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Post by valueinvestor123 on Jan 25, 2015 1:44:15 GMT
I suspect the reality of the situation would be that if a large majority wanted to bail out, they would be able to at a price because of the market place that exists, the 5 yr loans may reach 20%+. This in itself would become self limiting as a high majority that wanted to sell out would stay put when they see the cost of selling (something that currently prevents some from selling out at current rates) and there will always be someone willing to by at the right price. I think you assume that conditions or parameters may always stay same or similar. I was proposing a scenario that was an unknown unknown. What if there isn't anybody to buy at any price for some reason? If there is a widespread doubt over the worth of the loans, why is it unfeasible to imagine that nobody might buy in at any price? It happened to banks in 2008 with the 'safe', chopped up into million pieces MBSs or CDOs, making the underlying appear safer, together with the CDS insurance etc; all this complexity designed to reduce risks only obfuscated and increased the risks of the underlying investment when the crisis hit. I don't want to be scaremongering or sound flippant it's just that anyone who knows anything about how financial markets operate will know that unforeseen and unimaginable things happen much more often and with much more severe consequences than any statistics can predict (fat tail, black swan, whatever you want to call it). Perceived risk is what matters. I think Westonkev made a point somewhere about precisely that. In a crisis, the law of unintended consequences and the knock on effects (in areas which one would never imagine have anything to do with the origin of the crisis) can be a powerful thing. In 2006, a very wealthy acquaintance of mine from the US was dead sure that a housing bubble was around the corner. He sold some flats in New York and invested some of the proceeds into a 'safe' hedge fund, the Bernard L. Madoff Investment Securities LLC. The crash eventually came, he was right about that, but the prices in New York real estate barely moved. Many hedge funds went bust but this one hedge fund was a special case...(but if the crash never came and people didn't start withdrawing, it would have continued indefinitely). I am not suggesting fraud by any means, just that perceived and actual risk don't go hand in hand and people tend to apply hindsight reasoning, making them believe that the future will be different or that same mistakes won't be repeated. Anyway, this information is not terribly helpful so...IMHO don't worry too much about the ratios of the provision fund. The only way to counteract the unknown unknowns to some extent, would be to embrace the fact that there are risks one can never guard against and rather than making one investment as 'safe as possible' with a humongous provision fund or insurances or guarantees etc it's still always much safer for the investor to diversify among asset classes as well as within an asset class since no one investment is safe. In fact it is often safer to have a bunch of risky investments spread among various asset classes, than a single 'safe' one. Apologies for the lack of coherent thought, the pinot noir may have something to do with it.
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Post by moneyball on Jan 25, 2015 23:09:52 GMT
valueinvestor123
I agree that the existamnce of a PF isnt a completely fail safe mechanism against total meltdown... but to be fair to RS, I dont think they'd agrue that either.
Id even accept that the PF may not be the most efficient use of capital within this business opportunity/model but youd have to agree that in exchange for (in my opinion, relatively small) the amount of cost in efficiency, RS offer lower maintenance/micro managing requirements not to mention, added commercial appeal in this still, relatively new and fledgling industry... at least with regards to retail investors?
I also agree that true diversification lies in investment across multiple asset classes (business, paper, property, commodities, currencies, IP rights etc) but even given that, doesnt on its own negate the value (perceived or otherwise) of a provision fund.
In the gambling community, something called the "Kelly criterion" can be used to maximise efficiency but for various reasons, many intelligent participants either ignore it, or dilute it.
In other words, it has its place.
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pip
Posts: 542 
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Post by pip on Jan 31, 2015 21:56:56 GMT
I have always thought that Ratesetter is great however now the provision fund coverage concerns me a little. The coverage ratio is 1.47, and even more concerning has been falling pretty consistently at 0.01 a day for the past few months from around 2.2.
At this rate by around mid March the provision fund will be level with the expected bad debts!
I am also concerned that the level of bad debts as a % of repayments seems to have risen significantly in the last year and the current level of repayments over a month behind seems high (although i do understand this will rise as the amount on loan increases).
