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Post by propman on Nov 28, 2019 18:11:04 GMT
Reading the new Shield info, it appears that the haircut will be different for each annual cohort. As a result, no haircut is required for 2014. Not sure how this will work for 2015 - 2017 where the Shield was insufficient. I strongly suspect that the proposed haircut for 2019 loans will be the difference between current rate shown and headline rate. So 1.1% on growth and 1.2% for Flexible. These contributions will be the enhanced income due to the Shield.
The fee free withdrawal will presumably be just that for 2019 loans, but as the adjustment for loan rates still applies, if there is a larger reduction for the years that have already used their shields, these could be expensive to sell. Alternatively the haircut might be based on expected future defaults with only the retained cash and contributions due to offset before the haircut. This is likely to mean the earlier loans (where contribution to shield primarily made upfront) may see a more substantial haircut.
It would be good if this could be clarified and perhaps the loanbook amended to show the haircut. By the way, at present while the initial fee is split between shield and LW, there is no indication what, if any, margin is due to the Shield as opposed to LW. This would be a useful clarification.
I note that I have unsecured loans 8 payments behind. I am concerned that the Shield might be unable to meet the defaults that should have been recognised already and so the significant uplift proposed may not go as far as it appears. Clarification on the timing of defaults as these are unlikely to meet the timing of future contributions and therefore the Shield repayments might potentially be deferred.
On the basis of the info provided, I am inclined to accept the "free" exit, or at least to identify the capital cost that this would entail. Further info could well give me the comfort to remain in the light of low rates available elsewhere.
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trevor
Member of DD Central
Posts: 557 
Likes: 381
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Post by trevor on Nov 28, 2019 20:56:11 GMT
I have been lending to LW for about 9 months. When I lent into the 5 year 6.5% I thought I was getting 6.5% for 5 years. Where on the tin did it say 6.5% for 5 years but may be not?
I also invest in RS where they pay the rate that it says on the tin.
I was getting overweight in RS so opened an account with LW. They have now joined my blacklist with FC.
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Post by Matthew on Nov 28, 2019 22:30:15 GMT
Reading the new Shield info, it appears that the haircut will be different for each annual cohort. As a result, no haircut is required for 2014. Not sure how this will work for 2015 - 2017 where the Shield was insufficient. I strongly suspect that the proposed haircut for 2019 loans will be the difference between current rate shown and headline rate. So 1.1% on growth and 1.2% for Flexible. These contributions will be the enhanced income due to the Shield.
The fee free withdrawal will presumably be just that for 2019 loans, but as the adjustment for loan rates still applies, if there is a larger reduction for the years that have already used their shields, these could be expensive to sell. Alternatively the haircut might be based on expected future defaults with only the retained cash and contributions due to offset before the haircut. This is likely to mean the earlier loans (where contribution to shield primarily made upfront) may see a more substantial haircut.
It would be good if this could be clarified and perhaps the loanbook amended to show the haircut. By the way, at present while the initial fee is split between shield and LW, there is no indication what, if any, margin is due to the Shield as opposed to LW. This would be a useful clarification.
I note that I have unsecured loans 8 payments behind. I am concerned that the Shield might be unable to meet the defaults that should have been recognised already and so the significant uplift proposed may not go as far as it appears. Clarification on the timing of defaults as these are unlikely to meet the timing of future contributions and therefore the Shield repayments might potentially be deferred.
On the basis of the info provided, I am inclined to accept the "free" exit, or at least to identify the capital cost that this would entail. Further info could well give me the comfort to remain in the light of low rates available elsewhere.
Hi propmanA few interesting points raised here, thanks. Your individual downloadable loan book will show the expected return for each of your individual loans, from January 2020 once any rate adjustments have been made. Until that point they will continue to show the target rate. The margin due to the Shield is shown as Shield future income on the statistics page. This includes planned Shield contributions in addition to almost all future income Lending Works would have earned from these loans, as per the email earlier today. Regarding the loan which is 8 payments down, we do allow some loans to continue multiple contractual payments behind where they are in a payment arrangement. It's likely that loan will be charged off in the near future in any case. Loans such as this would be included within our future losses calculation i.e. we'd be assuming these would go on to default and factor that into our Shield forecasts. The way the new Shield is intended to operate is that it becomes fluid and, provided the loan portfolio continues generating repayments, it should always have sufficient funds to continue to operate as expected. The key variable is losses versus expectation, as any delta would result in an interest rate adjustment. We will be working very hard to ensure that our loss forecasting continues to improve and build trust through delivery of consistent returns over a long period of time. The new mechanism removes the binary nature of most contingency funds i.e. it's either fine or it's not, which I think should give peace of mind to investors.
