cedarcourtcapital
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Listening is not the same as understanding
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Post by cedarcourtcapital on May 4, 2018 14:52:52 GMT
Am I being overly naïve to think that a developer, whose exit plans do not come to fruition as he specified when he took out the loan, should have to pay a price? If a borrower sets out a plan and borrows based on it, then something goes awry, should they not have to pay an increased rate for their over run period?
I am asking this question because of the number of over runs and required extensions, now without the lender's option to cash out. Can anyone remember a Moneything development loan that ended on time?
I agree that development loans always seem to over run, but is this because the borrower has no real incentive to not seek an extension, other than his total amount of interest. Would it not be better to focus the borrowers mind, by having some penalty, known at the start, for over runs? This would probably require a shift in P2P platform thinking, but would that be unreasonable?
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archie
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Post by archie on May 4, 2018 15:00:03 GMT
Legals can take months so it's common for a loan to overrun. I think it's reasonable to charge a penalty rate if the extension gets an extension unless there is strong evidence of an imminent completion.
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hazellend
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Post by hazellend on May 4, 2018 15:06:27 GMT
I think it is reasonable too.
It’s a fine balance between making money and forcing default. I like seeing developments succeed.
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ptr120
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Post by ptr120 on May 4, 2018 15:13:40 GMT
I agree with archie on this and have expressed the same view to Ed in the past. An extension? Ok, - things happen. An extension on an extension, then the rate needs to go up.
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jlend
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Post by jlend on May 4, 2018 15:18:12 GMT
I do wonder if sometimes borrowers leave refinancing too late.
It has been obvious for some time that the Liverpool loan was going to need to refinance due to the slow off plan sales.
They could have started this many months ago.
I guess hindsight is easy....
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spiral
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Post by spiral on May 5, 2018 9:05:02 GMT
Someone posted a very good explanation (probably about 6 months ago) as to why the coupon rate of a loan should increase nearer the time of repayment.
It seems to me that many of the discussion points regarding extensions of loans and SM discounting would be addressed if this was done at source.
Lets say the coupon rate for a loan is deemed 12% as average over a 12 month period. If the loan started out as 10.5% but incremented by 0.25% per month, after 12 months the coupon rate would be 13.5% but at an average of 12% during this period.
This would make the loan more saleable later on but also focus the borrowers efforts to repay the loan because a 3 month extension would result in an average rate of 14% (13.75, 14.0 and 14.25) for those 3 months, an additional 3 months then becomes 14.5% and so on.
Obviously these are only the lender's rates but MT would also have their margin on top of this but it would help focus the borrowers mind on repaying sooner rather than later and also provide a better coupon rate to those taking on the greater risk with the loan as it nears the repayment date.
It also offers the borrower a discount incentive to pay up early as in this scenario, if they repaid 6 months early, their rate would average 11.25%.
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SteveT
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Post by SteveT on May 5, 2018 9:11:50 GMT
Someone posted a very good explanation (probably about 6 months ago) as to why the coupon rate of a loan should increase nearer the time of repayment. It seems to me that many of the discussion points regarding extensions of loans and SM discounting would be addressed if this was done at source. Lets say the coupon rate for a loan is deemed 12% as average over a 12 month period. If the loan started out as 10.5% but incremented by 0.25% per month, after 12 months the coupon rate would be 13.5% but at an average of 12% during this period. This would make the loan more saleable later on but also focus the borrowers efforts to repay the loan because a 3 month extension would result in an average rate of 14% (13.75, 14.0 and 14.25) for those 3 months, an additional 3 months then becomes 14.5% and so on. Obviously these are only the lender's rates but MT would also have their margin on top of this but it would help focus the borrowers mind on repaying sooner rather than later and also provide a better coupon rate to those taking on the greater risk with the loan as it nears the repayment date. It also offers the borrower a discount incentive to pay up early as in this scenario, if they repaid 6 months early, their rate would average 11.25%. I fully agree with your sentiment, but your proposed solution makes little sense to me. The loan contract agreed upfront with the borrower is a fixed rate of interest for a defined term. If all lenders held their loan parts to term then all lenders would be fairly compensated for the risk they bear. The issue of risk rising through the term only arises because MT operates a secondary market that trades all loan parts at Par. The only logical approach to pricing such secondary trades correctly, reflecting the increasing risk involved as they approach term, is to permit loan parts to be traded at a discount.
