P2P Lending / NFT Lending Forum

From the most recent Loan Stats File for 2016 Q3 (policy 1 code loans only):



I'm reasonably sure LC makes most of its money from origination fees. My understanding of banks is that they are going with the sure thing A's. Maybe they drop to the B's; I dunno. Let's call the C's "no man's land" (or "many man's land"). Too risky for banks to put on their books but seen as reasonably conservative to individual investors and perhaps others. Finally there's the D, E, F and G "land of extreme risk" or as some would say "the land of the intellectually challenged". These extreme risk loans represent about 25% of LC's current originations. No small amount and I would guess almost exclusively retail investors fund them. LC has described retail lenders as "sticky money". It would be most unfortunate if they had the misconception that we are "dumb money". That said, I do not think LC has yet done enough to protect its "extreme risk" lenders. Many months have passed and our ship is still sinking. Additional actions are needed to "right the ship" or the "intellectually challenged" money funding 25% of LC's loans will dry up.

I've experienced declining returns for several quarters which is why I'm looking into real estate crowdfunding now.

from: Rob L on January 18, 2017, 06:43:10 PM

from: Rob L on January 18, 2017, 06:43:10 PM

from: Rob L on January 18, 2017, 06:43:10 PM

Yes, the cost to service consumer credit is not the same across the credit spectrum.  But LC charges a flat fee, which gives some of the lower grade notes higher returns than they should have.

Are your investments so short term that you have to sell when they decline?  If not, then it is easy enough to pick safe bank stocks.  Just because your LC portfolio isn't marked to market in a crisis doesn't make it safer.  I promise you a portfolio of LC loans would have been selling at similar discounts.

I think buying the last one is the wrong conclusion. I almost started a thread on this but stopped.  Instead of chasing returns, decide the rules that govern your LC investment.  And just stick by them

from: rawraw on January 20, 2017, 06:28:26 PM

I'm not so sure FHN is a good example.  A good rule of thumb is that any bank with C&D loans >20% is not a safe bank stock (I doubt they had this much for the tech crash etc).  Unfortunately it seems like all the real estate fintech guys are jumping into C&D lending. I sure hope it isn't a train wreck.

I'm not suggesting that large swings in stocks are easily ignored.   But just like we  don't check our LC's mark-to-market daily, we do not have to check our stocks either.  If you are worried about not taking a loss in a financial crisis, LC loans are probably not where you should be either.  But the point still remains that if you want someone else to make those decisions, I guess you can buy a LC fund or another financial.

Where does 6% come from?  But I agree with your conclusion about lower grade notes. I don't see much incentive to invest in them.
 
LC is subject to the market, which is highly competitive for consumer loans.  Especially  lately.    When a company's ability to live comes from originations and they don't hold the paper, they tend not to be incentivized to miss out on volumes.   Where as another type of lender could choose not to grow or even shrink slightly and earn money off of existing loans, LC is reliant on origination fees so they have to move with the market or give up a lot of profit.  Anil used to bring this up in the past, but I think it is essential to understanding how the dynamic will work over time. 
   

The part I find really interesting with all this is that on Jan 10 I decided I needed to sit down and make a decision.  Start pulling out or start investing again.  After not reinvesting for 2.5 months I had a decent amount sitting there.  I decided to set up an extremely strict filter targeting only B and C loans.  It's grabbing about 80% B 10 C so far.  I've decided to not reenable my folio buyer.  I just want to say good buy to all 2015 and 2016 even if they look good.  Hopefully this semi gut reaction works out.

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from: rawraw on January 21, 2017, 03:45:19 AM

from: SLCPaladin on January 21, 2017, 05:28:37 PM

from: SLCPaladin on January 21, 2017, 05:28:37 PM

from: rawraw on January 22, 2017, 05:18:55 AM

You got it right nonattender.
Quote"> from: Rob L on January 21, 2017, 08:54:09 PM

from: rawraw on January 22, 2017, 07:09:51 AM

Quote"> from: Rob L on January 21, 2017, 08:54:09 PM

from: nonattender on January 22, 2017, 10:32:18 PM

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For the record, I also don't like "secret loan programs." Thanks to non-attender for explaining the history of this. I am, however, excited to hear more about LC's refinance auto-loan product. I tend to think it is good for LC to experiment with this sort of innovation, so long as they are upfront and transparent about it, and only if they do it in a way that doesn't put other lenders in jeopardy. Personally, I would be very interested in investing in an LC loan secured by a mortgage or an auto title.

