Blog Post: Automated Buying of Notes on Lending Club Folio Secondary Market

[AnilG]

Automated Buying of Notes on Lending Club Folio Secondary Market
https://www.peercube.com/blog/post/automated-buying-of-notes-on-lending-club-folio-secondary-market" class="bbc_link" target="_blank">https://www.peercube.com/blog/post/automated-buying-of-notes-on-lending-club-folio-secondary-market

Why should you buy notes from secondary market?

- Returns from Day One
- No Waiting for Loans to be Issued
- Minimize Early Prepayments
- Avoid Straight-Rollers
- Purchase Seasoned Notes
- Buy Notes of Shorter Term

[Rob L]

Not to mention that the number of fractional loans presently being released by LC four times a day is quite small.

[TravelingPennies]

I was just trying to list reasons that apply across different situations. You are correct, right now the lack of new loans on primary platform, greater possibility of loans not getting sufficient funding to be issued, and borrower not wiling to wait long enough are good reasons to consider purchasing notes on secondary market.

https://forum.lendacademy.com/index.php?topic=3928.msg35981#msg88888888Quote"> from: Rob L on June 13, 2016, 01:38:24 PM

[fliphusker]

I think what you are doing is a great service Anil.  Anyone who has done anytime digging through FOLIO knows how bad the site is to deal with. 
The question I have though, is why not set filtering with more options?  Will that come in the future?  I have pretty stringent filters that I use, and do not deviate from them.  DTI, income and public records, just to name a few. 

[TravelingPennies]

Staleness and unavailability of credit data such DTI, income and public records is the main reason such data doesn't work well with automation. Despite my best attempts to reconstruct credit data for recently issued loans from other sources, I still miss out a large fraction. Using credit attributes will restrict the filters to picking loans that are at least one quarter+ old. Majority of Folio activity is with loans issued within last 0-6 months. Also, once loans have been issued and paid for a while, application level credit data becomes much less relevant. The loan status change, payment history and FICO change becomes more important.

BTW, I do provide manual filtering using credit data but not automated filtering (too many things can go wrong).
https://www.peercube.com/filter/filtercreate" class="bbc_link" target="_blank">https://www.peercube.com/filter/filtercreate

https://forum.lendacademy.com/index.php?topic=3928.msg35984#msg88888888Quote"> from: fliphusker on June 13, 2016, 02:29:26 PM

[TravelingPennies]

https://forum.lendacademy.com/index.php?topic=3928.msg35986#msg88888888Quote"> from: AnilG on June 13, 2016, 02:57:34 PM

[TravelingPennies]

The historical loan data file is not updated and released until a few weeks after a Quarter has completed. This file includes the information about loans that were issued in the last Quarter. Without this file you don't have access to loan and credit attributes for a large number of new loans. As this file will be used to filter loans for credit and loan attributes, you will miss out on the loans issued in last Quarter. This is what I mean by "unavailability" of credit data for a large segment of new loans. Similarly, by the time historical loan data file is released, some of the time-sensitive data such as loan status, recent FICO score etc. are already stale (old) and might have changed. Any filtering based on stale data will result in erroneous automated purchase. By using manual filtering, you are able to review individual loan and note data for any such discrepancies but you don't have that luxury with automated filtering without adverse impacts.

The loan and credit data provided at the time of loan application loses its "relative" value with time. Older the loan, less likely this application data will help you make better note selection. Borrower payment history, change FICO and loan status become much more valuable once loan has been issued. The payment history, FICO change and loan status will help you more in identifying leopards who have changed their "stripes" than the information on stripes 12 months ago. If we had access to updated credit data, nothing will be better than that but we don't have access to updated credit data. We have to make the best decisions based on what information is available and updated unless we want to take our ball and go home because we don't like the playing field.

BTW, have you read my blog post  "FICO Score Trends and Defaults for Lending Club Loans" https://www.peercube.com/blog/post/fico-score-trends-and-defaults-for-lending-club-loans?" class="bbc_link" target="_blank">https://www.peercube.com/blog/post/fico-score-trends-and-defaults-for-lending-club-loans? 99+% of loans with FICO trend of FLAT and UP from application FICO fully pay the loans. The odds are in your favor that most borrowers with Up FICO trend will repay their loans.

https://forum.lendacademy.com/index.php?topic=3928.msg35987#msg88888888Quote"> from: fliphusker on June 13, 2016, 03:56:03 PM

[TravelingPennies]

https://forum.lendacademy.com/index.php?topic=3928.msg35987#msg88888888Quote"> from: fliphusker on June 13, 2016, 03:56:03 PM

[GregTexas]

Anil I'm curious how your system handles if multiple buyers' filter settings result in customers vying for the same note(s)? Which customer gets the note(s)? Do you process with the customers randomly sorted for each session?

