Lendy being naughty? Concerning article in the Telegraph

I'm afraid it's worse than any of you realise.

There are two entire categories of problem with peer-to-peer lending:

1) Systemic and insoluble problems

- our financial system is incapable of distinguishing between money that's been borrowed from somewhere and money that's been saved, so many of your peers are using leverage to provide liquidity for the platform. Since you trade with the platform, not those individuals, you're basing your decision as to the platform's solvency on incomplete and unknowable information about the other lenders
- valuations look stable but are in fact very volatile. The problem identified in this thread is that Lendy has been exaggerating the value of its borrowers' assets in order to make the trade look more appealing. This is a vast under-statement and assigns undue blame to Lendy: in point of fact all property valuations are bogus at the present time, due to all manner of highly volatile and artificial factors inflating property prices year after year. What looks like a world in which property prices just happen to go up a bit every year as a fact of life is in fact a world in which the money supply (and how it's being parked) is highly changeable - not at all stable - and in which property is just today's asset of choice, but at other times in the recent past the upward trend has sharply reversed and will likely do so again (unless you believe a flat in Kensington really is worth a couple of million) - so in essence not only is Lendy bigging up the valuations but they were bigged up to begin with
- interest rates in general are subject to interference from the central banks, domestic and foreign, which means the money being parked in risky trades like p2p lending could suddenly all flow out at once if less risky asset classes (like government bonds or five-year cash deposit accounts) begin to look less horrible at some point in the future. The flipside of that scenario is that if interest rates actually become more deeply negative (if for example general price inflation continues to accelerate until such a time that the real rate on a normal bank loan is under 1%) some borrowers may seek to get out of their loans entirely, which would impact the attractiveness of the platform to lenders as well as the potential for all those arbitrage traders working the various secondary markets

2) Specific problems affecting peer-to-peer

- the quality of lender is not very reliable at all. Some are veteran direct investors, while others quite honestly are savers who saw an ad that looked a lot better than their below-inflation bank bonds. This is a real problem because if you're trying to work out how risky a platform is, you have two things to go on: what the platform itself tells you (which as this article illustrates is often highly spun in their favour and even outright misleading) and what the other lenders tell you. If the other lenders are basically saying just that they haven't been wiped out yet, well then you could have the same experience at the bookie's
- the quality of borrower is not very reliable either: the platform has a vested interest in making them sound better than they are because people will want to know what individual borrowers are like as a means for deciding what the platform's like - indeed "what the platform's like" is ultimately the same thing as "what all the borrowers on the platform are like". Worse, once a platform earns a reputation for inappropriate leniency (very easy to fall into for ones with immaculate track records, like Lendy) it risks attracting outright fraudulent borrowers with no intention of repaying the loans. This is particularly bad since a lot of the loans are likely to turn sour at the same time, partly because the loans will tend to mature in the same year due to the nature of the thing (how old the platform is, etc.) and partly because once one bad loan goes into open default, another that knew all along it would eventually have to do the same might decide that it's better to be the second from first than the second from last, in terms of the likely degree of accommodation on offer from the platform

All in all, peer to peer looks like a classic bubble 'investment' behaviour. Greed (perfectly understandable greed and in fact this time around it's little more than the 'greed' of not wanting your life savings to be wiped out by inflation) is leading people to over-estimate their own ability to safely navigate risky environments. That's all very well until it's not, and let's face it we haven't officially had a recession for quite some time, even though large and established firms (ToysRUs anyone?) are going bankrupt every week.

Lendy is basically one housing correction away from systemic insolvency and one bout of simultaneous defaults away from scaring away the people who've been under-estimating the risks.

Overall the Telegraph has just served as another apologist for risky investment strategies. They in no way said "don't do p2p at all": they made out that this was just a little problem of platform integrity, presumably another job for the FCA or whoever to sort out through additional paper trail requirements.
Not so: it's far worse than that.

