|
Post by propman on Feb 19, 2016 8:51:19 GMT
RS has been making secured property loans (including for developments) for some time. I noticed this a while back when I came across 3 loans via the documentation that used to be available (2 £1m and one £660k IIRC), all were on the 1 year market.
Sorry to be a pedant, but an exponential increase from 0% remains 0%!
FWIW I agree re property loans. My experience is that the valuations are based on serene market conditions and don't reflect the risks. There is a reason why a significant proportion of property businesses go under during every recession! I also take comfort from periodic payments on RS loans. However the yearly (and I presume the monthly at least) lend on loans with bullet repayments. That means that there will usually be refinancing risk.
- Propman
|
|
pikestaff
Member of DD Central
Posts: 2,140
Likes: 1,486
|
Post by pikestaff on Feb 19, 2016 9:00:52 GMT
In any case sounds like the 3 changes I requested earlier this week are not going to happen ... 3) all creditors to be treated equally in resolution event. Notwithstanding anything that you may have seen elsewhere, all creditors have to be treated equally. I've said this before but it's worth repeating. The Lenders' Agreement is crystal clear: 7.5. If at any time, in the opinion of RateSetter, the Provision Fund does not have sufficient funds to cover current or expected borrower default (a "Negative Position"), and RateSetter reasonably believes the Negative Position is not capable of being rectified through the ordinary course of business, RateSetter may declare a “Resolution Event”. If a Resolution Event is declared, we will notify you, along with any other RateSetter Customers entitled to protection from the Provision Fund (the “Eligible Lenders”). 7.6. In order to spread the risk of borrower default equally between the Eligible Lenders, if a Resolution event is declared, the benefit of all loans outstanding and matched to the Eligible Lenders (the “Relevant Contracts”) shall be immediately assigned to the Provision Fund. The Relevant Contracts will then be held for the benefit of the Eligible Lenders as a whole and all payments received from borrowers will continue to be collected by RateSetter. The collected funds will, at such intervals as determined by RateSetter in its discretion (after deducting any fees payable to RateSetter under the Relevant Contracts), be distributed to the Eligible Lenders in proportion to their outstanding capital investment. RS can't do this if they pay out some investors before others. Nor would this comply with the less legalistic version on the provision fund page, which makes it plain that all lenders will be treated equally: "...Repayments would then be shared out (pro rata) to investors to ensure diversification of default risk. There would be a material delay in repayments being made. The Resolution Event would work to give all investors a reimbursement of, for example, £0.95 on every £1.00 invested."
|
|
locutus
Member of DD Central
Posts: 1,059
Likes: 1,622
|
Post by locutus on Feb 19, 2016 9:36:43 GMT
Why are we investing in RS for property loans at < 6.5% with all the associated risks when we can get 12% elsewhere?
|
|
|
Post by p2plender on Feb 19, 2016 9:41:14 GMT
Must admit it was personal lending that attracted me to RS and away from FC. Certainly not interested in having money invested in prop especially not at this point in the cycle.
