ashtondav
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Post by ashtondav on Jul 7, 2019 16:42:30 GMT
If loans are covered by accident unemployment and death insurance why is a PF required? And why is it going down? Does the insurance only cover say the capital repayments? I’ve mentioned this on a more general topic but thought I’d raise it here too.
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Post by gravitykillz on Jul 7, 2019 18:32:58 GMT
Possibly due to the pressure to lend. Everyone moans about the queue times. Due to this pressure the quality of their loans is possibly reduced.
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Post by gravitykillz on Jul 7, 2019 18:34:24 GMT
Bad loans, I'm sure the premiums for the insurance is going up as well. I think it's only a matter of time before rates fall as well.
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r00lish67
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Post by r00lish67 on Jul 7, 2019 20:15:27 GMT
If loans are covered by accident unemployment and death insurance why is a PF required? And why is it going down? Does the insurance only cover say the capital repayments? I’ve mentioned this on a more general topic but thought I’d raise it here too. No insurance would be so comprehensive as to eliminate the risk of loss to us and LW entirely, otherwise we'd be looking at an almost entirely risk-free product. You don't get 6.5% p.a. for that. I assume though that the projected returns from the insurance claims are baked into LW's 'forecast lifetime bad debt rate' which incorporates anticipated recoveries. I agree though that it would be interesting to understand this a bit more - perhaps we could see some stats about how successful these insurance claims have been to date for example. Matthew is there anything you can share with us on that?
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Post by Matthew on Jul 8, 2019 7:09:05 GMT
If loans are covered by accident unemployment and death insurance why is a PF required? And why is it going down? Does the insurance only cover say the capital repayments? I’ve mentioned this on a more general topic but thought I’d raise it here too. Hi ashtondavBecause there are various other reasons for late payments/defaults, which are generally not insurable e.g. loan stacking or simply non-payment. The insurance also relies on us being able to have open dialogue with the customer and unfortunately some customers tend to 'go to ground' and are difficult to engage to provide the necessary paperwork etc. The insurance covers the full payments due by the borrower for the relevant period, usually capped at 12 months. Hope this helps.
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Post by Matthew on Jul 8, 2019 7:21:57 GMT
Possibly due to the pressure to lend. Everyone moans about the queue times. Due to this pressure the quality of their loans is possibly reduced. Hi gravitykillzI appreciate it might seem like this is the case, but I can assure you that longer queue times do not have any bearing on our credit policy. I cannot imagine a scenario where our credit risk team would make changes to our credit appetite or policy to accommodate the business wanting to reduce the investor queue - it simply would not happen. As we have matured as a platform, we've identified the segments of the market where we operate most effectively, given our cost of funds (i.e. desired rates of return for investors), our available origination channels, our risk appetite etc and this has meant our average APR has increased over the years. We have no appetite to do the majority of our lending at the 3% APR end of the spectrum - the commercials simply do not work without 'robbing Peter to pay Paul' i.e. charging 51% of customers 3% and the other 49% of customers 20%+. I would not expect material changes to our average APR going forward as I think we have found a good balance between providing investors with a suitable return for the risks involved in lending, and ensuring the business is sustainable and can continue to offer a great platform for investors and borrowers. Hope this helps.
