jimc99
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Post by jimc99 on Nov 1, 2015 1:04:54 GMT
Sorry but I don't get all the talk about bonds and the sell out function being unfair. Look at Clause 6 of the lender agreement. That's how the sell out works. You lend money through the platform on RS terms so what's the problem?
My only concern was the misleading marketing email. The way the sell out is working is what all lenders signed up for so it makes no sense to complain after the event.
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james
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Post by james on Nov 1, 2015 6:39:03 GMT
Sorry but I don't get all the talk about bonds and the sell out function being unfair. Look at Clause 6 of the lender agreement. That's how the sell out works. You lend money through the platform on RS terms so what's the problem? My only concern was the misleading marketing email. The way the sell out is working is what all lenders signed up for so it makes no sense to complain after the event. The concern is the marketing email and what lenders would expect from that and other descriptions of how it works vs how it actually works. So long as lenders are made aware of the situation in suitable places and ways so they don't get misled it's basically OK even though the way they do it is very strange compared to how normal bond investing works. The mention that they may provide a calculator for this stuff could turn out to be really useful for investor education, particularly if they pick defaults that cover potential bad cases, not optimised best case situations. Getting it wrong happens sometimes and it'd be really nice to see them doing a comprehensive job of recognising that and addressing the issues. The chief strangeness is the aspect of going back in time and pretending that the loan was originally at a shorter term instead of just using the rates at the time of sale for whatever is left of the term. I expect that to catch out just about everyone familiar with how bonds work unless they have it pointed out to them. The other big strangeness is having the seller pay a capital loss if the interest rates have increased but keeping the capital gain if they have gone down. It's a head you lose, tails we win situation. This particular strangeness is shared by Zopa. At least in the case here the money goes to a protection fund rather than going to the platform, as it does at Zopa indirectly - it subsidises the buyer interest rate allowing Zopa to charge higher fees or lower rates to get more loans - (or did last time I checked, maybe the changed it at some point after introducing their own form of protection fund). Of course a platform can have strange things as long as they treat consumers fairly and meet the expectations of consumer contract law. I'm far from sure that heads you lose, tails we win rule, in particular, does. Those things aren't strange just because they are so far from normal bond practice, but also because they are pretty much the opposite of what a platform could be expected to want: more money offered on longer terms because that's where they tend to have the most trouble competing with banks, so it's where they need more lender competition to get the P2P interest rates down to a more competitive level. Which I assume is why the email ended up with that small fee phrase originally, to try to get more people investing longer term, a good idea. Yet for some reason beyond just the market interest rate movements that could be painful enough they have those two extra punitive pricing factors that further disincentivese longer term lending by increasing the potential loss level and eliminating the potential capital profit if rates go down. They can do this but I find it really hard to understand the business logic of giving investors incentives to do the opposite of what a platform can be expected to want them to do. Given the broad expectations of market interest rate increases at the moment, including warnings by the Bank of England to expect them, the sell out feature appears to be a high risk feature likely to cause substantial capital losses for those who use it once those rate increases have happened. Depending on the various aspects like loan term and term remaining and the various interest rate changes involved in each. Not helped by RateSetter apparently not using a particularly investor-friendly selection of what to sell. Not minimising loss but apparently just last in first out. So you'd be sold out of a loan with four and a half years remaining at 2% interest rate differential instead of one just one month to go with that 2% differential, where the remaining time with the interest rate differential is so short that the pure rate differential/capital value calculation would make the loss much smaller. Though the lets pretend the loan was at some sort of market rate for a shorter term aspect might make the shorter term remaining one worse the way RateSetter does it anyway. In any case, my own view is that the RateSetter secondary market is so dangerous via its design in its capital loss risk for investors that it's not something I'd want to rely on for an exit. Two modificatios to normal bond pricing, both of which act against the investor to increase potential loss beyond normal bond selling expectations, and a naive which loan to sell selection algorithm, are not at all investor-friendly. Yet the concept of offering to sell in the main market itself is quite an investor-friendly one.
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jimc99
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Post by jimc99 on Nov 1, 2015 6:48:48 GMT
But lenders are NOT buying a bond!!! Just because calling a loan a bond may support your arguments it does not make it a bond.
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Post by GSV3MIaC on Nov 1, 2015 9:42:54 GMT
He didn't call it a one, but a bond is just a Loan with a Fancy document.
