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Post by bengilbert on May 14, 2016 22:42:21 GMT
I wanted to get your views on the best way of listing the LTV on a loan we're hoping to bring to the platform soon.
All the information I give here will be in the loan particulars, with the LTV details highlighted, so lenders will have a full picture. I'm wondering which figure should be used as the summary number (e.g. what you see on the "loan" page where all the loans are listed).
The loan will have a series of drawdowns, with all the money borrowed being spent on a development which will rise in value as the works progress. On the initial (substantial) drawdown, the LTV will be around 20%. By the end of the loan, the LTV will be c.50%. Further drawdowns will only be given after we get a formal valuation of the current value of the building, and we don't expect the LTV to exceed 60% at any point. In any case, the loan contract specifies a maximum LTV of 70% at any time (=66.5% after Broadoak's first loss tranche).
So, the question is which of these numbers we use as the summary LTV. I'm inclining towards using the actual LTV any point, i.e. 20% on the first drawdown, but with a big bold explanation of the above information at the beginning of the loan description. We would then keep the LTV updated through the course of the loan with each new valuation and/or drawdown.
I'd be very grateful for your thoughts.
Edit: for clarity, and in response to a later question, all tranches will rank equally.
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james
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Post by james on May 14, 2016 23:37:19 GMT
Will the first tranche have precedence over later tranches such that there can be an 80% loss of value before those lending in the first tranche suffer a loss? And similar for later tranches?
If yes then the LTV at the time of the offering of each tranche seems appropriate.
If no then the maximum final LTV would be the correct one to use because that indicates the eventual security being provided for all tranches.
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Post by bengilbert on May 15, 2016 0:06:52 GMT
Will the first tranche have precedence over later tranches such that there can be an 80% loss of value before those lending in the first tranche suffer a loss? And similar for later tranches? If yes then the LTV at the time of the offering of each tranche seems appropriate. If no then the maximum final LTV would be the correct one to use because that indicates the eventual security being provided for all tranches. All tranches will rank equally, and the LTV on all tranches would be updated as it changes. Thanks for the suggestion. The issue with using the final LTV (say 50% in this case) is that the LTV may go higher than this during the course of the loan, so the final LTV may not be the maximum LTV. It might be misleading to use this if it suggests it's the maximum LTV, which might be less of an issue with a regularly updated LTV based on the latest valuation. I don't think there's any definitively right or wrong answer on this, it's just a matter of finding the most informative number.
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paulg
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Post by paulg on May 15, 2016 0:30:30 GMT
I wanted to get your views on the best way of listing the LTV on a loan we're hoping to bring to the platform soon. All the information I give here will be in the loan particulars, with the LTV details highlighted, so lenders will have a full picture. I'm wondering which figure should be used as the summary number (e.g. what you see on the "loan" page where all the loans are listed). The loan will have a series of drawdowns, with all the money borrowed being spent on a development which will rise in value as the works progress. On the initial (substantial) drawdown, the LTV will be around 20%. By the end of the loan, the LTV will be c.50%. Further drawdowns will only be given after we get a formal valuation of the current value of the building, and we don't expect the LTV to exceed 60% at any point. In any case, the loan contract specifies a maximum LTV of 70% at any time (=66.5% after Broadoak's first loss tranche). So, the question is which of these numbers we use as the summary LTV. I'm inclining towards using the actual LTV any point, i.e. 20% on the first drawdown, but with a big bold explanation of the above information at the beginning of the loan description. We would then keep the LTV updated through the course of the loan with each new valuation and/or drawdown. I'd be very grateful for your thoughts. Edit: for clarity, and in response to a later question, all tranches will rank equally. I think that your suggestion (which I've highlighted in bold) would be a fair approach. No one should invest without reading the loan description first, so there should be no misunderstandings.
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james
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Post by james on May 15, 2016 2:47:54 GMT
All tranches will rank equally, and the LTV on all tranches would be updated as it changes. Then unless the eventual expected LTV is used I'd consider it misleading if it was done as standard loans. Borrower knows that the initial LTV is not going to be the one that is protecting the money longer term. The issue with using the final LTV (say 50% in this case) is that the LTV may go higher than this during the course of the loan, so the final LTV may not be the maximum LTV. It might be misleading to use this if it suggests it's the maximum LTV, which might be less of an issue with a regularly updated LTV based on the latest valuation. My inclination is to use the maximum permitted LTV and say what it currently is in the more detailed description. This is, after all, about the worst case protection for the lenders and that worst case happens at the highest possible LTV. A way to use increasing LTVs would be to offer a buyback guarantee for earlier tranches whenever the LTV increases. That is, guarantee to buy back within say one week of the end of the new lending being completed and during that week hope that the market takes care of it. Naturally this will be most tested with the final tranche, not the first. Of course you should in all cases say more about what's anticipated in the more full description, as you plan.
