Loan recovery - an analysis of different structures

Firstly, MoneyThing has never yet had a formal default and I hope that may continue for some time to come!

That said, eventually it would be safe to assume this record will be broken...

However, there are two different types of loan structures which MT offers so I wanted to think about how they could work, if a loan was in default. I'm conscious that the apparently absent samford71 was correct in his view that there is relatively little discussion on trying to quantify elements of loans. I lack his in depth knowledge on a lot of topics, but I do like a graph, so here is a very limited attempt to look at a single aspect.

MT offers loans which have come from a range of sources. Most of these are 'straight' in that lenders get a percentage return per month and if the loan goes into default, we would get a recovery based on the percentage of the asset value which was recovered. However, it also offers BPF loans (bengilbert ) which have a different approach. For these BPF have a 'first loss' 5% invested, which means that if the loan defaults that any recovery goes to the 'retail lenders' first and only if the loan gets over 95% of all of the loan monies recovered does BPF get their monies returned.

This means that there is a difference between the outcome for a lender in these two structures.

I've taken the total money returned for a hypothetical MT and a BPF structured loan and graphed them... If anyone disagrees with my maths, please let me know!


This assumes:

• MT loan at 12% (which is a common value for MT loans)
  
• BPF loan at 11% (which is a common value for BPF loans)
• 70% of the total asset value is loaned in both cases, i.e. 70% LTV, ignoring the BPF first loss.
  
• The loan runs and pays interest for 12 months before defaulting. The period of time to recovery the money from the asset is ignored.
  
• Any compounding of interest earned during the year has been ignored.
• In both cases, the investor put in 1000 UKP. For the BPF loan this would mean that there were less investors but that is out of the scope of this post.
• The x axis shows the recovery for the original asset, not of the loan. This is why there is the flat line at the right of the graphs.
  

Comments:

• Any recovery over 70% of the asset value will pay back all capital in both cases, so the greater interest from the loan will result in the greater return, hence the higher numbers for the MT loan.
  
• The BPF loan hits the 'all capital returned' at 66.5% of the original asset due to the first loss held by BPF.
• Between 14% and 68.5% recovery, BPF gives a higher return than MT. Lower than 14% recovery, the additional interest from the MT loan out ways the recovery, whilst over 68.5% as BPF has already repaid all the capital, again, the greater interest from the MT means a greater return.
• This post is completely about the recovery levels after a default. You might have a view if the lending 'team' have money in the loan themselves if that would modify the probability of default and if having an experienced team of investors working alongside the platform team might also modify the probability of a default. That is beyond the scope of this post though!
• The above ignores the various costs a recovery would take. Liquidation, insolvency or similar all cost money which would need to be taken from any assets. Depending on the type of asset, simply being a forced sale could reduce the value as people know the seller needs the sale. The graph tracks recovery figures after all costs.
• Tax is ignored in all cases. Your personal circumstances might result in different outcomes.
• Whilst I picked 12% and 11% for the above, even at 13% and 10% the shape of the graph is pretty similar. At those percentages, the 'cross overs' are at around 40% and 68% instead of 14% and 68.5%.
• I've assumed the same LTV for both loans for simplicity sake. I haven't done the maths, but I suspect that an average BPF loan might have a slightly lower real LTV than an average property MT loan. That said, modelling different LTVs is far too much for a Sunday afternoon.
  

The above is one of the reasons I have a reasonably large percentage of my 'higher rate' p2p cash in BPF loans, although I also have invested in a range of other none BPF loans on the MT platform.

Similar logic to the above could be applied to other platforms which offer 'straight' loans at a fixed interest percentage, but I've put this here as MT is the only platform I know which offers both models.

Final point: MoneyThing hasn't yet has had a formal default.