bjorn
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Post by bjorn on Oct 5, 2015 10:50:53 GMT
I've started dabbling with LC and other than deal flow, it looks promising. I'd be interested in how people think the risk bands align with FC - without estimated default rates, I'm struggling to decide if the rates are good, bad or indifferent. Are there any known criteria used by either, or is it a just relative thing? thanks LC do actually give estimated bad debt rates. They're slightly hidden away under autobid settings, where it tells you that estimated bad debt rates are: A+ 0.5% A 1% B+ 1.5% B 2.25% C+ 3% In other words, the risk band "grades" are broadly what you'd expect compared to FC - e.g., B+ at LC has lower bad debt than B at FC and so on. Of course, LC having a much shorter track record and no defaults to date, it remains to be seen whether their estimates are correct. (One thing I always found encouraging at FC was that they could show that their overall actual bad debts were lower than their estimates ... in other words, their estimates were conservative and if you took that as the likely outcome, you should be pleasantly surprised). Here's a quick FC/LC comparison of their risk bands and associated estimated bad debt: | FC band | FC est bad debt | LC band | LC est bad debt | | A+ | 0.6% | A+ | 0.5% | | | A | 1% | | A | 1.5% | B+ | 1.5% | | B | 2.3% | B | 2.25% | | | | C+ | 3% | | C | 3.3% | |
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LC seem keen to ensure that companies they lend to have been very carefully vetted. Let's see if that pays off in practice ...
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oldgrumpy
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Post by oldgrumpy on Oct 5, 2015 11:10:26 GMT
FC was my first P2B venture about three years ago. In all that time Fundamental Cracks has not changed its "estimate" of bad debt for each risk band. (Does anyone know how close these estimates are to reality?). Today I see 34 loans of which only three are available because auctions no longer apply, and the first one is entitled "A Cracking Investment". Fusion Crystals assess it as an A+ risk, (we all know how anomalous some of those assessments can be, not necessarily this one). The borrower is answering no questions, and Friendly Custard informed us three days ago he is having trouble with his computer (does such a business with a £400K annual turnover only have access to one connectible computer??).
For all that the lender rate for five years is 7.3% (net of FC fees), with no provision fund backing.
I am gradually grumping ship.
Now, where shall I stick my money?
<FIFTY LASHES WITH A BANANA BRANCH FOR THE FIRST PERSON WHO TELLS HIM!>
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bjorn
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Post by bjorn on Oct 5, 2015 11:35:21 GMT
FC was my first P2B venture about three years ago. In all that time Fundamental Cracks has not changed its "estimate" of bad debt for each risk band. (Does anyone know how close these estimates are to reality?). You can see how their bad debt performance (actual vs expected) on their stats page. With the exception of 2010/11, their actual levels of bad debt are all below the expected level. I think this was one of the points that arbster picked up from their investor evening ... they can show that they are getting better at predicting bad debt and the ratio of defaults for companies they lend to versus those they reject is falling. This is an area where having a longer running history definitely helps - you can do useful stuff with five years of data.
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registerme
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Post by registerme on Oct 5, 2015 11:38:39 GMT
The problem with model based estimates of default risk (and presumably recoveries?) is that none of the platforms has been through an interest rate cycle. How sensitive are the businesses and people we are lending to to a rise in interest rates (of 1%, 2%, 4%, 8%)? How much does amortisation and the ability to sell off mitigate this risk? Similarly, whilst diversification by business / consumer / location etc is good, how much correlation risk is being run? How well do any of the models used by the P2P industry actually model this? At the moment I don't think we have any basis for concluding an answer to that question. You can take some comfort in default rates being lower than platform predictions, but I wouldn't take too much comfort in it. I'm actually getting more nervous about the "securitisation" approach that some platforms take. Whilst it might vary to a degree, essentially they are:- Modelling Originating Warehousing Approving Distributing Managing client funds Unprofitable / low profitability Little to no skin in the game Making (hopefully) enough money to be profitable If default rates spike for some reason how well will any provision fund cover losses? That's more concentrated "function risk" than we saw with banks, credit rating agencies, Fannie and Freddie, sub-prime and CDOs prior to the credit crunch. To be fair though there are some important differences - no leverage, no synthetics, no repackaging of debt that's been repackaged, perhaps less concentration risk, perhaps better security, perhaps no NINJA loans and they ARE disintermediating the banks, providing us with better returns (currently) and borrowers with better rates.I guess the acid test is whether or not I have money on those platforms. The answer is yes, I do, but I am continually challenging my own view that they are safe enough given the returns on offer. I'm going to cross post this in to the "Where is your money safest" thread because my answer grew beyond being FC specific  . |
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bigfoot12
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Post by bigfoot12 on Oct 5, 2015 12:38:46 GMT
Today I see 34 loans of which only three are available... As recently as this morning there were quite a few loans available. I guess that they were filled by weekend deposits and repayments auto-bidding them. Friday night/Saturday morning there were about 20 choose from.
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blender
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Post by blender on Oct 5, 2015 13:31:59 GMT
The only public definition of the FC Bands is the loss rate, and the plan will be, over the medium term, to adjust the band entry criteria so that the loss rate is achieved. The loss rate is the end, the band criteria are the means. There should be sufficient inertia in the loan book to allow FC to correct. It is a classic feedback model with errors in the loss rate adjusting the amount of risk allowed in each band. 40 years ago I could have expressed it as a differential equation and modelled it with analogue computing using op amps. Nowadays I put my watch on upside down and go to bed in the middle of the day. Hello Autobid.
