this increased interest rate effect will show up on your charts, right? If not, do you have any thoughts of a way that could be incorporated into the analysis? Maybe a tough thing to do and I sure don't have an answer.
Title: 2015 & recent loan quality
Post by: rawraw on November 12, 2016, 12:00:00 AM
from: Rob L on November 12, 2016, 01:43:38 PM
Title: 2015 & recent loan quality
Post by: TravelingPennies on November 16, 2016, 12:00:00 AM
Thank you, Fred!

Jenn
Title: 2015 & recent loan quality
Post by: TravelingPennies on November 20, 2016, 12:00:00 AM
LC has released the November payments file, which I downloaded & processed tonite.  This gives me a first look at 16Q3 delinquencies.  I'm traveling so I haven't updated the charts. 

For 60mo loans, at 1 & 2 & 3 months, 16Q3 is pretty much right on top of 16Q2.   All of the Q3 loans have not yet had 3 payments, so this numbers are still evolving a bit.  LC doesn't yet show the 3 month number for Q3 in the delinquency file they publish, but I figured with 94 delinquencies out of 8988 loans that have made 3 payments, we had enough data to calculate a meaningful number.

In short, there is no evidence yet that LC's credit changes have turned around the recent credit degradation.  The good news is that unlike 16Q2, 16Q1, 15Q4, the latest quarter 16Q3 wasn't significantly worse than the prior quarter. 
Title: 2015 & recent loan quality
Post by: TravelingPennies on November 20, 2016, 12:00:00 AM
from: Fred93 on November 20, 2016, 02:03:22 AM
Title: 2015 & recent loan quality
Post by: SLCPaladin on November 21, 2016, 12:00:00 AM
Quote
Title: 2015 & recent loan quality
Post by: TravelingPennies on November 21, 2016, 12:00:00 AM
No offense, but if I was LC I wouldn't raise rates.  I certainly do not want yield chasing, quick to panic retail investors.  I would want more passive retail money, likely managed by a disinterested third party.  Or money that can't easily leave, like retirement accounts.  No matter what you try to do, these panicky retail people will always be this way.  And you can't just raise rates to avoid bad times.  This is a market place of a commodity and we have limited pricing power.  That's just the way consumer lending works.