Post by propman on Aug 2, 2019 12:34:43 GMT
The optmistic view of the expected defaults is that there credit checking has improved. I have always been wary of P2P re potential to create high defaults due to relatively small issues in credit checking.
P2P generally employs only soft crdit checks prior to loan acceptance. This allows potential borrowers to shop around and bots might make this widely used*. Due to relatively low market share of a P2P company of all loans, an error missing a bad credit marker identified by the other lenders could become catestrophic. Even if this marker only applied to less than 1% of potential borrowers, this might be a very large number of applicants relative to the loans 1 P2P provider is originating. This would lead to giving sub-market quotes to these applicants (ie their quotes do not adequately charge for the credit risk identified by that marker). These would then be accepted by a high proportion of the applicants concerned which could be a high proportion of the loans agreed by that P2P. Hence their entire loan book would under estimate the credit risk.
Such errors will show up in default rates. I would hope that the sites use retrospective analysis to identify common attributes of defaulting (or even late) loans as a minimum, even if they are not utilising an effective AI learning algorithm (ie self correcting credit checking) for credit assessment. Over time this should allow the above faults to be ironed out.
*I do not know whether comparrison sites currently enable automated personalised loan quotes to be obtained from soft checking providers, but if they don't now I expected they will soon!
As I have posted elsewhere, LW has substantially increased the contributions to the Fund. Whether sufficiently is of course a matter of judgement. Personally I stopped lending on RS at one point when lesser excess default issues arose. As it transpired they seem to have weathered that particular bad debt tranche. personally I am struggling to find investments whose return is acceptable, but with low deposit rates (excluding the limited amounts that can be placed in some regualr savings and current accounts), I have reluctantly recommenced lending on RS and am putting a small amount in LW.
1) Is this low risk? Definitely not.
2) Does my over estimation of the impact of increased defaults and lower funds in the past show that I should decrease my risk assessment? No, the nature of fixed income investments is limited potential income against potential total capital losses (picking pennies up in front of steam rollers) so low likelihood risks are potentially critical to the correct risk assessment (ie fat tails can't be ignored) and 1 result is statistically insignificant data from which to assess the future.
So I hold my nose and dive in but make sure that I don't invest criitical funds in P2P. That said, as stated elsewhere I have assessed the likelihood of losing a significant proportion of funds in RS/Zopa to be small, so if I don't need the liquidity, I believe it is a useful investment class that I consider striated into around 90% good capital security and 10% high risk and the premium of returns over risk free only acceptable in the context that most of it is attributable to the 10% tranche.
Hope that makes some sense to some of you!