My final concern is that to my knowledge nothing happened last year that would mean that the bad debt ratio's should rise. Unemployment fell, interest rates stayed low and there was no fall in house prices. What would happen if unemployment rises, interest rates rise and house prices fall?
A few questions:
a) do people think that the coverage ratio will continue down to 1.0 and below in the next few months or is there any sign it will level off. I have looked and the monthly bad debt as a % of expected bad debt and every month (bar month one) is below 3.7 bad debt to repayment ratio (what I work out to be the current level where bad debts would equal the provision fund) which means that in theory it should not go down forever but the fall does seem relentless at the moment.
b) if the ratio does go down below 1.0 does this mean that the provision fund is 'depleted' and will go into pooled repayments?
c) Ratesetter say ' If we see increases in claims we're able to adjust our risk parameters with a deft flick here and a minor twist there.' I am assuming that based on the current months record lending ratesetter has not significantly tightened lending? In fact in the last year I have noticed that the average income of borrowers has fallen a little, so I am assuming that the lending criteria has if anything been loosened? Is now the time for ratesetter to tighten lending even if it means monthly matches decline?
d) Do any other lenders have any plan at what levels they plan to either i) stop lending or ii) sellout. I will tell you mine, I no longer plan to lend at the 5 year until the rate passes 1.5, I am happy in the monthly until 1.36 and below 1.22 I am selling out everything. Does anybody else want to share theirs?
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Post by oldatheist on Jan 31, 2015 23:16:32 GMT
I'm confident it is not going to fall to those levels. As explained in a previous post, the falls we are seeing are do to the charges on borrowers to cover this from front ending the charge to spreading them over the lifetime of the loan.
If you look at expected default rates you will see a huge increase from 2013 to 2014, and a corespondent huge decrease in actual defaults across those 2 years. Expected defaults are unchanged this year but I can see no reason why they are so much higher than 2013 other than RS being rather conservative on expectations.
I see no real cause for alarm.
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c88dnf
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Post by c88dnf on Jan 31, 2015 23:24:22 GMT
I have always thought that Ratesetter is great however now the provision fund coverage concerns me a little. The coverage ratio is 1.47, and even more concerning has been falling pretty consistently at 0.01 a day for the past few months from around 2.2. At this rate by around mid March the provision fund will be level with the expected bad debts! Goodness me, that coverage ratio has people's unmentionables in a twist. Forget about it. The only important piece of data is what percentage of the money out on loan is covered by the fund. As I write, there is £300,741,749 out on loan and £11,184,617 in the Provision Fund. So roughly 3.72% of the monies on loan are covered by the fund. If you go back to page 2 of this thread, you'll find the equivalent figures (from me) for December 1st, 2014. Two months ago, 3.78% of the monies on loan were covered by the fund. So that's erosion of about 0.03% per month. IF the erosion were to continue at the same rate, then the fund would reach parity with the 2.5% expected default rate in 40 months, not by March, and be exhausted in 124 months. That assumes that RS management simply go to sleep and don't act at some point. That seems somewhat unlikely, not least as on the same page of this thread, RS's representative westonkevRS indicated that the coverage ratio (and hence the fund size) was expected to grow again from 2Q2015. You'll gather that I'll happily be investing in all markets which offer a competitive rate.
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jlend
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Post by jlend on Feb 1, 2015 19:34:54 GMT
I have always thought that Ratesetter is great however now the provision fund coverage concerns me a little. The coverage ratio is 1.47, and even more concerning has been falling pretty consistently at 0.01 a day for the past few months from around 2.2. At this rate by around mid March the provision fund will be level with the expected bad debts! Goodness me, that coverage ratio has people's unmentionables in a twist. Forget about it. The only important piece of data is what percentage of the money out on loan is covered by the fund. As I write, there is £300,741,749 out on loan and £11,184,617 in the Provision Fund. So roughly 3.72% of the monies on loan are covered by the fund. If you go back to page 2 of this thread, you'll find the equivalent figures (from me) for December 1st, 2014. Two months ago, 3.78% of the monies on loan were covered by the fund. So that's erosion of about 0.03% per month. IF the erosion were to continue at the same rate, then the fund would reach parity with the 2.5% expected default rate in 40 months, not by March, and be exhausted in 124 months. That assumes that RS management simply go to sleep and don't act at some point. That seems somewhat unlikely, not least as on the same page of this thread, RS's representative westonkevRS indicated that the coverage ratio (and hence the fund size) was expected to grow again from 2Q2015. You'll gather that I'll happily be investing in all markets which offer a competitive rate. I'm also still "comfortable" investing in all markets - and more "comfortable" than I was in 2010 when I signed up that is for sure.
