mikeh
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Post by mikeh on Dec 5, 2015 14:57:28 GMT
I wonder how those who are defending the treatment of the acceptance of an offer by insisting the AER is "right" are going to justify what happens in the case of an acceptance of a bid.
A decides he wants to buy an amortising loan on the SM. He navigates to the SM page for the loan in question and clicks on the "CREATE BID" button and enters an amount of £1000, a price of 100% and selects an expiry date. He is shown no information on what he will actually have to pay if his bid is accepted or the yield he will achieve. He believes he will be buying at par and may or may not understand that he will have to compensate the seller for the interest he has earned but not yet been paid. To proceed all he has to do is tick the agreement box and click the "EXECUTE" button.
To keep things as simple as possible let's assume
1) This is a new loan less than 1 month old. ie there have been no capital repayments.
2) A's Bid is the only one live on the loan's SM page.
B sees A's bid of £1000 at 100% and is happy to accept it in full. So he enters £1000 in the "Amount to Sell" box and clicks the "Calculate" button. He then sees a pop-up screen something like this
SECONDARY MARKET TRADE SUMMARY You sell £1,000.00 of remaining capital (of £xxx,xxx.xx originally borrowed) At a price of 100.00p for every 100p remaining Proceeds £1,000.00 Accrued interest £xx.xx Total sale proceeds £10xx.xx (Yield xx.xxx% AER)
This probably looks all in order to B. The total sale proceeds may seem higher than he expected. Certainly nothing to put him off the deal. So he clicks the "EXECUTE" button and the deal is done.
Now the problems start. The deal executed by AblRate is not the one A Bid at all. Because the accrued interest has been calculated incorrectly A discovers he has paid a higher price than the 100% he bid. The fault here is crystal clear. The deal Ablrate offered B is not the one A offered and the blame falls entirely on them. If they refused to compensate A in this situation they would have no case at all.
This is why I think all amortising loans should be paused on the secondary market asap.
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ablender
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Post by ablender on Dec 5, 2015 16:58:01 GMT
Things do not seem complicated enough so if you do not mind I am going to add another ingredient to the soup. I am looking at N**M**C** Sept2015. 14% interest rate maturing 11/3/16, interest only (so I understand this is not amortising) There is almost a £1000 offered at 102.12% and it says the yield is 6.126%. Why is the yield so low? (Is it correct in the first place?) Can someone check this info and explain please?
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SteveT
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Post by SteveT on Dec 5, 2015 17:06:50 GMT
Things do not seem complicated enough so if you do not mind I am going to add another ingredient to the soup. I am looking at N**M**C** Sept2015. 14% interest rate maturing 11/3/16, interest only (so I understand this is not amortising) There is almost a £1000 offered at 102.12% and it says the yield is 6.126%. Why is the yield so low? (Is it correct in the first place?) Can someone check this info and explain please? Because the offer is asking for a 2.12% premium on a loan that has only 3 months still to run and pays 14%. So the first 6 weeks of interest will simply be covering the premium paid.
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blender
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Post by blender on Dec 5, 2015 17:27:09 GMT
Things do not seem complicated enough so if you do not mind I am going to add another ingredient to the soup. I am looking at N**M**C** Sept2015. 14% interest rate maturing 11/3/16, interest only (so I understand this is not amortising) There is almost a £1000 offered at 102.12% and it says the yield is 6.126%. Why is the yield so low? (Is it correct in the first place?) Can someone check this info and explain please? Because the offer is asking for a 2.12% premium on a loan that has only 3 months still to run and pays 14%. So the first 6 weeks of interest will simply be covering the premium paid. That is right and it demonstrates why the AER is the figure to consider - because it takes account both of the interest rate and any premium/discount. However it is a bit more complicated than that if you are an income tax payer. You will have to pay income tax on the actual interest rate of 14%, rather than on the before-tax AER of 6.126%. If you are a higher rate tax payer then you do not want to be paying premiums in addition to tax on the full interest. Discounts or cash back giving the same pre-tax AER are what to look for. (To put this thread in context, at least Ablrate do not occasionally sell the same loan part to two different purchasers, charge both of them, credit the seller twice and pass the loan part to only one purchaser. And at least Ablrate are trying to fix the problem, whereas there is no known plan to fix the long standing problem I mention. And there are others.)
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ablender
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Post by ablender on Dec 5, 2015 17:29:57 GMT
This is sounding as complicated as A level Maths.
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oldgrumpy
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Post by oldgrumpy on Dec 5, 2015 17:38:33 GMT
Does this problem exist on other platforms where the SM includes sale of amortising loan parts?
Just checked and I've only ever spent £84 on the ABL SM, and that was on an interest only loan (containers), so no amortisation.
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blender
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Post by blender on Dec 5, 2015 17:53:58 GMT
This is sounding as complicated as A level Maths. GCSE even today. Your example £1000 part at 14% for 3 months gives total interest £35. Basic rate tax at 20% = £7. You are left with £28. With a premium of 2.12%, you get still £35 in interest less £21.20 = £13.80, but you still pay £7 in tax leaving £6.80. Now suppose you are a higher rate taxpayer at 40% and the £7 becomes £14. Without the premium you are left with £21. With the premium you have an overall loss of 20p.
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james
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Post by james on Dec 5, 2015 18:23:02 GMT
Having waded through this thread I now realise why the SM's on "at par only" sites such as SS (and now MT) are so hugely liquid whereas the more "complex" market-making SM's are not! The Ablrate secondary market is very liquid even with modest premiums and at par things will move very fast for most loans that aren't recent. The Bondora one is also very liquid for sales at par and somewhat above even with some difficulties finding good deals. On both I've sold tens of thousand of Pounds worth of loans.