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Post by Matthew on Jul 8, 2019 7:29:44 GMT
If loans are covered by accident unemployment and death insurance why is a PF required? And why is it going down? Does the insurance only cover say the capital repayments? I’ve mentioned this on a more general topic but thought I’d raise it here too. No insurance would be so comprehensive as to eliminate the risk of loss to us and LW entirely, otherwise we'd be looking at an almost entirely risk-free product. You don't get 6.5% p.a. for that. I assume though that the projected returns from the insurance claims are baked into LW's 'forecast lifetime bad debt rate' which incorporates anticipated recoveries. I agree though that it would be interesting to understand this a bit more - perhaps we could see some stats about how successful these insurance claims have been to date for example. Matthew is there anything you can share with us on that? Hi r00lish67Historically, the insurance has roughly covered itself i.e. the level of claims has generally covered premiums paid. This is to be expected - after all, if claims were significantly in excess of premiums, the insurer would not be happy. The insurance is there primarily to help protect some of the downside risk, for example in the event of widespread unemployment. It's important to remember that there is no such thing as risk-free - everything carries risk. Even FSCS-protected savings accounts carry the risk that the value of your savings will diminish over time as a result of inflation being higher than your returns - I actually think this should carry its own risk warning but that's another discussion. We are currently undergoing a major overhaul of our statistics pages - partly to include some additional information required by the FCA's recent PS, but also to clarify and provide more helpful information on the Shield. It should be a significant improvement on the current pages. Thanks
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r00lish67
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Post by r00lish67 on Jul 23, 2019 10:33:41 GMT
I've expanded on this elsewhere, but as no-one's mentioned it here since they were published a few days ago, anyone invested in LendingWorks may wish to check out their latest statistics published a few days ago. In particular, note that the percentage of provision fund cash vs the loans it protects has dropped in the last 4 months from 2.05% to 1.17%. I personally find that steepness of decline a little too much to be unconcerned about. Also, the continually rising contractual future income aspect rather confuses me, given that is not accompanied by a deduction for expected future losses. Given that PF cash keeps falling month-on-month, this rather suggests that what is posited as a positive future inflow is in reality subject to the formula of 'future income - future losses', which in recent months has consistently resulted in a negative figure, especially this month as PF cash fell sharply. |
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Post by propman on Jul 23, 2019 14:05:32 GMT
I share your concern in that the cash has declined £275k while loans covered has increased by £1.9m. Future contributions to the fund has increased, but only some £50k suggesting (given increased loans written) that more of the contributions have been taken upfront and this was still insufficient to offset the payouts.
I find the update somewhat confusing. The average maturity of loans has declined in all categories, so there must have been some reassessment of these values. Similarly, Shield utilisation percentages appear to have fallen as well despite the amount in the Shield falling. Does this mean that further contributions have been found (sale of loans in default?)
the arrears rates seem to have reduced, but this is more than offset by bad debts increasing, especially in 2018. This is partially reflected in the expected bad debts, but not in total. So either the assumption is that future performance will improve, or that the arrears are used as a basis of estimating defaults and so a decline in thee suggests better performance going forward.
It would be good to know whether the methodology has been changed or the reasons for the apparent anomalies.
- PM
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benaj
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Post by benaj on Jul 23, 2019 14:39:10 GMT
I am not too concerned about the shield at the moment as long as the loan book is growing healthily, and its loanbook is still growing. Lending works and other similar platform have managed shield utilisation beyond 100% in the past.
Unless there is a sharp increase in default rate to double digits. The one to watch is 2017 default rate, current projection is 6.8% and actual default to date is 6.1% with 60% cohort maturity.
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jlend
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Post by jlend on Jul 23, 2019 15:51:38 GMT
Comparing RS and Lending Works PF, RS are more reliant on future income. So should you stop investing in RS before LW?
RS
12.7m Cash
27.2m Future income
LW
1m Cash
2m Future income
I think some lenders would like to see a higher proportion of cash, but I don't think this is going to happen. Borrowers are not willing to pay a lot of the risk fees up front to fund the PF. The PF funding has to come mostly from the monthly fees or from upfront seed capital from platforms.
Does 1 third cash vs 2 thirds future income feel about right?
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Post by propman on Jul 23, 2019 20:14:28 GMT
I do worry about the liquidity risk where the PF comes from future payments. We saw with RS and there wholesale lending that there may come times when high amounts of payouts may be required. Fortunately that happened to RS during benign tims and investors stumped up the shortfall, in a downturn it could have been the end of them. In addition, clearly rtthe actual future income will be less when defaults occur.
Personally I think most borrowers just look at the monthly repayments. So upfront requires interest to be paid on the contributions when it earns little, so some cost. The benefit is that this sticks if the loan is repaid early or defaults, so it is more reliable. Personally I probably discount the income more than the cost of consumer loans, but that is a matter of judgement.
- PM
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r00lish67
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Post by r00lish67 on Jul 24, 2019 8:41:50 GMT
I share your concern in that the cash has declined £275k while loans covered has increased by £1.9m. Future contributions to the fund has increased, but only some £50k suggesting (given increased loans written) that more of the contributions have been taken upfront and this was still insufficient to offset the payouts.