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Post by propman on Nov 29, 2019 8:50:53 GMT
Reading the new Shield info, it appears that the haircut will be different for each annual cohort. As a result, no haircut is required for 2014. Not sure how this will work for 2015 - 2017 where the Shield was insufficient. I strongly suspect that the proposed haircut for 2019 loans will be the difference between current rate shown and headline rate. So 1.1% on growth and 1.2% for Flexible. These contributions will be the enhanced income due to the Shield.
The fee free withdrawal will presumably be just that for 2019 loans, but as the adjustment for loan rates still applies, if there is a larger reduction for the years that have already used their shields, these could be expensive to sell. Alternatively the haircut might be based on expected future defaults with only the retained cash and contributions due to offset before the haircut. This is likely to mean the earlier loans (where contribution to shield primarily made upfront) may see a more substantial haircut.
It would be good if this could be clarified and perhaps the loanbook amended to show the haircut. By the way, at present while the initial fee is split between shield and LW, there is no indication what, if any, margin is due to the Shield as opposed to LW. This would be a useful clarification.
I note that I have unsecured loans 8 payments behind. I am concerned that the Shield might be unable to meet the defaults that should have been recognised already and so the significant uplift proposed may not go as far as it appears. Clarification on the timing of defaults as these are unlikely to meet the timing of future contributions and therefore the Shield repayments might potentially be deferred.
On the basis of the info provided, I am inclined to accept the "free" exit, or at least to identify the capital cost that this would entail. Further info could well give me the comfort to remain in the light of low rates available elsewhere.
Hi propman A few interesting points raised here, thanks. Your individual downloadable loan book will show the expected return for each of your individual loans, from January 2020 once any rate adjustments have been made. Until that point they will continue to show the target rate. The margin due to the Shield is shown as Shield future income on the statistics page. This includes planned Shield contributions in addition to almost all future income Lending Works would have earned from these loans, as per the email earlier today. Regarding the loan which is 8 payments down, we do allow some loans to continue multiple contractual payments behind where they are in a payment arrangement. It's likely that loan will be charged off in the near future in any case. Loans such as this would be included within our future losses calculation i.e. we'd be assuming these would go on to default and factor that into our Shield forecasts. The way the new Shield is intended to operate is that it becomes fluid and, provided the loan portfolio continues generating repayments, it should always have sufficient funds to continue to operate as expected. The key variable is losses versus expectation, as any delta would result in an interest rate adjustment. We will be working very hard to ensure that our loss forecasting continues to improve and build trust through delivery of consistent returns over a long period of time. The new mechanism removes the binary nature of most contingency funds i.e. it's either fine or it's not, which I think should give peace of mind to investors. Thank you for your response and continuing to engage on here through what is a difficult time.
My point addressed in the final para of your response is a timing one. If you corretcly calculate the extra required by the Shield and the proportion of interest paid (ie net of early repayments), then there would be sufficient in the long run to meet all defaults. My concern is that the defaults might occur earlier than the income leaving the Shield temporarily unable to meet the defaults. In those circumstances, would you defer declaring defaults or temporarily increase the haircut?
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p2pmark
Member of DD Central
Posts: 218
Likes: 187
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Post by p2pmark on Nov 29, 2019 9:29:40 GMT
I've done some calculations below on the sustainability of this. Would be grateful for comments /corrections for others, especially from Matthew and r00lish67 . On 1 June 2019, the cash element of the Shield stood at £1.4m. It has fallen by almost exactly £1m in 6 months - about £160k a month. So, assuming things carry on more less as they have been, contributions need to increase by £160k a month to maintain the Shield as it's current (low) level. The loan book covered by the Shield currently stands at £92.5m. £160k / £92.5m is 0.17% and so contributions need by this much per month. LW are helpfully contributing an extra 0.4% per year (so 0.03% per month). The drop in rates for new loans is about 0.1% per month. This suggests there is still an overall shortfall of 0.04% per month. This is within the levels of uncertainty for this sort of thing, but bearing in mind the cash element of the Shield is already small, this still all feels risky. On top of this, there are further factors increasing the risk: - the insurance element has been dropped which would increase the burden on the Shield. Matthew , is this saving being diverted to the Shield? - the haircut for existing loans is smaller at roughly 0.03% per month (as I understand it) suggesting the Shield will fall at a faster rate in the short term. - the composition of loans will increase in risk over time - suggesting more Shield support needed - as the older cohort of loans (which are less risky) mature. Thoughts? |
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r00lish67
Member of DD Central
Posts: 2,692
Likes: 4,048
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Post by r00lish67 on Nov 29, 2019 10:50:16 GMT