|
|
alender
Member of DD Central
Posts: 957
Likes: 647
|
Post by alender on Feb 19, 2016 10:55:55 GMT
Personally I don't like the whole idea of lending to property developers in a big way anyway. If too great a proportion of the loan book is secured against one asset type, then it creates a systemic risk. It also can create a misleading default rate as with such deals the default rate is likely to be 0% in a time of a rising property market, however could rise exponentially in a falling one. I also think it's a bubble waiting to burst but anyway another debate. I have no idea about the deals but the valuations on some new properties on other sites seem pretty punchy, and I think the new build market (many of the properties I can't justify why are at such a premium to existing stock) may be the first to fall. In any case sounds like the 3 changes I requested earlier this week are not going to happen, namely 1) no lending to ratesetter loans from provision fund, 2) independent body to call a resolution event and 3) all creditors to be treated equally in resolution event. All of these I see as a must for me, other people can decide for themselves. This combined with the continued increase in default rate and seemingly relaxation of borrowers accepted (see changes in their average profile) my drawdown of funds continues. I agree, points 1 and 2 should be implemented; point 3 is already in place. For property loans I think there are some danger points coming up. First when the 3% stamp duty is implemented, most Buy to Let investors who are looking to buy will have done so before it comes in, pushing prices up only to leave a reduced number of buyers once in. The second is if we leave the EU, and the currency drops (predicted to be 25%) the BOE may have no choice but to raise interest rates. The trouble seems to be RS have too much control of the PF and there seems to be no legally binding rules on the use of the PF. For me all money in the PF should be ring fenced, invested in very safe investments, never invested in any P2P and absolutely not in the loans it is there to protect against, also all directors should have no connection to RS to avoid conflict of interests. IMHO the PF is compromised and does not offer the protection is should. We can get information on how it is currently used but there seems to be no legal rules prevents RS from using the funds either under the current rules or by changing the rules of the PF (like recently). In good times I sure it will work fine but it is primarily there for the bad times which is when people get desperate, I doubt if Nick Leeson planned what he did. In fact given my current knowledge I cannot think of this as a Provision Fund but something that smoothes defaults in the good times and as a tool for RS to help with liquidity, reduce rates and marketing for new investors.
|
|
mark123
Member of DD Central
Posts: 111
Likes: 120
|
Post by mark123 on Feb 19, 2016 13:14:45 GMT
The impact on the lenders is zilch. If the loan defaults within the 90 days it will be depleted from the fund directly. If lenders had funded the loan from day zero they would be reimbursed by the Provision Fund post default. The net result either way is exactly the same and has no impact on lenders. I am not convinced that the "impact on lenders is zilch"; consider this scenario: 1. The PF is used to provide liquidity for large property loans. 2. The financial climate means lender funding starts to dry up (e.g. new fears of financial meltdown + property prices start to fall + referendum + regulator casts doubt on P2P). 3. The team at RS are under pressure and might increase funding from PF above 10% (I think this number has been quoted as an illustration, not a limit). 4. The lack of lender funding means that these property loans are not re-financed by lenders. 5. Lowering property prices mean that several maturing property loans cannot be repaid on time. Under the previous system, the PF is only called on as loans fall due for repayment, one by one over a period of time, giving time for refinancing or forced property sale at a loss or other solutions. Under the new system, the PF has been partly spent on new property loans and is not available to cover maturing ones, resulting in the risk of an earlier resolution event. I think the PF is around £17m. It would not take many £1m loans, due to be repaid in one chunk if the property can be sold, to consume the fund. Of course, RS will say that lenders must judge the platform risk and decide whether to invest... ... the difficulty is that over recent months the PF a) has a reducing coverage ratio, b) was an independent Trust and is now a subsidiary Ltd. Company and c) is being used to fund the same asset class as it is insuring. ... I perceive the risk of loans that I have already made, some of which will not be repaid until 2021, has increased. ... unless I can trust RS not to move the goalposts in the middle of loans, how can I judge the platform risk? We each have our own assessment of the risks of the new PF arrangement. For me the bigger issue is one of trust. This can only be restored by publishing clear rules of how the PF will be administered and ensuring that this is 100% as a Provision Fund for the benefit of lenders.
|
|
DeafEater
Member of DD Central
Extremely Moderate
Posts: 218
Likes: 292
|
Post by DeafEater on Feb 19, 2016 14:53:04 GMT
I've been following this thread for the past few days but this is my first foray into the debate over using a portion of the PF for the initial funding of large loans. Initially I was in the "What the f***?" camp but I've calmed down to a more moderate "Come on now chaps this really doesn't sound too clever". Essentially it's akin to a bank lending some of its statutory cash reserves to someone else which means they're no longer available for the purpose they were intended. The period over which the funds are loaned is said to be only a few months but if RS are doing it on a regular basis, that's still a chunk of the PF tied up in RS loans most of the time.