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am
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Post by am on Nov 1, 2015 10:09:41 GMT
The 3rd big strangeness is that loans are "resold" on the original market, rather than on the market appropriate to the period remaining. This makes the capital loss of early exit greater for loans close to maturity, while for bonds the capital loss/gain of early exit decreases as loans approach maturity. If the loans were resold on the appropriate market the assignment fee would be lower, or even wiped out, as the lower yields of shorter term loan compensate for any general rise in interest rates.
RateSetter want a significant exit cost to discourage people for removing their money. They presumably don't want 30%-40% exit costs, which are a real prospect with assignment fees. This could reduce the risk of this by reselling on shorter term markets rather than the original market. Loans less that two years in are still a potential problem; does RateSetter have enough liquidity to introduce 2 year and 4 year (and even 3, 6 and 18 month markets)? (More bands would eliminate the 13.5% interest rate clawback as well.)
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niceguy37
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Post by niceguy37 on Nov 2, 2015 11:56:57 GMT
Sorry but I don't get all the talk about bonds and the sell out function being unfair. Look at Clause 6 of the lender agreement. That's how the sell out works. You lend money through the platform on RS terms so what's the problem? My only concern was the misleading marketing email. The way the sell out is working is what all lenders signed up for so it makes no sense to complain after the event. In my case we lent the money before the Sell-Out fees were introduced. There was only the stated intention of a future secondary market, and one could only presume that it would have reasonable and fair charges.
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jimc99
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Post by jimc99 on Nov 28, 2015 2:31:16 GMT
Question for Kevin if I may.....
I have money in the 3 year market earning an average of 5.8%. If I chose to sell out say 25% of it do you know how RateSetters computer would select the loans it would sell? For example would it choose:
The loans with the highest interest rates. Loans with shortest/longest time to run. Loans with the best/worse risk borrowers.
Etc, etc.
Thanks Kev if you can help on this one.
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locutus
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Post by locutus on Nov 28, 2015 9:44:42 GMT
I'm fairly sure it sells out your most recent loans first to minimise the impact of any fees.
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pikestaff
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Post by pikestaff on Nov 28, 2015 10:35:56 GMT
...Given the broad expectations of market interest rate increases at the moment, including warnings by the Bank of England to expect them, the sell out feature appears to be a high risk feature likely to cause substantial capital losses for those who use it once those rate increases have happened. Depending on the various aspects like loan term and term remaining and the various interest rate changes involved in each. Not helped by RateSetter apparently not using a particularly investor-friendly selection of what to sell. Not minimising loss but apparently just last in first out. So you'd be sold out of a loan with four and a half years remaining at 2% interest rate differential instead of one just one month to go with that 2% differential, where the remaining time with the interest rate differential is so short that the pure rate differential/capital value calculation would make the loss much smaller... I do not expect increases in bank rate to have more than a trivial effect (if any) on the market rate on RS, for a number of reasons: 1. they will be small; 2. the bank rate is a short-term rate. Increases are already priced into expectations about longer term rates (not directly on RS perhaps but on the alternatives such as term deposits, and thus indirectly on RS; 3. the relationship between bank rate and what the banks offer current account holders is tenuous at best, and I would not expect small increases in the rate to have a significant impact. Certainly not when it comes to the subsidised high-interest current accounts, where the banks will be pleased of the opportunity to reduce their losses. Increases in rates will have been anticipated when those products were designed; 4. I think the rate on RS is much more heavily influenced by relative marketing spend in the lender and borrower spaces. At the moment rates are abnormally high because RS have built up their distribution capability to borrowers in anticipation of... 5. p2p ISAs, which will generate a lot of lender demand and push rates down. On your second point, LIFO minimises the retrospective interest adjustment for the reduction in term. I think that for most people this will outweigh any hit from rate increases. Certainly from where we are now. If 5 year rates dip to 4% in the ISA season, which is quite possible, anyone lending at those rates will face a much higher risk of heavy exit charges. Of course, those are the people least likely to have read and understood the Ts&Cs... Rather a late comment but I missed your post and was brought back to this thread by the latest Q&A. (BTW, locutus is correct.)
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Post by westonkevRS on Nov 28, 2015 14:50:29 GMT
Question for Kevin if I may..... I have money in the 3 year market earning an average of 5.8%. If I chose to sell out say 25% of it do you know how RateSetters computer would select the loans it would sell? locutus is correct, newest to oldest. Working on the basis that the newest contracts should be a similar rate - and therefore should cost less to sellout Kevin.
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