Adair Turner commentary on R4 this morning

Every platform has its own procedures. Ours does not issue credit ratings on loan. If we think they'll pay up, they get listed. If we are nervous, they don't. Then the lenders decide. My biggest concern in the sector as a lender is the number of platforms who feel they have better credit procedures and risk management than banks. If someone tells you that, walk away. My advice is to be comfortable with how the platform handles loans because the relentless quest for growth inevitably leads to a lowering of standards in most sectors.

Actually, I think he had one particular platform in mind.

Might that particular platform be a larger one that has had a lot of doubts raised about their banding in recent months...?

Adairs comments - i am not going to rattle on about the individual and specifics said as all been said earlier however

If it sparks some more control from either internal or external areas of the system this can only be a good thing. 

- If things do go bad it is usually all at the same time so you have a domino effect of the bad businesses going first and taking some good business down with them.

- This time around there are more business with too much borrowing so this is a serious risk.

- Some of these businesses were not around in 2007 so only see the good times and need some advice on how to run a business.

- SM's  will see some bargains shall we say?

Ideally some of the platforms do need to tighten up who they lend to without any real check of 'affordability' I think we all know who I am talking about!

However that system is cheap and profitable but could seriously bring a bad name to the whole industry.

I am not saying the platforms need to become banks!!!! just some I believe are easy targets for people like Adair to bring a bad name to P2P.

My concerns with what I have just said is that the controls will come in and this means extra costs and therefore, rates become lower, deals become fewer and smaller platforms struggle to survive.

Overall a negative start to my day!

I love reading the comments from the naysayers who regard P2P as "dodgy" and "risky", when you know they havn't got a clue about how P2P works. It always amazes me when people comment on things they have very little knowledge of.

This one made me smile....




boston 16h ago



I would be a big supporter of P2P if they paid less interest. If the rates of return were maybe 0.5% or 1% better than you might expect from a bank loan then I could believe that the loans were of reasonable risk and P2P was offering a community service. But at 10% it screams risk and exploitation.


And this one,


boston

10% is too good to be true....4% ok. I have no problem with the model, but it's implementation seems dodgy to me and I don't necessarily believe stuff posted on a website. Some P2P will fail miserably and the ones that keep the credit risk and interest rates reasonable will probably be ok. As ever "caveat emptor".....for me the lack of liquidity in P2P is the deciding factor to stay with high quality corporate and government bonds for the small amount of fixed income I own.


....Obviously hasn't seen the SM on Saving Stream in recent months..

As someone who has worked in the property industry for nearly 20 years, 35% is not a great margin on commercial properties. These are much more volatile than residential and have fallen 50%+ several times in my career and that is the whole market, individual assets can become all but worthless and large amounts become unsaleable. In 2008 only property with very good tenants on 10+ year leases were saleable for a 6 month period and buyers were rare and often forced to withdraw due to banks refusing borrowings. As a result (and that I may already be in the sticky stuff when the market tanks again) I steer clear of property backed loans on P2P.

As often mentioned valuations are dependent on their assumptions. Gross development value is not useful unless the development has been completed. I was involved in one project abandoned about half built. The costs of picking it up were more than it would have cost starting with nothing due to the costs of ensuring everything had been properly built and modifying to the changed market. One other point I have yet to see discussed is that often properties are owned in "special purpose vehicles" so the borrowers have nothing except their security. As a result I think these asset backed loans are an alternative to unsecured loans backed by a real income streams i.e. it is not that the security is over and above what would be required for unsecured lending, it is the only reason the lending could possibly be viable.

Finally, the commercial property markets are closely linked so a downturn will effect all commercial property backed loans. It will also severely reduce the appetite of buyers both directly and by reducing their funding (most are either fund backed and so impacted by withdrawals from nervous investors or borrow heavily and so impacted by reduced appetite from banks).Unsecured lending attempts to assess the likelihood of a default from the borrower based on a rounded assessment. Personal borrowing is affected by market conditions through availability of alternative sources of credit and job prospects, but the vast majority will not be severely affected so I consider it much more stable. From experience commercial property lending charges a premium in the knowledge that it will take heavy losses in any significant downturn when a high proportion of loans will default. The security will generally allow some recovery on all of them, but that merely reduces the losses rather than avoids them.

Just my opinion, but I do not think you can generalise about secured lending being preferable. I think you need to look at what the security is, how sensitive it is to market conditions and whether there is any other substance to service the loans.

Times article


www.thetimes.co.uk/tto/business/industries/banking/article4687931.ece


The peer-to-peer lending industry reacted angrily after the former head of the City regulator warned that the fast-growing sector was an accident waiting to happen.
Lord Turner of Ecchinswell, who led the Financial Services Authority during the credit crisis, predicted that losses on peer-to-peer loans “within the next five to ten years will make the worst bankers look like absolute lending geniuses”.
Peer-to-peer lenders use online platforms to link up consumers and small businesses that want to borrow money with retail and professional investors. The industry has lent an estimated £5 billion since the first platform, Zopa, emerged in 2005.
Lord Turner, who was appointed at the FSA, which has since been replaced by the Financial Conduct Authority, at the onset of the credit crunch, described peer-to-peer platforms as “a group of people [who] are going into a lending process on a technical platform without anybody really doing ‘go out and kick the tyres’ credit analysis”.
He told the BBC: “You cannot lend money to small and medium enterprises in particular without somebody going and doing good credit underwriting. This idea that you can just automate that on to a platform — it has a role to play but I think it will end up producing big losses.”
Lord Turner, who is on the board of Oak North, a start-up bank, said that people should invest in peer-to-peer platforms only “if they have money they can afford to lose”.
Andrew Holgate, managing director of Assetz Capital, a peer-to-peer lender that provides credit to small businesses, said: “Lord Turner’s sweeping statement isn’t a true representation of the sector.
“Speaking for Assetz Capital, we actually have fewer automated processes in the credit process than the banks, and our underwriting heavily relies on face-to-face relationships with [companies], not just credit-scoring algorithms or telephone interviews.”
Christine Farnish, chairwoman of the Peer-to-Peer Finance Association, the industry’s trade body, said that Lord Turner’s analysis “[flew] in the face of the evidence”.
“P2P lenders . . . take credit risk underwriting extremely seriously, and they have exactly the same information at hand, and do the same sort of analysis, that the banks do, if not more.
“P2P lending offers for the first time in history actually something that’s really clear, understandable to ordinary folk, that spells out the risks and the rewards, so people can make their own decision.
“Strict credit underwriting rules apply to all our members and this should not be confused with higher-risk forms of crowdfunding or lending to sub-prime customers.”
She added that members of the trade body, which represents about 90 per cent of the sector in the UK, “operate with high standards of transparency and business conduct”.
“This includes publishing their full loan books on their websites and providing clear information on all fees and charges to both investors and borrowers. I would challenge anyone to find this level of transparency in any other part of the financial services market.”
The organisation added that the industry’s default rate is low, running at present at about 3 per cent.
Christian Faes, co-founder of LendInvest, an alternative finance platform, said: “These comments are self-serving and timed to drum up more sales of Lord Turner’s book. Surely, he is conflicted too, given that he’s now a regulator-turned-banker.”
Landbay, a peer-to-peer mortgage lender, said that “to presume that all platforms use automated underwriting processes is incorrect and misleading”.