I find the update somewhat confusing. The average maturity of loans has declined in all categories, so there must have been some reassessment of these values. Similarly, Shield utilisation percentages appear to have fallen as well despite the amount in the Shield falling. Does this mean that further contributions have been found (sale of loans in default?)
the arrears rates seem to have reduced, but this is more than offset by bad debts increasing, especially in 2018. This is partially reflected in the expected bad debts, but not in total. So either the assumption is that future performance will improve, or that the arrears are used as a basis of estimating defaults and so a decline in thee suggests better performance going forward.
It would be good to know whether the methodology has been changed or the reasons for the apparent anomalies.
- PM I hadn't spotted that shield utilisation by year seems to have dropped. I agree that I don't see how this reconciles with the shield overall (cash) having fallen by nearly a quarter in just one month. Whilst I'm sure there are explanations for all of the detail, it's really the message just behind the headline stats that concerns me. In the last 4 months, nearly half of the PF cash (as a % of the overall loan portfolio) has evaporated. Last month, I had said that If the rate of change were to continue, then the PF cash would be fully empty by about next April. Working on this month's statistics, that date would probably fall in this December.
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r00lish67
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Post by r00lish67 on Jul 24, 2019 8:58:59 GMT
Comparing RS and Lending Works PF, RS are more reliant on future income. So should you stop investing in RS before LW? RS 12.7m Cash 27.2m Future income LW 1m Cash 2m Future income I think some lenders would like to see a higher proportion of cash, but I don't think this is going to happen. Borrowers are not willing to pay a lot of the risk fees up front to fund the PF. The PF funding has to come mostly from the monthly fees or from upfront seed capital from platforms. Does 1 third cash vs 2 thirds future income feel about right? Interesting question, but after thinking about it IMV the proportion of cash vs future income is bit of a red herring. Reason - future income is a bit meaningless without the corresponding future outflows. RS do publish this, and that figure is currently £33.0m. So, this "2 thirds future income component" is by the by really, as the real net flow is £27.2m income minus £33.0m future losses = - £5.8m. i.e. it's actually detracting from the PF, not adding to it. As I see it, what we actually have on both platforms is an ever decreasing amount of actual PF cash being drained by a net outflow each month. This seems to be supported by the fact that PF cash keeps on dropping on each (as a % of overall loans at least, and often in absolute terms too). We don't know what the forecast net outflow figure is in LW, but in a way it doesn't really matter. In Spring 2019, PF cash was 2.05% of the loans it protected. Today, that figure is 1.17%. That's pretty dramatic and tells you all you need to know about how well 'future income' is supporting the PF to date. In contrast, RS's figures for the same period are 1.69% moving to 1.43%. Yes RS started from a lower base, but the rate of decline is much slower currently. Personally, I've now disinvested from LW, and am keeping more than a close eye on RS too. Edit: Further, on a non-statistics basis for once, think about their rivals. Zopa and Funding Circle pass all losses to their investors, and have done so in spades in recent months. LW and RS are currently forced to pay the full rate of return to investors come what may. So to continue to believe that RS/LW are going to perform requires the belief that they are 'special' in spite of their rivals performance and in spite of the statistics that they produce themselves. I think a lot of people have their head in the sand.
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r00lish67
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Post by r00lish67 on Jul 24, 2019 9:03:15 GMT
I am not too concerned about the shield at the moment as long as the loan book is growing healthily, and its loanbook is still growing. Lending works and other similar platform have managed shield utilisation beyond 100% in the past. Unless there is a sharp increase in default rate to double digits. The one to watch is 2017 default rate, current projection is 6.8% and actual default to date is 6.1% with 60% cohort maturity. Ever heard the phrase 'past performance is no guarantee of future success'? I'm not sure why you would pick 'double digits' as a target for concern in any case. LW's estimate for bad debt in 2017 at the point of origination was 3.4% and they're now forecasting 6.8%. Is a 100% overshoot not concerning enough in itself? Why does it need to be a 200% overshoot? Sorry, I'm a right doomster this morning  However, what I'm talking about is all right there in statistics.
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However, what I'm talking about is all right there in statistics.