The really laid back lenders say there's nothing to worry about because if the brown stuff hits the blades and a resolution event is called, all of the loans go into the PF so what's the difference? Well I suppose simply that what we're all trying to avoid is a resolution event and the thing that makes that less likely is a large, liquid PF. If defaults start to rise and the PF becomes substantially depleted, lenders will get (more) nervous and start drawing down their repayments which leaves no money for new loans. A lack of lender money means that the short term (large) loans that the PF has funded can't be offloaded onto the normal lender population so the portion of the PF that is funding those loans can't be used to settle the rising level of defaults. Hence although this use of PF money looks fairly liquid in theory, the time when it becomes illiquid is exactly the same time that it's needed as cash in the PF to fund defaults and avoid having to call a resolution event.
We have been told that the proportion of the PF that can be used for this sort of activity is no more than 10% and at the moment, the total in use is considerably less. If RS are adamant they can't fund large loans in a timely manner without using the PF to start them off then I propose a further rule: namely that the practice MUST stop when the PF coverage ratio falls below some specified level - say 1.3. This should allow enough time to turn the current PF loans back into cash before lender money drys up as a result of people getting scared over how low the coverage ratio is getting.
I would also echo some of the sentiment I've heard in this thread about who RS is making these large loans to. I don't lend on FC for a reason. RS claim that most of these big business loans are backed by security that can be called on if they go bad. There are plenty of FC lenders who thought their loans were secured on tangible assets that later got burned so I am sceptical about the warm fuzzy feeling afforded by the 'security' on these big loans. If I fancied the risk profile offered by these business loans I'd be earning double the interest on FC and spending the proceeds on sleeping pills.
One last thing - a question for Kev on the process by which these bridging loans are absorbed by mainstream lenders: In providing the initial funding for a big wedge of these large loans, RS has clearly decided on an interest rate that the PF wants in return for that loan. The borrower contract has an overall interest rate that can't change once the borrower has agreed to it so when the PF is offloading that initial loan to mainstream lenders over the next few months, they need to average the original PF loan rate (or lower if they want to skim off some profit). The lenders that hang around this forum are not daft enough to fall for the RS Lend it now rates so is this why we sometimes see a week of crazy low borrower rates in a particular market while the nearest funded lender queue is 0.5% above those crazy rates? If this was the case, I presume the offloaded PF loans would just gradually mop up the money coming in at MR (and chicken YR investors) until RS decide to open the floodgates again for genuinely new borrowers. Alternatively do you offload the PF loans into shorter markets at lower rates and refinance as and when necessary until the end of the borrower's term. If the latter then it would seem the period of illiquidity is longer than the few months suggested in previous posts because if confidence in the platform fails and lenders start to desert at any point during the borrower's term, you won't be able to refinance the loan from ANY market and either the PF will have to pick up the remainder of the loan again or you'll have to evoke the clause in the terms that says the monthly lenders get tied in for longer than they were expecting.
Interesting times.
|
|
mike
Member of DD Central
Posts: 187
Likes: 121
|
Post by mike on Feb 19, 2016 14:59:57 GMT
westonkevRS This issue is beginning to gather momentum and I would suggest you folks at RS take a step back and look at the bigger picture. You can provide all the detail you want but once an apparent issue of trust arises people tend to look beyond the "facts". Whatever benefits the use of the PF (even capped at 10%) has in helping the smooth running of your business does it outweigh the possible reputational risk that might arise? I've deliberately used a lot of "ifs and maybes" but a prudent approach would be to steer the safe course. Mike
|
|
|
Post by pepperpot on Feb 19, 2016 15:41:50 GMT
Kind of agree with some of the recent sentiment, I'm not as red faced about it as I was at first but I still remain in the not convinced camp. I think everyone would agree 100% in-market usage of the pf is stupid and 0% is sensible, 10% therefore is a judgment call by the powers that be to be safe enough. In normal market conditions I'm sure it'll be fine, it's the not so normal (but regular and possibly overdue) conditions I'm concerned about. I'll retract my earlier 'house of cards' statement to be replaced with 'it's 10% less sensible than it was'. There is also more of a concentration risk with larger loans to property/business, so maybe 12% less sensible? (but that's obviously just a judgment call by me ) Bottom line is I (and most others here) just wasn't expecting judgment calls to be made with the safety net.