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Post by GSV3MIaC on Oct 5, 2015 14:27:33 GMT
Be careful Blender old chap .. remember, autobid was constructed and is run by people who a) wouldn't know an op amp from a pop tart and b) probably think a PID control loop is some sort of catheter... you may be better off using your upside down watch as a pseudorandom number generator and bidding manually .. 8>.
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fasty
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Post by fasty on Oct 5, 2015 14:36:59 GMT
The only public definition of the FC Bands is the loss rate, and the plan will be, over the medium term, to adjust the band entry criteria so that the loss rate is achieved. The loss rate is the end, the band criteria are the means. There should be sufficient inertia in the loan book to allow FC to correct. It is a classic feedback model with errors in the loss rate adjusting the amount of risk allowed in each band. 40 years ago I could have expressed it as a differential equation and modelled it with analogue computing using op amps. Nowadays I put my watch on upside down and go to bed in the middle of the day. Hello Autobid. My gain isn't high enough.
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Post by Deleted on Oct 5, 2015 15:25:06 GMT
The Economist did an article a while back that suggested that P2P in Uk is not yet at the size to use raw data analysis to auto-model risk, however FC are getting closer than most due to their US data providing them with with comparison modeling. It was one of Zopa or RS that were close too in their end of the market, though I forget which.
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nick
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Post by nick on Oct 5, 2015 20:33:12 GMT
The problem with model based estimates of default risk (and presumably recoveries?) is that none of the platforms has been through an interest rate cycle. How sensitive are the businesses and people we are lending to to a rise in interest rates (of 1%, 2%, 4%, 8%)? How much does amortisation and the ability to sell off mitigate this risk? Similarly, whilst diversification by business / consumer / location etc is good, how much correlation risk is being run? How well do any of the models used by the P2P industry actually model this? At the moment I don't think we have any basis for concluding an answer to that question. You can take some comfort in default rates being lower than platform predictions, but I wouldn't take too much comfort in it. I'm actually getting more nervous about the "securitisation" approach that some platforms take. Whilst it might vary to a degree, essentially they are:- Modelling Originating Warehousing Approving Distributing Managing client funds Unprofitable / low profitability Little to no skin in the game Making (hopefully) enough money to be profitable If default rates spike for some reason how well will any provision fund cover losses? That's more concentrated "function risk" than we saw with banks, credit rating agencies, Fannie and Freddie, sub-prime and CDOs prior to the credit crunch. To be fair though there are some important differences - no leverage, no synthetics, no repackaging of debt that's been repackaged, perhaps less concentration risk, perhaps better security, perhaps no NINJA loans and they ARE disintermediating the banks, providing us with better returns (currently) and borrowers with better rates.I guess the acid test is whether or not I have money on those platforms. The answer is yes, I do, but I am continually challenging my own view that they are safe enough given the returns on offer. I'm going to cross post this in to the "Where is your money safest" thread because my answer grew beyond being FC specific . I totally agree. FC and other P2P platforms have grown in a very benign rate environment. The real test is when we start going through the rate tightening cycle and what happens if we hit any liquidity shocks......
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Post by jackpease on Oct 6, 2015 12:33:49 GMT
....and my puzzlement is where people are jumping ship to that could weather shocks? A sharp property shock will wipe some platforms out altogether - whereas it'll only take a chunk out of FC - not take out the whole thing.
Jack P
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Post by GSV3MIaC on Oct 6, 2015 15:39:00 GMT
Depends how bad the shock is .. there is an awful lot of FC (customers') money now tied up in property loans, nigh on £100m as far as I can tell. That'd be a big dent.
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adrianc
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Post by adrianc on Oct 6, 2015 18:55:43 GMT
Depends how bad the shock is .. there is an awful lot of FC (customers') money now tied up in property loans, nigh on £100m as far as I can tell. That'd be a big dent. If it's THAT big a "shock", I think I'd rather have my money tied up in secured property loans and take a ding, than in unsecured loans to smaller-medium businesses, which are very likely to just go <poof!>...
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blender
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Post by blender on Oct 6, 2015 19:33:03 GMT
Depends how bad the shock is .. there is an awful lot of FC (customers') money now tied up in property loans, nigh on £100m as far as I can tell. That'd be a big dent. If it's THAT big a "shock", I think I'd rather have my money tied up in secured property loans and take a ding, than in unsecured loans to smaller-medium businesses, which are very likely to just go <poof!>... So you think the first charge on property might be more productive that a director's guarantee? I rather agree. In that position I would rather use my personal money to try to save my company rather than default on the loan earlier and then give my personal cash to FC. The problem with the argument is that a general collapse in property prices would be a common mode risk to all property loans, whereas the SME loans are very diverse and not all sensitive to the same economic events (large exchange rate variations etc). But true that SME defaults result in slow recoveries of up to 40% in the good times, while the value of property security should be much better (smaller ding) even if property prices take a large hit. Personally I am in the property loans.
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registerme
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Post by registerme on Oct 6, 2015 20:09:48 GMT
Whilst that's true a general property (so country-wide, and resi as well as commercial) property crash of >20% would throw the "real economy" into a complete tail spin anyway. So I doubt those diverse SME loans would remain unaffected.....
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