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Post by lb on Aug 27, 2015 12:14:03 GMT
Hello all
I am considering putting some money in their 30 day easy access product but I am trying to find out how the PF actually works and what protection it provides. The current PF is ~ £1.9m - and apparently it covers ~ £90m of P2P loans.
So, if I am invested in a loan that defaults badly and there is a large capital loss (say £500k), would the PF cover this amount? Or is there a set amount it would cover? There does not appear to be any clear explanation on their site where it just says
If a loan goes into default we will automatically apply to the Provision Fund to cover any shortfalls in interest and capital that you suffer as a result. If the provision fund was unable to cover any losses of capital and interest we will contact you to make you aware that your borrower is in default and explain the next steps of the enforcement process that we will manage on your behalf.
This certainly implies that it would cover the full loss - but if so, then 2/3 bad loans and the PF vanishes?
Does anyone know the answer?
Thanks
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c88dnf
Member of DD Central
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Post by c88dnf on Aug 27, 2015 16:10:13 GMT
Hello all
I am considering putting some money in their 30 day easy access product but I am trying to find out how the PF actually works and what protection it provides. The current PF is ~ £1.9m - and apparently it covers ~ £90m of P2P loans.
So, if I am invested in a loan that defaults badly and there is a large capital loss (say £500k), would the PF cover this amount? Or is there a set amount it would cover? There does not appear to be any clear explanation on their site where it just says
If a loan goes into default we will automatically apply to the Provision Fund to cover any shortfalls in interest and capital that you suffer as a result. If the provision fund was unable to cover any losses of capital and interest we will contact you to make you aware that your borrower is in default and explain the next steps of the enforcement process that we will manage on your behalf.
This certainly implies that it would cover the full loss - but if so, then 2/3 bad loans and the PF vanishes?
Does anyone know the answer?
Thanks Wellesley's provision fund's philosophy is exactly the same as those operated by (for example) Ratesetter and Zopa. It is sized to cover an expected amount of defaults from the total portfolio, with an amount of cover on top. The expected amount of default is expressed as a percentage of the loan portfolio, which varies by year (1% of 2014 loans; 0.4% of 2015 loans). Those percentages, whether on Wellesley or elsewhere, are a combination of estimates from knowledge of the investment sector, past experience and a degree of guesswork. Wellesley's position is slightly different to platforms such as Ratesetter & Zopa in that the lender has security over a tangible asset - property - so total loss of any investment is (or should be) a lower percentage risk. As I write, Wellesley's provision fund contains £1.94m against lender loans of £99.3m. That's 1.95% coverage. For comparison Ratesetter's fund is £15.5m covering £428.7m, or 3.62%. The two percentages are, however, not directly comparable since, as noted, Wellesley have extra (asset) security against total loss which RS don't. On the other hand, as you suggest, Wellesley's fund would be wiped out by 3 bad loans - assuming total loss - but remember that Wellesley's directors have an equal stake in loans with retail investors, so you have to think through whether they are likely to stake their own assets against potential bad debts. Basically, it's a risk/ percentages game. You either believe that the chance of the business going "phut" are low enough to risk investing, or you don't.
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Post by lb on Aug 29, 2015 17:52:48 GMT
Thanks C88
How do you know the company has equal stake in loans? I know they say that they have a part in each loan but I assumed a small part such as 5% ... Equal would suggest they can only grow their loanbook by 100% of it's own capital which I would doubt is the case
also, it seems that you are assuming that if a loan defaults that the PF would cover the full loss (up to max £1.9m currently) but I still do not know if that is the case
if a loan goes bad (say £500k loss as their minimum loan is £750k) then where does that hit get taken. What hit do Wellesley take, what does PF take and what does investor take. This is totally unclear
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Post by batchoy on Aug 29, 2015 20:25:14 GMT
Thanks C88 How do you know the company has equal stake in loans? I know they say that they have a part in each loan but I assumed a small part such as 5% ... Equal would suggest they can only grow their loanbook by 100% of it's own capital which I would doubt is the case also, it seems that you are assuming that if a loan defaults that the PF would cover the full loss (up to max £1.9m currently) but I still do not know if that is the case if a loan goes bad (say £500k loss as their minimum loan is £750k) then where does that hit get taken. What hit do Wellesley take, what does PF take and what does investor take. This is totally unclear It depends on how the loan had been assigned. For that part of the loan which had been assigned to investors covered by the PF the PF would take the hit, for everyone else they would take the hit. Assuming that all loans are assigned in a similar ratio the PF would have to cover 44.5% or £222k of the £500k loss.