Just for clarity, I see Westonkev adjusted his thoughts on when he thought the coverage ratio would grow to 3Q2015 on his post on Jan 18th, rather than 2Q2015 in an earlier post. So I am expecting the ratio to fall further over the next 6 months, starting to level out in Q3.
Telling people to "forget about it" feels a bit harsh, even if it's with the best of intention :-) If someone is worried, they should ask a question, see what the responses are (including those from westonkev), and then decide themselves if they want to keep on lending. I am sure there will be a few lenders who feel the "risk" of P2P lending through ratesetter is too much for them over the coming months as the coverage ratio falls, and they are happier putting their money in a savings account.
I agree the provision fund still appears healthy. I am sure there is a ratio I would also stop lending, but I honestly don't know what it is right now, and I am still comfortable lending.
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pip
Posts: 542
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Post by pip on Feb 1, 2015 21:20:23 GMT
I have always thought that Ratesetter is great however now the provision fund coverage concerns me a little. The coverage ratio is 1.47, and even more concerning has been falling pretty consistently at 0.01 a day for the past few months from around 2.2. At this rate by around mid March the provision fund will be level with the expected bad debts! Goodness me, that coverage ratio has people's unmentionables in a twist. Forget about it. The only important piece of data is what percentage of the money out on loan is covered by the fund. As I write, there is £300,741,749 out on loan and £11,184,617 in the Provision Fund. So roughly 3.72% of the monies on loan are covered by the fund. If you go back to page 2 of this thread, you'll find the equivalent figures (from me) for December 1st, 2014. Two months ago, 3.78% of the monies on loan were covered by the fund. So that's erosion of about 0.03% per month. IF the erosion were to continue at the same rate, then the fund would reach parity with the 2.5% expected default rate in 40 months, not by March, and be exhausted in 124 months. That assumes that RS management simply go to sleep and don't act at some point. That seems somewhat unlikely, not least as on the same page of this thread, RS's representative westonkevRS indicated that the coverage ratio (and hence the fund size) was expected to grow again from 2Q2015. You'll gather that I'll happily be investing in all markets which offer a competitive rate. Guy's thanks for your responses. Unfortunately I am not inclined to 'forget' about the ratio of the provision fund to expected bad debt, and this is for two reasons: a) Unless I am mistaken if the ratio goes below 1.0, repayments will be a on a pooled basis, and I am guessing that to protect long term lenders from the fund becoming totally depleted by short term lenders then repayments must be subject to a haircut. b) Your idea about the provision fund being exhausted in 124 months is misleading. Your model assumes that ratesetter will not go into active management of the fund before it goes to zero and apply haircuts to repayments way before the pot is empty. Secondly your model assumes that people will continue to lend the same amount even as the provision fund falls to zero, I just can't see this being the case. Thirdly your model assumes that nothing changes, as previously said 2014 was a pretty benign year macro-economically, any downturn/rise in rates/fall in house prices and it could be much worse. I am not saying that I think ratesetter is in a huge problem, just that for me the risk/reward ratio has changed as a result of the steep fall in the provision fund to expected bad debt ratio. I would like to know what measures are and will be taken to stop the pretty dramatic fall of the fund to a level at which, as things stand, I believe haircuts to repayments must be applied. This is the reason why for me I cannot invest at the moment for any longer than a month. If in a few months the provision fund starts going back up over 1.5 I will happily invest again. Too cautious? Maybe, but holding off a few months for peace of mind for me is well worth it.