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james
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Post by james on Dec 5, 2015 18:54:36 GMT
I am looking at N**M**C** Sept2015. ... 14% interest rate maturing 11/3/16, interest only (so I understand this is not amortising) ... There is almost a £1000 offered at 102.12% and it says the yield is 6.126%. ... Why is the yield so low? (Is it correct in the first place?) ... Can someone check this info and explain please? All of the figures on that one are right. The yield is so low (compared to Ablrate initial offers) or so high (compared to Zopa or RateSetter or Wellesley norms) because the person who owns that much of the loan isn't particularly keen to sell and is quoting a price that they would be willing to sell at rather than one that is intended to cause a rapid sale. It's a type of sale offer that you will never see on a par-only platform because those force the seller to price to sell rapidly. Most people probably won't want to buy at that price but some will notice that the loan ends just before the end of the tax year, realise that's convenient and may choose to pay the price. Or not. The seller doesn't care either way because they are happy to continue to own the loan and collect the interest. What also happens for all loans at Ablrate is that when you price at a fixed premium or discount the AER gradually drops over time, faster for short term remaining loans than long term remaining ones. So a seller who is trying to offer a particular AER to buyers needs to regularly adjust their offers with lower AERs. This is because the seller keeps the accrued interest. It's the opposite at Bondora where the buyer gets the accrued interest, then at the next payment the AER decreases and starts to climb again. I don't think that the 4.646%, 5.347% or 6.126% AER offers to sell on that loan will be sold quickly, if at all, the AER is too low for that, well below the level that would sell rapidly. But that's OK, it's not why the sellers have the current listings in place. If an offer to sell was made at 14% AER, a bit below par, the loan would sell as soon as someone with the money noticed it - within hours or minutes. The best offers on that loan are now 7.005% and 6.538%. Still in the not particularly keen to sell sort of range. Anyone who doesn't like the best offers can set up a bid instead. I've sold to a bid in the past, though not often, usually they are so far below what is sensible for a seller that they are unlikely to get many takers. If I wanted to buy on this loan I expect that a bid in the 7-8% range might find a seller. much less likely in the 8-9% range and above that little chance of finding as seller at the moment. All of this commentary only applies to this loan that has been out for a while, prices tend to be much closer to par just after a loan has been newly issued.
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james
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Post by james on Dec 5, 2015 19:12:24 GMT
Does this problem exist on other platforms where the SM includes sale of amortising loan parts? Just checked and I've only ever spent £84 on the ABL SM, and that was on an interest only loan (containers), so no amortisation. Not at Bondora. It's just a bug that hasn't yet been fixed at Ablrate. All of Bondora's loans are amortising so it's no surprise that theirs is OK, though it's also been around for many years so they have had plenty of time to fix issues. They have had something over 1.2 million offers to sell and over 257,000 sales in the time it's been operating - they provide a data dump for them. Bondora has some interesting issues in AER calculation because it's possible to buy and sell late or defaulted loans there. Defaulted don't show an AER, late do, but not quite priced as fully on time because the alt payments aren't included. Being able to sell defaulted loans is relatively new, around for a month or so only. Don't assume that buying defaulted loans is automatically a bad idea. The accrued late and other penalties can produce very high AERs if the borrower pays. I've sold parts of formerly defaulted loans at AERs of over 90% because the 40%/140% premium cap at Bondora meant that was the lowest AER I could offer and I wanted to reduce my exposure. Conversely it's possible to find defaulted loans for sale at 50% or less of the current capital value owed. Or even 30%. Loans that are late but not defaulted can also be found at 30%, depending on how assorted sellers view the prospect of payment before default or debt recovery after default. Quite a few of my defaulted loans at Bondora have borrowers who are paying regularly and quite often at higher than their original payment level. I've offered to sell some of those.
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mikeh
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Post by mikeh on Dec 6, 2015 10:10:08 GMT
Can someone explain to me how I have paid a premium, like your examples that have been given prior? My record shows something like this: Buy £19.25 for £17.98 on loan SEaB Energy To me this looks like a discount? What part of the Ablrate system has gone wrong? IMHO there are basically 2 bugs in the processing of amortising loans: 1). When a borrower makes a capital repayment, the outstanding principal values of the loan and its parts are not being adjusted. They are left at their original values. 2). When a lender "asks for a quote" ie presses one of the CALCULATE buttons in the SM, the accrued interest for the potential deal is calculated incorrectly because it includes an amount of capital repayment. If the lender goes ahead with the deal by clicking the EXECUTE button, this amount is added to the value of the deal. Consequences for SEaB loan: Currently (1) results in an overcharge to the buyer of around 2.4%. This will increase by a similar percentage on each repayment day. (2) results in an overcharge to the buyer of approximately 0.08% per day since the last repayment date. So in the worst case scenario the overcharge is 2.4% for 30 days. This will also increase on each repayment day but in a complex way. Solution: I would of thought that (2) could be easily fixed in isolation with a line or two of code in the two CALCULATE procedures and possibly the two EXECUTE procedures. (1) is technically more difficult to fix as the database will need to be updated in addition to coding. It may also require changes to the generation of repayment schedules etc. but hopefully not since capital repayments and interest payments seem to be processed correctly in the monthly repayment process.
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