I've done some calculations below on the sustainability of this. Would be grateful for comments /corrections for others, especially from Matthew and r00lish67 . On 1 June 2019, the cash element of the Shield stood at £1.4m. It has fallen by almost exactly £1m in 6 months - about £160k a month. So, assuming things carry on more less as they have been, contributions need to increase by £160k a month to maintain the Shield as it's current (low) level. The loan book covered by the Shield currently stands at £92.5m. £160k / £92.5m is 0.17% and so contributions need by this much per month. LW are helpfully contributing an extra 0.4% per year (so 0.03% per month). The drop in rates for new loans is about 0.1% per month. This suggests there is still an overall shortfall of 0.04% per month. This is within the levels of uncertainty for this sort of thing, but bearing in mind the cash element of the Shield is already small, this still all feels risky. On top of this, there are further factors increasing the risk: - the insurance element has been dropped which would increase the burden on the Shield. Matthew , is this saving being diverted to the Shield? - the haircut for existing loans is smaller at roughly 0.03% per month (as I understand it) suggesting the Shield will fall at a faster rate in the short term. - the composition of loans will increase in risk over time - suggesting more Shield support needed - as the older cohort of loans (which are less risky) mature. Thoughts? That seems a sensible way of looking at the situation to me. Reading LW's page about the shield, this bit sticks out: "In the event that an annual cohort of loans performs worse than expected - i.e. the value of expected claims on the Shield is greater than the value of its expected future income, an adjustment will be made to the expected investor returns for that cohort to ensure the Shield receives adequate funding. Such adjustments are reviewed and communicated to investors on a quarterly basis, following approval by the Board of directors of the Trustee."Broadly speaking, in principle they've now adjusted investor returns and their margins to roughly what they believe is required, as per your rough calculation. What they'll now do going forwards as I understand it, is tweak rates further as required depending how the cohort performs. So actually, in a way is this not LW moving along the spectrum away from RS ('guaranteed' returns) and towards Zopa/FC (loser bears all)? It collectivises the risk of loss and stops the situation whereby LW are on the hook for all of the cost of underperformance. I think for the sustainability of the platform, it's a good thing. It had to change, as otherwise LW would not survive. Overall it's not a bad compromise. This said, I've still no plans to reinvest. Despite Matthew giving a good account of their side of it, I'm still just not convinced about losses being able to be reduced whilst increasing the borrower APR to such an extent for 2019. I think we've now lost this view from the stats, but the expected loss rate for the 2019 cohort was very low (5.0%?). So, if that needs to be increased, the difference now is that investors will pay for that rather then LW. At least it won't break the platform anymore, but it might (I suspect) end up deflating investor returns further. Going back to the quote "an adjustment will be made to the expected investor returns for that cohort" - I wonder how clearly that will be seen from the investor side, who will perhaps have various years of loans in their portfolio?
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jlend
Member of DD Central
Posts: 1,840
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Post by jlend on Nov 29, 2019 10:55:19 GMT
I've done some calculations below on the sustainability of this. Would be grateful for comments /corrections for others, especially from Matthew and r00lish67 . On 1 June 2019, the cash element of the Shield stood at £1.4m. It has fallen by almost exactly £1m in 6 months - about £160k a month. So, assuming things carry on more less as they have been, contributions need to increase by £160k a month to maintain the Shield as it's current (low) level. The loan book covered by the Shield currently stands at £92.5m. £160k / £92.5m is 0.17% and so contributions need by this much per month. LW are helpfully contributing an extra 0.4% per year (so 0.03% per month). The drop in rates for new loans is about 0.1% per month. This suggests there is still an overall shortfall of 0.04% per month. This is within the levels of uncertainty for this sort of thing, but bearing in mind the cash element of the Shield is already small, this still all feels risky. On top of this, there are further factors increasing the risk: - the insurance element has been dropped which would increase the burden on the Shield. Matthew , is this saving being diverted to the Shield? - the haircut for existing loans is smaller at roughly 0.03% per month (as I understand it) suggesting the Shield will fall at a faster rate in the short term. - the composition of loans will increase in risk over time - suggesting more Shield support needed - as the older cohort of loans (which are less risky) mature. Thoughts? Personal loans tend to default early in their lifetime, asset backed property loans tend to default later in their cycle. You can see the default profile on the LW website for each cohort and see that it is reducing and for earlier cohorts leveling off. This is quite normal for personal lending in my experience. So if they wrote no more loans the defaults should level off to some extent for the existing loans and there should be much less new defaults on the exiting cohorts. So you shouldn't see such high reductions in the cash balance. By reducing the lender rate for the existing loans and contributing their interest rate margin there will hopefully be sufficient money to cover losses on the current mature loan book. Of course this does assume that they have got their numbers right for future expected losses on the mature loan book, that defaults really do level off on the exiting loan book, that the general economy doesn't throw up issues that they havent already built into their numbers, and that future loans they write are materially better forecast than some of the previous years. I think it will take at least a year for us to see how the changes are working and get a better idea of they look like they are sufficient.