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spiral
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Post by spiral on May 5, 2018 9:28:25 GMT
The loan contract agreed upfront with the borrower is a fixed rate of interest for a defined term. But that is what I'm suggesting changes. If the contract states rate starts at 10.5% but increases by 0.25% on each additional calendar month then it would incentivise them to repay on time or early. I am not against discounting SM sales and would favour it but believe that my suggestion would also address the OP's point regarding extensions being made without increasing the rate of the loan. i.e. It kills 2 birds with one stone so I'm not sure whether your statement refers to the fact that they are a fixed rate for a defined term because that is a legal requirement and as such my example could never work.
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agent69
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Post by agent69 on May 5, 2018 9:33:00 GMT
We often see people incentivized to invest in new loans via the cash back system, but I have often wondered if there was a marketplace for a platform that took the opposite approach, by offering an incentive to keep loans to term (something like the old terminal bonus system from endowment mortgages). So instead of paying 12% over 5 years it pays 11% and whoever is left holding the parcel at the end of month 60 get the extra 5%.
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SteveT
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Post by SteveT on May 5, 2018 11:33:56 GMT
The loan contract agreed upfront with the borrower is a fixed rate of interest for a defined term. But that is what I'm suggesting changes. If the contract states rate starts at 10.5% but increases by 0.25% on each additional calendar month then it would incentivise them to repay on time or early. I am not against discounting SM sales and would favour it but believe that my suggestion would also address the OP's point regarding extensions being made without increasing the rate of the loan. i.e. It kills 2 birds with one stone so I'm not sure whether your statement refers to the fact that they are a fixed rate for a defined term because that is a legal requirement and as such my example could never work. I misunderstood you, assuming you meant the borrower would still pay, say, 16% to the platform but the platform, rather than paying 12% to lenders throughout the term, started paying 10.5% and finished paying perhaps 14%. However I think your suggestion would be a hard sell to convince potential borrowers (in a competitive lending market) to pay a rising rate of interest, even starting a little lower, when comparable offers from other lenders were at a fixed rate.
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pom
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Post by pom on May 5, 2018 13:07:59 GMT
We often see people incentivized to invest in new loans via the cash back system, but I have often wondered if there was a marketplace for a platform that took the opposite approach, by offering an incentive to keep loans to term (something like the old terminal bonus system from endowment mortgages). So instead of paying 12% over 5 years it pays 11% and whoever is left holding the parcel at the end of month 60 get the extra 5%. Sounds a bit like what Lendy tried.... That's working well...
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agent69
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Post by agent69 on May 5, 2018 15:42:10 GMT
We often see people incentivized to invest in new loans via the cash back system, but I have often wondered if there was a marketplace for a platform that took the opposite approach, by offering an incentive to keep loans to term (something like the old terminal bonus system from endowment mortgages). So instead of paying 12% over 5 years it pays 11% and whoever is left holding the parcel at the end of month 60 get the extra 5%. Sounds a bit like what Lendy tried.... That's working well... I'm not in Lendy, but they tell me nobody has ever lost a penny!
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pom
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Post by pom on May 5, 2018 18:00:48 GMT
Sounds a bit like what Lendy tried.... That's working well... I'm not in Lendy, but they tell me nobody has ever lost a penny! Yeah and maybe we'll (fortunately I have sufficiently little "stuck" to not really care) get our bonus interest before the sun swallows the earth....
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