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jlend
Member of DD Central
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Post by jlend on Feb 1, 2015 21:37:12 GMT
I have always thought that Ratesetter is great however now the provision fund coverage concerns me a little. The coverage ratio is 1.47, and even more concerning has been falling pretty consistently at 0.01 a day for the past few months from around 2.2. At this rate by around mid March the provision fund will be level with the expected bad debts! I am also concerned that the level of bad debts as a % of repayments seems to have risen significantly in the last year and the current level of repayments over a month behind seems high (although i do understand this will rise as the amount on loan increases). My final concern is that to my knowledge nothing happened last year that would mean that the bad debt ratio's should rise. Unemployment fell, interest rates stayed low and there was no fall in house prices. What would happen if unemployment rises, interest rates rise and house prices fall? A few questions: a) do people think that the coverage ratio will continue down to 1.0 and below in the next few months or is there any sign it will level off. I have looked and the monthly bad debt as a % of expected bad debt and every month (bar month one) is below 3.7 bad debt to repayment ratio (what I work out to be the current level where bad debts would equal the provision fund) which means that in theory it should not go down forever but the fall does seem relentless at the moment. b) if the ratio does go down below 1.0 does this mean that the provision fund is 'depleted' and will go into pooled repayments? c) Ratesetter say ' If we see increases in claims we're able to adjust our risk parameters with a deft flick here and a minor twist there.' I am assuming that based on the current months record lending ratesetter has not significantly tightened lending? In fact in the last year I have noticed that the average income of borrowers has fallen a little, so I am assuming that the lending criteria has if anything been loosened? Is now the time for ratesetter to tighten lending even if it means monthly matches decline? d) Do any other lenders have any plan at what levels they plan to either i) stop lending or ii) sellout. I will tell you mine, I no longer plan to lend at the 5 year until the rate passes 1.5, I am happy in the monthly until 1.36 and below 1.22 I am selling out everything. Does anybody else want to share theirs? In answer to your questions:
a) I'm comfortable with the current ratio, bad debts to date and the estimated default rates. I currently don't think the ratio is at risk of dropping to 1.0 or below. I trust westonkev to continue to manage the risk and keep lenders updated on the ratesetter site and this forum as he has done so to date. Of course some lenders may feel the risk of P2P lending is too much for them as the ratio falls, and they are happier with a normal savings account. I do think that the ratio will continue to fall until Q32015 as westonkev indicated was his current thoughts on Jan 18th I believe
b) Personally I am assuming this is the case. In fact I am assuming ratesetter might at least consider going into pooled repayments before the ratio got to 1.0 depending on the number of loans that are late with repayments but have yet to default. Of course ratesetter might also decide they don't need to go into pooled repayments until the ratio falls some way below 1.0 and that they can recover the situation. As I said in (a) I don't currently think the ratio is at risk of dropping to 1.0
c) I am personally happy with the bad debts to date and the estimated default rates - and hence the ratesetter lending criteria
d) Honestly I don't have any fixed plans and am currently comfortable with the provision fund and the expectation that the ratio will continue to fall until Q32015 as westonkev indicated was his current thoughts on Jan 18th I believe
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jlend
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Post by jlend on Feb 1, 2015 21:51:20 GMT
Goodness me, that coverage ratio has people's unmentionables in a twist. Forget about it. The only important piece of data is what percentage of the money out on loan is covered by the fund. As I write, there is £300,741,749 out on loan and £11,184,617 in the Provision Fund. So roughly 3.72% of the monies on loan are covered by the fund. If you go back to page 2 of this thread, you'll find the equivalent figures (from me) for December 1st, 2014. Two months ago, 3.78% of the monies on loan were covered by the fund. So that's erosion of about 0.03% per month. IF the erosion were to continue at the same rate, then the fund would reach parity with the 2.5% expected default rate in 40 months, not by March, and be exhausted in 124 months. That assumes that RS management simply go to sleep and don't act at some point. That seems somewhat unlikely, not least as on the same page of this thread, RS's representative westonkevRS indicated that the coverage ratio (and hence the fund size) was expected to grow again from 2Q2015. You'll gather that I'll happily be investing