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woodie
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Post by woodie on May 15, 2016 7:18:45 GMT
Confidence and transparency are the absolute keys to the success of the platform.
With the latter in mind the LTV that should be used for all tranches is 70% (66.5%) allowed for in the Contract.
With the former in mind I wonder why you thought it necessary to ask the question.
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SteveT
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Post by SteveT on May 15, 2016 7:45:52 GMT
Elsewhere, development finance loans are usually quoted as "Loan to Gross Development Value", which I think you're suggesting would be around 50% in this example. I'm sure there are many, many examples of such development loans where, if work suddenly stopped mid-build, the "spot" LTV would be significantly higher than the quoted LTGDV, but most platforms don't make this at all clear. Further tranches are often released against a Quantity Surveyor's confirmation of the cost of works completed, which is not the same thing as the increase in development sale value!
Adopting the LTGDV route used by other development finance lenders seems reasonable to me, provided that you clearly indicate that mid-build LTV may be higher (but is contractually limited to 70%). I applaud the fact that Broadoak obtains formal project revaluations at each drawdown, not simply a QS report on works completed.
I think using the first-tranche LTV of 20% could only be justified if the release of the next tranche was managed as a Renewal, giving lenders the option to roll their stake forward or to exit. However I doubt either Broadoak or MT would reckon this a good route.
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ben
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Post by ben on May 15, 2016 8:03:00 GMT
I think advertising it at 20% when you have no intention of it being at 20% for very long is not that good an idea. If it was ranking seperately then fine but as during the life of the loan if you do not invest any further it will go up to 70% a bit of a difference
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rogerbu
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Post by rogerbu on May 15, 2016 8:04:28 GMT
MT's behavior to date has been to highlight the worst situation - ie usually the LTV when all tranches advanced with an explanation that this particular tranche raises the LTV to XX%.
A loan I accept shouldn't increase its LTV later even if it is allowed in the small print with agreement of the lenders involved - please continue to treat us fairly
Transparency in the better P2P sites makes them standout against the older/bigger sites and banks etc.
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duck
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Post by duck on May 15, 2016 9:50:19 GMT
Looking at the 'problem' from slightly different angle, the first aim has to be to have the first (and subsequent tranches) filled.
If 66.5% was quoted would that put off investors? Looking at other loans on other platforms that fill quickly my answer to that question would be no*.
Whilst some of us on this forum may be very familiar with building projects, staged payments, site values etc investors that do not read this forum might not be as familiar and might feel that the increasing LTV of later tranches muddies the water and might not invest .... or might not realise that the first tranche follows the LTV. Whilst this can be explained with the loan details it adds complications that some may not get their heads around and if you can't get your head around something should you invest?
The less risk tolerant (and BH's) should be able to understand that if they buy in early then exit early the LTV will have been lower .... but if the projected figures are detailed in the loan details I cannot see how anybody could feel mis-led.
*interest rate seems to have a far higher draw rate than LTV with a lot of investors so this answer is rate dependent.
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littleoldlady
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Post by littleoldlady on May 15, 2016 10:10:25 GMT
I suggest "Variable up to a max of 70% - see below for latest figure".
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Post by mrclondon on May 15, 2016 11:26:04 GMT
Advertising a 20% LTV to fill the first loan sounds to be deliberately misleading, and could lead to a complaint of mis-selling if a purchaser of that first loan lost money if the security realised more than 20% of its value.
I'm puzzled by the question TBH, given MT's policy with the AE HP agreement loans of advertising the worst case 80% LTV against asset value not the 50% LTV against the cash flows.
There are enough problems surrounding property LTV's on p2p platforms IMO, without MT adding to the list. MT is marketing to retail investors not sophisticated investors and I'm far from certain how much of the "small print" text a retail lender would be expected to understand to bring a successful mis-selling complaint if the headline security is 20% LTV at the point of purchase.
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Post by uncletone on May 15, 2016 19:18:12 GMT
MT is marketing to retail investors not sophisticated investors and I'm far from certain how much of the "small print" text a retail lender would be expected to understand I know my place.  en.wikipedia.org/wiki/Class_sketch
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Post by bengilbert on May 16, 2016 15:57:21 GMT
Thank you to every one of you for your thoughts, really helpful to read.
Ed and I have decided to list the loan with the headline LTV 59.5% and cap the lender LTV at this level. We'll cover any increase in LTV over this with our own funds, on a first loss basis, to keep the lender LTV at 59.5% or under at all times. We don't expect the LTV will ever get to this level, but agree that it's important that the headline number is kept conservative. We didn't want to start using loan to gross development value, since we've seen this used misleadingly elsewhere.
Very much appreciate all your contributions.
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