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Post by Matthew on Dec 3, 2019 10:47:54 GMT
Hi propman A few interesting points raised here, thanks. Your individual downloadable loan book will show the expected return for each of your individual loans, from January 2020 once any rate adjustments have been made. Until that point they will continue to show the target rate. The margin due to the Shield is shown as Shield future income on the statistics page. This includes planned Shield contributions in addition to almost all future income Lending Works would have earned from these loans, as per the email earlier today. Regarding the loan which is 8 payments down, we do allow some loans to continue multiple contractual payments behind where they are in a payment arrangement. It's likely that loan will be charged off in the near future in any case. Loans such as this would be included within our future losses calculation i.e. we'd be assuming these would go on to default and factor that into our Shield forecasts. The way the new Shield is intended to operate is that it becomes fluid and, provided the loan portfolio continues generating repayments, it should always have sufficient funds to continue to operate as expected. The key variable is losses versus expectation, as any delta would result in an interest rate adjustment. We will be working very hard to ensure that our loss forecasting continues to improve and build trust through delivery of consistent returns over a long period of time. The new mechanism removes the binary nature of most contingency funds i.e. it's either fine or it's not, which I think should give peace of mind to investors. Thank you for your response and continuing to engage on here through what is a difficult time.
My point addressed in the final para of your response is a timing one. If you corretcly calculate the extra required by the Shield and the proportion of interest paid (ie net of early repayments), then there would be sufficient in the long run to meet all defaults. My concern is that the defaults might occur earlier than the income leaving the Shield temporarily unable to meet the defaults. In those circumstances, would you defer declaring defaults or temporarily increase the haircut?
Hi propmanThe expected returns will always be assessed over the lifetime of the loans and each quarter's assessment will obviously need to consider the timing of cash flows in making that assessment. The interest rates will be adjusted over time to ensure the Shield remains liquid, and these adjustments will be communicated on a quarterly basis. Thanks
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Post by Matthew on Dec 3, 2019 10:55:53 GMT
I've done some calculations below on the sustainability of this. Would be grateful for comments /corrections for others, especially from Matthew and r00lish67 . On 1 June 2019, the cash element of the Shield stood at £1.4m. It has fallen by almost exactly £1m in 6 months - about £160k a month. So, assuming things carry on more less as they have been, contributions need to increase by £160k a month to maintain the Shield as it's current (low) level. The loan book covered by the Shield currently stands at £92.5m. £160k / £92.5m is 0.17% and so contributions need by this much per month. LW are helpfully contributing an extra 0.4% per year (so 0.03% per month). The drop in rates for new loans is about 0.1% per month. This suggests there is still an overall shortfall of 0.04% per month. This is within the levels of uncertainty for this sort of thing, but bearing in mind the cash element of the Shield is already small, this still all feels risky. On top of this, there are further factors increasing the risk: - the insurance element has been dropped which would increase the burden on the Shield. Matthew , is this saving being diverted to the Shield? - the haircut for existing loans is smaller at roughly 0.03% per month (as I understand it) suggesting the Shield will fall at a faster rate in the short term. - the composition of loans will increase in risk over time - suggesting more Shield support needed - as the older cohort of loans (which are less risky) mature. Thoughts? Hi p2pmarkJust to pick up on a couple of your points: - The saving on insurance premiums will be fully realised by the Shield. There is no additional burden because the premiums on average were greater than the proceeds from claims (as with any insurance, if claims are greater than premiums for any length of time the insurer wouldn't be too happy) - The level of defaults and cash drop will not remain at that level as defaults will taper significantly on the existing book - partly because bad loans tend to go bad in the first 18-24 months or so and partly because the outstanding balance reduces significantly over the life of the loan so the loss given default drops off - the lifetime default curves on the statistics page show this quite well - The loss forecasts consider the composition of each cohort and remaining terms etc so this has already been factored into the assessment. Unfortunately it's not quite as simple as the figures quoted above, but understand your points Hope this helps
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mickj
Member of DD Central
Posts: 435
Likes: 191
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Post by mickj on Jan 8, 2020 11:49:46 GMT
Your individual downloadable loan book will show the expected return for each of your individual loans, from January 2020 once any rate adjustments have been made. Until that point they will continue to show the target
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zlb
Member of DD Central
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Post by zlb on Jan 17, 2020 15:10:32 GMT
I'm bothered that the expected rates are already back as they were before they became variable rates. I wonder what period in time or forecasting this is based on.
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