This is in reply and agreement to much of what has been said above so I'll omit quotations for brevity. When I said LC's underwriting was broken I may have misspoken or been misunderstood, but it's really simple. Divide the world into low risk and high risk borrowers. It's a fuzzy line but that's ok, go with the flow.

My crystal ball envisions a future where banks (Discover, Marcus, and those that follow) dominate the low risk world. The banks et.al. are just as savvy as LC, meaning LC has no informational or underwriting advantage over them (maybe less; who wants to compete with GS quants anyway?). What happens? LC is only able to originate low risk loans at rates lower than what the banks find profitable. No problem; it's not LC's money they're loaning anyway. A year or two LC investors figure out their loans aren't doing so great. This is kinda like individual investors buying notes in whole loans that the institutions passed on in the first place. That never seemed to be a very smart thing to do personally. So as time passes LC becomes less and less able to compete for low risk borrower's business.

High risk is different. So many regulators are looking over banks shoulders they can't throw their FDIC insured depositors money out there as stupidly as was once the case. I don't see them competing for this business for a very long time. LC and other MPL's have this field to themselves, but what are they doing? They are making high risk loans at "near low risk" interest rates. I don't mean the interest rates are low in an absolute sense, but the projected returns per LC's own crystal ball are abysmal. Well, that's a great way to make tons of originations right now, but you hose your lending base at the same time. This returns to the "suffer fools gladly" theme. Eventually fools figure out the game and walk away from high risk loans, leaving LC with nothing. I don't understand why LC doesn't get it.

I am very much looking forward to rebuttal to this bleak thesis. I'd really like to remain optimistic, but I've got the above in my head right now. Can somebody put a smiley face on the future?

from: SLCPaladin on January 23, 2017, 03:52:53 PM

I appreciate the explanation - thanks.

from: Rob L on January 23, 2017, 06:45:55 PM

from: rawraw on January 25, 2017, 06:24:34 PM

You would think that being all web based would b a positive for a lot of people now a days.  But most are catching/caught up there already.

Interesting story.  I have a friend who has known I have been in investing in LC from day 1.  The topic comes up now and then.  The other day he logged into his Amex account to pay his bill and saw their banner saying get a personal loan.  He was like that is a great idea I can pay off XYZ.  Clicked, got it, and done.  He had known about me and LC for at least a year at that point and he is a commercial property underwriter so not like it is some topic totally foreign or hard to understand to him.  But for some reason the amex banner made him go Hell yes. (It might have been an email and not a banner, but same idea of practically $0 acquisition cost borrower)  He didn't even compare rates to LC or anywhere else.  I'm not sure if it was the brand name or what that made the idea click and him borrow.  Hard to compete with that.

1) Yes, but a lot of it was due to indemnification clauses in terms of fraud. If the loan has defects, it can be put back.  Like I've said on this forum before, comparing LendingClub to a mortgage originator is the best mental model I can find.

3) I don't think it's fair to say there is no competition for high risk. It's certainly less competition, but low rates have caused people who normally wouldn't lend in the space to enter. So you have hedge funds, pensions, and other institutions competing for yield.

Ultimately the above (LC being a mortgage broker) is why I never could justify the stock price, even at these levels. But the factors that make them attractive busines vs just one that provides attractive loans for me are separate. 

I currently expect companies like LendingClub to become more like a provider of services for others, like banks. Every bank in the country uses the same few core processors and people for their websites, but to the consumer it looks bank specific. It seems like most of these Fintech firms will go from customer acquisition models to software solutions for banks and others. But some will certainly stay with the current model, but it really needs a ABS market to sell into.  At least, this is how I think about it

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