in all markets which offer a competitive rate. Guy's thanks for your responses. Unfortunately I am not inclined to 'forget' about the ratio of the provision fund to expected bad debt, and this is for two reasons: a) Unless I am mistaken if the ratio goes below 1.0, repayments will be a on a pooled basis, and I am guessing that to protect long term lenders from the fund becoming totally depleted by short term lenders then repayments must be subject to a haircut. b) Your idea about the provision fund being exhausted in 124 months is misleading. Your model assumes that ratesetter will not go into active management of the fund before it goes to zero and apply haircuts to repayments way before the pot is empty. Secondly your model assumes that people will continue to lend the same amount even as the provision fund falls to zero, I just can't see this being the case. Thirdly your model assumes that nothing changes, as previously said 2014 was a pretty benign year macro-economically, any downturn/rise in rates/fall in house prices and it could be much worse. I am not saying that I think ratesetter is in a huge problem, just that for me the risk/reward ratio has changed as a result of the steep fall in the provision fund to expected bad debt ratio. I would like to know what measures are and will be taken to stop the pretty dramatic fall of the fund to a level at which, as things stand, I believe haircuts to repayments must be applied. This is the reason why for me I cannot invest at the moment for any longer than a month. If in a few months the provision fund starts going back up over 1.5 I will happily invest again. Too cautious? Maybe, but holding off a few months for peace of mind for me is well worth it. If you are uncomfortable after thinking about it, then you should stop lending. Ratesetter does not have the same safeguards as a savings account.
I like the provision fund - it's current size and coverage ratio. I am also comfortable with the current default rate and the projected default rate. However my money in ratesetter is not as secure as the money I have in savings accounts.
I am currently comfortable with the provision fund and the way risk is being managed, if you are not happy then hold off investing.
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c88dnf
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Post by c88dnf on Feb 2, 2015 1:31:05 GMT
I am currently comfortable with the provision fund and the way risk is being managed, if you are not happy then hold off investing.
Exactly so. I'm as chilled as a polar bear about the amount of default coverage, not least as it isn't the same as the coverage ratio for reasons already explained in previous posts.
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Post by westonkevRS on Feb 2, 2015 2:19:13 GMT
Just to answer the totally hypocritical question, what would happen if the coverage ratio reduced to, lets say, 1.0
The answer for lenders is probably nothing. The money in the Provision Fund would continue to pay missed payments and defaults, and over the next 5 years it might or might not be sufficient as the "expected" losses materialise or not. But if we were worried, we can always change the make-up on future loans towards the credit fee rather than a ratesetter fee. I don't like the idea of this as it feels a little Ponzi-esque. But there are levers that can be pulled on future loans.
Allocation of payments would only occur when the Provision Fund itself was depleted (or near depleted). But this isn't happening anytime soon. And even then in this extreme event it would be interest that would reduce before capital was impacted. For those earning 6%, for example, the defaults would have to be greater than this on an annual basis before anyone lost capital.
For the last 12 months, I've slept very soundly in my bed.
Kevin.
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c88dnf
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Post by c88dnf on Feb 2, 2015 11:07:34 GMT
Just to answer the totally hypocritical question, what would happen if the coverage ratio reduced to, lets say, 1.0 I think that you intended the word to be "hypothetical" westonkevRS
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Post by westonkevRS on Feb 3, 2015 6:02:49 GMT
Regular forum members will know my grammar could be better.... I think they are just hoping my mathematics isn't as flawed!
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spiral
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Post by spiral on Feb 3, 2015 13:50:52 GMT
Regular forum members will know my grammar could be better.... I think they are just hoping my mathematics isn't as flawed! Its a good job you don't write the T&C's. We have a hard enough job deciphering them as it is. 
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c88dnf
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Post by c88dnf on Feb 7, 2015 13:00:08 GMT
I thought it might be reassuring to anyone having sleepless nights to point out that in the past week the percentage of RS loans covered by the Provision Fund has risen from 3.72% to 3.74%. Running out by March? Nah!
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