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Reasonable Way to Price In Grace Period Notes?

Started by Peter, January 08, 2013, 11:00:00 PM

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mo

I have a note that is listed as "In Grace Period" and On Payment Plan with 0 payments so far.  What is a reasonable way to price that loan for sale on FolioFN?  Should I even bother to try selling it or hope the payment plan works out?

https://www.lendingclub.com/account/loanDetail.action?loan_id=2285418" class="bbc_link" target="_blank">https://www.lendingclub.com/account/loanDetail.action?loan_id=2285418

New Jersey Guy

Interest Radar Results.

Note ID   Principal   Accrual   Asking Price   Markup/Discount    YTM   Days Listed
16089324    $300.00    $5.71    $259.75    -13.42%    30.52%    0 day
16087073    $50.00    $0.95    $45.00    -10.00%    26.97%    0 day
16081798    $25.00    $0.48    $25.26    +1.04%    17.19%    0 day

In the business of hustling notes more than most, I always try to make my prices more attractive than the next.  So I'm always checking to make sure the next guy isn't offering a better deal than me!

Forget the stats on the note for $259.  High price notes are harder to sell.  Normal people in the $25 and $50 note business will normally skip buy those regardless the discount.

I would discount my note 10.25% to 10.5% in order to offer a better deal than the guy at 10%.  However, I can tell you than even discounting a single penny less than the other guy will normally guarantee you the sale first.

Monitor your note closely over the course of the next week.  As more investors see it's going into grace, chances are you'll see more appear in the listings.  Somebody is bound to undercut you, so watch out.  You need to dump that note quickly for the reasons outlined below.

From a speculative view, I wouldn't touch that note for anything less than a 30% discount only because there is no payment history.  Grace notes only stay in Grace for a few days.  Once it goes 16-30 then I'd be looking to buy that note for 35% to 50% off.
 

TravelingPennies

".....or hope the payment plan works out?"

Oh, I forgot about that part!  I've had fairly good luck with payment plans!  What I look for is communication between LC and the borrower in the notes.  It's much more encouraging when a borrower makes a promise rather than seeing a half-dozen notations where LC is unable to contact the borrower. I've picked up several "Payment Plan" notes for my regular portfolio at discounts just to have them continue to pay!

Frankly, you're kinda stuck between a rock and a hard place on that particular note.  Personally, I'd hold it just to see what happens.  If the person comes through and pays, then that note will be worth more as "Current" on the secondary market.  I've sold notes similar to this situation for as little as 50-cents to $1 under par (for a profit, of course!)  Heck, if that happens, it might even be worth holding onto for another month or two before re-evaluating it.  It could end up to be a good payer.  However, if this borrower fails to keep their promise on the payment plan, dump it fast.......and cheap!

AnilG

This is the reason I advise people to stay away from FolioFN. It's state is no different than Prosper 1.0 where lenders were stepping over each other and driving interest rate lower in hopes to attract the borrower. In the end, lenders landed up getting burnt and Prosper reputation was tarnished because of lenders' own greed.

Using comparable to price the note is not a good idea unless market was efficient which FolioFn is not. I will encourage you to read Freakonomics where authors discuss use of comparable in real estate market.

The key with listing notes in the secondary market is to determine intrinsic value of notes at the time of listing notes on Foliofn. Use Time Value of Money and Discounted Cash Flow concepts to price the notes. Spend more time figuring out what will be default probability of your note and accordingly discount the note. If note doesn't sell at that price, eat the note. Don't start reducing the price until someone bites, it is only race to the bottom.

Also, you will come out ahead by eating some notes than sell all notes at deep discount. Remember not all troubled notes will default. Instead of getting rid of all troubled notes at any cost, try to do some math to figure out whether you will come out ahead as a whole by eating a few notes.

https://forum.lendacademy.com/index.php?topic=619.msg2607#msg88888888Quote"> from: New Jersey Guy on January 09, 2013, 08:59:01 PM

rev

In Grace Period notes are tough to price, because we have little data about them. The payment history skips that status almost completely: the billing cycle of the note ends 29 days after it's due date, so it captures either the Late 16-30 days in its final day, or already Late 31-120 days.
I have put together a rollover report in Interest Radar for late and defaulted notes, but there isn't much more we can do other than trust Lending Club's 84% recovery rate for "once in Grace Period" notes (https://www.lendingclub.com/info/statistics-performance.action" class="bbc_link" target="_blank">https://www.lendingclub.com/info/statistics-performance.action).
So, based only in that figure, I'd say the rule of thumb is to price your note at 16% discount or less. Like Anil said, if it sells, statistics are on your side, if it doesn't, then don't lower the price because you're, in average, better off keeping it.

(Unless of course you're going to risk your health and have a heart attack if one of your notes becomes late or defaults. Some people are so averse to loss that they prefer not to play the game. In that case, do what NJ Guy said, let the rule of the free market price it and offer it for lower than the competition is offering.)

TravelingPennies

"It's state is no different than Prosper 1.0 where lenders were stepping over each other and driving interest rate lower in hopes to attract the borrower."

I'm not sure how Prosper works, but I'm pretty sure about Folio.  The interest rates are locked regardless of how many lenders are selling and how low the price goes.  In the case of the note in question, there are going to be several other investors with the same note asking the same questions.  Conservative investors will begin listing the same note at different prices, so there will be competition.  It's not unusual to see the same note listed on Folio 3, 4 or even 6 times once it goes Grace.  If getting rid of the note is a priority, then he needs to list it attractively. 



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