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Post by 4thway on Aug 31, 2015 19:42:52 GMT
Thanks C88 How do you know the company has equal stake in loans? I know they say that they have a part in each loan but I assumed a small part such as 5% ... Equal would suggest they can only grow their loanbook by 100% of it's own capital which I would doubt is the case also, it seems that you are assuming that if a loan defaults that the PF would cover the full loss (up to max £1.9m currently) but I still do not know if that is the case if a loan goes bad (say £500k loss as their minimum loan is £750k) then where does that hit get taken. What hit do Wellesley take, what does PF take and what does investor take. This is totally unclear It depends on how the loan had been assigned. For that part of the loan which had been assigned to investors covered by the PF the PF would take the hit, for everyone else they would take the hit. Assuming that all loans are assigned in a similar ratio the PF would have to cover 44.5% or £222k of the £500k loss. Hi folks Wellesley or its directors keep 5% of every loan. We individual P2P lenders on Wellesley are ranked higher than Wellesley! The directors and marketing manager have told me on several occasions that they will take the first loss of any loan if the security is insufficient. Only then will the provision fund be tapped and, after that, we lenders lose money.
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Post by 4thway on Aug 31, 2015 19:51:40 GMT
Edit: Sorry, I was trying to quote this bit: "...Wellesley's fund would be wiped out by 3 bad loans - assuming total loss..."The only reason to expect a total loss is probably fraud. Wellesley would have to be seriously negligent and incompetent. I did a simple stress test assuming 10% of all the loans default and Wellesley is just able to recover 55% of the debt. In this scenario, individual lenders were still looking fine: www.4thway.co.uk/?p=2316
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Post by jackpease on Sept 1, 2015 8:52:50 GMT
>>>>The only reason to expect a total loss is probably fraud. Wellesley would have to be seriously negligent and incompetent.
Well FC (Crappy Scrappy etc) and FK (the printer) have both both been caught out by people who set out to defraud them - i'm not sure FC/FK were seriously negligent and incompetent - even banks get hoodwinked so i think Wellesley is presumably could be similarly hoodwinked - I have similar worries about SS which has some big loans relative to their size.
Jack P
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Post by mrclondon on Sept 1, 2015 11:47:53 GMT
>>>>The only reason to expect a total loss is probably fraud. Wellesley would have to be seriously negligent and incompetent. Well FC (Crappy Scrappy etc) and FK (the printer) have both both been caught out by people who set out to defraud them - i'm not sure FC/FK were seriously negligent and incompetent - even banks get hoodwinked so i think Wellesley is presumably could be similarly hoodwinked - I have similar worries about SS which has some big loans relative to their size. Jack P Very true. However the mitigation with SS / W&Co is the realisable asset security should cover the majority of the loan value even if sold quickly below OMV.
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Post by 4thway on Sept 1, 2015 16:18:22 GMT
>>>>The only reason to expect a total loss is probably fraud. Wellesley would have to be seriously negligent and incompetent. Well FC (Crappy Scrappy etc) and FK (the printer) have both both been caught out by people who set out to defraud them - i'm not sure FC/FK were seriously negligent and incompetent - even banks get hoodwinked so i think Wellesley is presumably could be similarly hoodwinked - I have similar worries about SS which has some big loans relative to their size. Jack P Right, Jack, thanks, I should have taken a larger chunk to quote, but I meant that to get three frauds in a row - to wipe out the bad-debt fund - would be seriously worrying.
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Post by lb on Sept 3, 2015 5:19:10 GMT
4th way
W state that their minimum loan is £750,000. This indicates their largest is going to be several million (more than the size of the Entire PF)
Assume a property loan of £3m takes a loss of £1m for whatever reason. Seeing as their loans are potentially several million this is a real possibility. Where would that £1m loss sit?
Why can W not set out clearly the priority order in the event that a £3m loan takes a £1m loss.