[TravelingPennies]

Yes, random.

https://forum.lendacademy.com/index.php?topic=3928.msg35998#msg88888888Quote"> from: GregTexas on June 13, 2016, 07:42:28 PM

[TravelingPennies]

https://forum.lendacademy.com/index.php?topic=3928.msg35993#msg88888888Quote"> from: AnilG on June 13, 2016, 05:27:26 PM

[TravelingPennies]

https://forum.lendacademy.com/index.php?topic=3928.msg36002#msg88888888Quote"> from: fliphusker on June 13, 2016, 09:41:41 PM

[TravelingPennies]

Lets do a thought exercise.

Q1a: Will you buy loan ID 6744587 from primary platform? Why or why not?
Q1b: When would you have sold this loan if you bought from primary platform? Why?
Q2: Will you now buy a note from Loan ID 6744587 on Folio and what premium/discount you will be willing to pay? Why or why not?
Q3: If you hold a note from this loan in your portfolio, will you sell this note now? If yes, at what premium/discount and why? If not, why not?

Loan Details on PeerCube
https://www.peercube.com/comment?loanid=6744587" class="bbc_link" target="_blank">https://www.peercube.com/comment?loanid=6744587

A few notes from this loan listed for sale on Folio
https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=6744587&order_id=76770933&note_id=28750753" class="bbc_link" target="_blank">https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=6744587&order_id=76770933&note_id=28750753
https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=6744587&order_id=66076167&note_id=28749212" class="bbc_link" target="_blank">https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=6744587&order_id=66076167&note_id=28749212
https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=6744587&order_id=16022463&note_id=28749207" class="bbc_link" target="_blank">https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=6744587&order_id=16022463&note_id=28749207
https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=6744587&order_id=10391995&note_id=28749387" class="bbc_link" target="_blank">https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=6744587&order_id=10391995&note_id=28749387
https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=6744587&order_id=12117700&note_id=28747801" class="bbc_link" target="_blank">https://www.lendingclub.com/foliofn/browseNotesLoanPerf.action?showfoliofn=true&loan_id=6744587&order_id=12117700&note_id=28747801

https://forum.lendacademy.com/index.php?topic=3928.msg36002#msg88888888Quote"> from: fliphusker on June 13, 2016, 09:41:41 PM

[TravelingPennies]

Lets do a thought exercise.

Q1a: Will you buy loan ID 6744587 from primary platform? Why or why not? 
No, has 3 issues that would kick it from my filter.  Income, inquiry and BK.   
Q1b: When would you have sold this loan if you bought from primary platform? Why?
I would have posted it immediately if accidentally bought.  For the same reasons I would not have bought it above. 
Q2: Will you now buy a note from Loan ID 6744587 on Folio and what premium/discount you will be willing to pay? Why or why not?
I still would not buy this note on FOLIO, due to not meeting my initial criteria.  I did not break it down and taking a rough guess to keep the YTM at or above its current value, would be -6%.  I am assuming I am high,but would be what I would be willing to pay for it if I was going to buy it. 
Q3: If you hold a note from this loan in your portfolio, will you sell this note now? If yes, at what premium/discount and why? If not, why not?
If this was an accidental buy, only reason I would end up with it, I would sell it. 
I sit on over 70 notes similar to this (not same number of payments obviously) because of a bad filter on LR when I initially started.  70 is not much to most here, but that is a big chunk for me.  And I do list them on FOLIO.  Normally for 1% simply to cover the fee.  Right now I have them at 0, as most of them would just make a bit.  While I would feel more comfortable in loans I know have a smaller chance, as a whole, not to default.  Sure, most of the notes are probably just fine, but I see them as ticking time bombs. 
Loan id: 73955953 this is one bomb that has already gone off.  1 payment then BK.  You see any reason why a sane person would invest in that note?

Lets do a bit of backtesting and get specific on this note. 
40-45k income and more then 1 inq. on an E grade note.=6.95 ROI and 13.42% loss. 4,213 total notes. 
Let's toss in some of my filters.
E notes-11.7 ROI and 8.19 loss on 1700 notes.  Relevant count?
C notes-10.3 and 3.6 loss on 12.6k notes. 
Hope I am not comparing apples to dolphins here.  But just by cutting off a couple of simple criteria points, I have significantly increased earnings and decreased risk. 
And yes, I see the listings you have there for the same note, and how they are broken.  Just another reason to not use FOLIO for searches. 

[TravelingPennies]

https://forum.lendacademy.com/index.php?topic=3928.msg36008#msg88888888Quote"> from: AnilG on June 14, 2016, 01:21:08 AM