Just picking up this point - Telegraph is written by journalists who are trained in libel, trained to keep records of their sources so they can defend themselves against genuine/vexatious libel accusations, have fact checkers, have in house lawyers to check stories like that, and have libel insurance. Comments beneath articles in The Telegraph are similarly vetted lest the original article isn't libellous but becomes libellous due to subsequent comment posts.

Joe Public cannot be expected to understand libel law eg it is dangerous mistake to believe just because someone else reports something, it is safe to repeat elsewhere. 

The policy is tiresome but necessary unless we want to cough up for all the legal overheads that the Telegraph etc have to bear. The minute you name people, you need to be careful.

Jack P

 

Surely the issue is DD.  If you check the history of the key borrower (google is available to all) and don't like his/her history don't lend.

Should Portals do this too?  You bet.  But we are adults.


On a different note.  When a tiny company starts sponsoring a major sporting event, you just know it is time to gently wind down your investments.  History tells us that such sponsorship works well for big companies but is an indicator of a problem for smaller ones.

As is often the case, a story such as this does not always give the full picture. First, lenders through the Lendy platform have, to date, suffered no losses of principal on loans, and we have so far returned £29.5 million in interest alone to lenders. Repayments of principal include a further £137.8m.

The Lendy platform offers lenders loans with a range of risk/reward ratios, with interest set at between 7% and 12%. The company never lends at LTVs above 70% (with the majority closer to 60%) and all property is professionally valued by independent RICS-registered valuers. A 49-step due-dilgence process is also in place to ensure all loans are stringently assessed before being offered on the platform.

Lendy’s loan book stands at £166 million. At present, 13% of the live loan book is classed as being in default – this is normal for the bridging and development loans market. If you include repaid loans, then the default rate falls to 7.4%, which is below average for the alternative finance sector, and is typical for lending on more complex property investment projects, where events such as delays to planning permission, and lengthy negotiations with local authorities can frustrate progress.

In cases where a borrower defaults, Lendy may recover lenders’ principal through sale of the security. In cases where sale of the security does not cover lenders’ principal, Lendy operates a discretionary provision fund and will aim to cover the capital shortfall if appropriate. 

We state clearly on our website that lenders should not however rely on the provision fund when making a decision to lend. Lenders should ensure than any loan they make matches their risk appetite.

In respect of the cases mentioned in the article:

The Cxxxxxx’:

In this case, the borrower became bankrupt subsequent to borrowing from Lendy. This property has been subject to litigation, to which Lendy is not party. This has delayed the sale process. However, Lendy is pleased to say it has received sale offers for the property in excess of the lenders’ principal. Lendy’s professional advisors are confident that these offers should be sufficient to repay lenders’ principal in full when the sale process completes.

"Axxxx’:

The borrower in this case was not, as has been suggested in the article, an individual known to have been bankrupt. Rather, the borrower was a business. The individual in question was not the owner of the borrower business. Lendy is satisfied that the valuation at the time of the loan was accurate. The sale process for this property is now underway.
 

Lendy Support

Ah yes. IOW. I must have got things wrong again.

Lendy support reassures us: The company never lends at LTVs above 70% (with the majority closer to 60%) and all property is professionally valued by independent RICS-registered valuers.

That is the loan with security valued at £5M by the independent RICS-registered valuers, for a loan of £3.25M and is now being put up for sale for £900,000. No doubt Lendy is "satisfied". I expect the provision fund will pay our losses due to the valuation error misrepresentation offered to lenders.

I think we all understand the quality of Lendy's operation and bul pronouncements now.

I don't think that's the only reason for the increase in the SM. 

Two loans - PBL168 and DFL019 - have dropped below the psychological barrier of 200 days which has seen increased selling well before the article. With no other long-dated loans in the pipeline to replace those sales I think it is likely those queues will disappear again in the next few days and definitely after the interest run.

Good luck with Lexit though. If I were a betting man I'd put a fiver on you being back in the game as soon as the next tasty 12% loan hits the pipeline