According to C88 that loan (where there was a 1m loss) would be funded ~55% by Wellesley and 45% by p2p. Therefore if this was the case the investors get full 45% invested which is £1,350,000, Wellesley get the £650k balance and Wellesley take the full loss of £1m. PF untouched
according to 4th way however the share of that loan would be 5% to W and 95% p2p. In this case the £2m recovered would go to investors. The £1m loss W would take their £150k hit but what about the £850k shortfall to investors? Does the PF cover all of this or part of this and if only part then how is this calculated???
I think the difference between you is that one of you (c88) is including bond money as W money (therefore subordinate to p2p) and 4th way is counting bond money as parr passu with p2p? So which is it ??
4th way your article about a crisis stress test has nothing to do with the above and if you are really interested in reporting accurately about the risk then you should find this out.
Thanks in advance.
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c88dnf
Member of DD Central
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Post by c88dnf on Sept 3, 2015 18:45:32 GMT
What did Wellesley advise when you asked them?
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Post by lb on Sept 4, 2015 5:39:11 GMT
They didn't know when I asked on live chat just kept saying security gets sold first. Duh!
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Post by wellesleyco on Sept 8, 2015 9:25:35 GMT
lb & c88dnf, As per the above example: "Assume a property loan of £3m takes a loss of £1m for whatever reason." - As all loans on the platform are asset backed (Typical 65% Loan to Value), the security held against a £3m loan would be valued at c. £4.6m and therefore a £1m loss would not affect the loan, it would merely wipe out the borrowers equity. In the event that a borrower defaulted on their loan and Wellesley was unable to recover £1m of the loan amount through sale of the loan security. This would mean that on the above case where the LTV is 65%, in liquidation the security could only achieve 43% of its market value**. This is based on £1m loss on £3m lent, with Security valued at £4.6m Wellesley take first loss, the Wellesley Peer to Peer Customers and The Wellesley Listed Bond holders are ranked pari-passu. It is best to re-enforce the message here as many people seem to ignore this but every 'Provision/Safeguard Fund' in the industry is at the Discretion of Management. No platform is legally allowed to 'Guarantee' its use. In the event that investors on the Wellesley & Co platform would suffer a loss of interest or capital as a result of investing with Wellesley & Co, the Directors of Wellesley & Co will seek to deploy provisions at their discretion to make good any loss. While Wellesley & Co cannot guarantee the use of funds, it is the Directors' severest intention that no investors loses funds while investing through the Wellesley & Co Platform. Does this Clarify? ** Sales pitch aside, there is a focus on lending in liquid areas with low market volatility to avoid the possibility of this happening. We do no wish to lose the portion we hold in every loan, therefore me make decisions to lend where we will get it back, and with it, investors' capital and interest. Investment through Wellesley & Co Limited involves lending to individuals or companies and therefore your capital is at risk and interest payments are not guaranteed if the borrower defaults. Security Arrangements do not guarantee full return of capital and interest.
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Post by lb on Sept 10, 2015 17:35:27 GMT
Wellesley thank you for taking the time to reply it is appreciated.
i know no one can guarantee the fund would make any payments otherwise it would be classified as insurance no doubt and you wouldn't want to be regulated for that!
However, with that said, most are easy to understand how that 'discretion' would be applied. Yours is not and therefore it actually is seemingly entirely at your discretion.
I am very interested to know that the listed bonds and p2p are parri passu. Why the better rate for bonds in that case? You offer early withdrawals to both classes ...
Cheers
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james
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Post by james on Oct 6, 2015 9:57:44 GMT
However, with that said, most are easy to understand how that 'discretion' would be applied. Yours is not and therefore it actually is seemingly entirely at your discretion. Consider for example RateSetter, which in a first draft of some promotional material too strongly suggested that the fund guaranteed the investor's money. After having that pointed out to them they did a double-take and adjusted things. Wellesley is trying about as hard as they possibly can to tell you that the fund will pay out, without breaking the rules that bar them from saying that it always will. Now consider the 5% of the loan held by Wellesley and its directors, one of the nicer things about this particular platform. Is 5% more or less than the total value of the provision fund at any place you're comparing it to? I'll bet on it being more, hence protecting a larger percentage of the money at Wellesley. And this is money that Wellesly have definitively said is ahead of lenders in taking losses if there are any after the security is sold. On the negative side is the duration of much of the lending which can mean that the borrowers might not be able to sell in a property crunch fast enough to meet their obligations. But the Wellesley LTV is pretty thoroughly decent even for that case and there are the softer control aspects of their choices of borrowers and properties/locations.
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