|
|
|
Post by Deleted on Feb 19, 2016 15:42:16 GMT
www.altfi.com/article/1757_ratesetter_provision_fund_updateHowever, we highly value the views of our investor community and, having listened carefully to them, have decided to suspend the use of the Provision Fund for this purpose with immediate effect. We have therefore also unwound the 0.6% of the Provision Fund balance that was being used this way. We will update our investors with more information shortlyI'm very critical of RateSetter on here, but kudos for listening. This issue was the first one that made me seriously consider pulling my funds.
|
|
|
Post by pepperpot on Feb 19, 2016 15:44:34 GMT
If only I'd have waited a minute or so. <10% happier than I was a minute ago>
|
|
|
Post by propman on Feb 19, 2016 15:47:46 GMT
Why are we investing in RS for property loans at < 6.5% with all the associated risks when we can get 12% elsewhere? We cannot chose the loans we make on RS, but these do only make up about 15% of RS loans. As these are typically only for a year or so, they will make up less than this as a proportion of the loanbook, say 10%. The PF provides diversification across all loans made and so even a 20% loss on these (a severe loss given they are secured) would be easily met by the PF. Yes it might be the end of RS (sorry to be a bad record re the weakness of the resolution event approach), but most of these are likely to be bullet repayments and so will only arise over a 6-12 month period rather than at the moment of a property crash, and so increased contributions to the fund might enable RS to survive even this (especially if it assesses future recoveries on security generously in determining the adequacy of the fund). So the losses for individual lenders would be unlikely to be substantial and likely to reduce returns rather than lose capital when all resolved. So investing in RS is much safer than the largely property sites. I agree that I would be more comfortable with a site that had no such lending, recognising the lower return achievable and choosing whether to top up with high yielding loans or not, but that isn't going to happen! I would personally call for a regular publication of the nature of the loanbook as disclosed when they hit £1B as the biggest risk is increased late cycle property loans that we find out about too late. Property tends to lag the economic cycle, so I am not that concerned at the moment. The trouble is that this very fact has often lead banks to be over exposed just when the cycle turns as demand (excluding business loans to provide the liquidity needed to deal with the down turn) reduces while the property development market is in full swing.
- Propman
|
|
registerme
Member of DD Central
Posts: 6,233
Likes: 6,038
|
Post by registerme on Feb 19, 2016 16:10:50 GMT
www.altfi.com/article/1757_ratesetter_provision_fund_updateHowever, we highly value the views of our investor community and, having listened carefully to them, have decided to suspend the use of the Provision Fund for this purpose with immediate effect. We have therefore also unwound the 0.6% of the Provision Fund balance that was being used this way. We will update our investors with more information shortlyI'm very critical of RateSetter on here, but kudos for listening. This issue was the first one that made me seriously consider pulling my funds. Agreed. Respect to RateSetter for taking this action. Two days ago I made the decision to focus all my consumer lending on Zopa (in spite of the lower rates achievable). Now, because of negative Zopa changes (even lower rates!), and this positive RateSetter change, I've reversed that decision .
|
|
DeafEater
Member of DD Central
Extremely Moderate
Posts: 218
Likes: 292
|
Post by DeafEater on Feb 19, 2016 16:14:25 GMT
www.altfi.com/article/1757_ratesetter_provision_fund_updateHowever, we highly value the views of our investor community and, having listened carefully to them, have decided to suspend the use of the Provision Fund for this purpose with immediate effect. We have therefore also unwound the 0.6% of the Provision Fund balance that was being used this way. We will update our investors with more information shortlyI'm very critical of RateSetter on here, but kudos for listening. This issue was the first one that made me seriously consider pulling my funds. Ooooh suddenly I'm feeling uncharacteristically powerful as it happened just after my post Since the initial funding of large loans remains a problem and RS is chasing more of them, perhaps RS would like to consider using its own money to fund them rather than what is effectively ours.
|
|
locutus
Member of DD Central
Posts: 1,059
Likes: 1,622
|
Post by locutus on Feb 19, 2016 16:32:46 GMT
Well done for listening to investor sentiment. Credit where credit it due.
|
|