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Risk
Mar 11, 2016 18:04:24 GMT
Post by valueinvestor123 on Mar 11, 2016 18:04:24 GMT
This may have been asked before but...something doesn't seem quite right:
I am still trying to gather the risks of p2p. The returns (12%) seem rather high. A lot of the info I have read indicates that after bad debt, p2p returns should be in the 'junk bond' area (no offence), i.e. around 7-8% during the normal business cycle and negative, in a downturn. Savingstream returns seem consistently high, granted we haven't yet been through a proper downturn. Around 2008, commercial properties experienced quite steep declines (around 30% from memory?). A lot of the funds/investment trusts (especially the geared ones) never really recovered from that but those where over-leveraged.
What would a similar downturn do to sites like savingstream I wonder? The advantage here is that savingstream are not geared. A maximum of 70% LTVs does presuppose that it should withstand 30% decline, but...12% for something that is asset-backed does seem quite high. Why is the rate so much higher than for example mortgage rates where the risks are similar?
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Post by Deleted on Mar 11, 2016 18:45:58 GMT
1. Please us the search button. This topic is discussed extensively in this forum.
2. Basically bridging loans have been offering these rates for a very long time and there are multiple platforms offering them.
3. The LTV is only one parameter. You have to consider the 'time effect' as well. A property taken over by SS will have to be sold in a rush and it might not get so close to the full market value as you would hope, specially if a downturn on this sector comes by and bring the values down.
In any case the overall risks are far lower than with non asset-backed loans.
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cooling_dude
Bye Bye's for the PPI
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Post by cooling_dude on Mar 11, 2016 18:48:09 GMT
This may have been asked before but...something doesn't seem quite right: I am still trying to gather the risks of p2p. The returns (12%) seem rather high. A lot of the info I have read indicates that after bad debt, p2p returns should be in the 'junk bond' area (no offence), i.e. around 7-8% during the normal business cycle and negative, in a downturn. Savingstream returns seem consistently high, granted we haven't yet been through a proper downturn. Around 2008, commercial properties experienced quite steep declines (around 30% from memory?). A lot of the funds/investment trusts (especially the geared ones) never really recovered from that but those where over-leveraged. What would a similar downturn do to sites like savingstream I wonder? The advantage here is that savingstream are not geared. A maximum of 70% LTVs does presuppose that it should withstand 30% decline, but...12% for something that is asset-backed does seem quite high. Why is the rate so much higher than for example mortgage rates where the risks are similar? There are 100s of P2P platforms, and the element of risk ranges from the very safe to these riskier 12% platforms that use property as a means of security. The risk on SS is in the security; in the event of a default SS will try to reclaim the loan via the sale of the security, but if this security has lost its value the investor could lose out (although SS do have a provident fund to (try to) cover any losses). The current worst-case scenario is if the value of the security suddenly became non-existent, i.e. due to a fire with no payout from insurance A big threat is an economic downturn; not only would SS see a sudden rise of loans defaulting, you would also see the security value drop, and SS would find it hard to sell the security at all. Finally, the platform itself could be viewed as risky. Savingstream is only 3 years old and has yet to have suffered any major setbacks; what happens if there is a major setback.... we just don't know. So, because of the above, investors view SS as risky. As such we investors are rewarded with a generous 12%; simply because if we didn't get this rate SS would have a lack of investors.
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registerme
Member of DD Central
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Post by registerme on Mar 11, 2016 19:10:08 GMT
It's a very valid question though, and one I continually ask myself about all my investments on all the platforms I use. Why am I getting rate x for this? Regardless of what x is, and which platform you're talking about, something that contributes to it is a) less traditional bank finance being available and b) lower costs (regulatory / capital / infrastructure, staff and buildings etc) associated with p2p when compared with traditional finance. If somebody looking for a bridging loan would have had to pay high twenties to a traditional bridging loan outfit then they benefit if they pay SS a few percent less than that, we benefit because we get considerably higher yields than in, for instance, a cash ISA, and SS benefit because they capture the business and effectively get a turn. But again, keep asking the question (and as suggested by @hor1997 root around the forums, there's lots of good discussion). samford71 in particular has some quite sobering things to say about LTVs and distressed asset sales.
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Post by valueinvestor123 on Mar 11, 2016 19:44:52 GMT
My question relates specifically to savingstream (and perhaps to assetzcapital and fs to some extent). I realize there are dozens of other p2p platforms. I have been investing 6-figure sums with them for just over a year but the majority of my net assets are still in more 'traditional' stocks & bonds investments. I am cautious putting more than 20% of networth in p2p. Let me re-phrase the question then: why do borrowers go to savingstream if they could get financing of around 3-5% from a bank? Or rather, why do banks reject these borrowers if the assets are solid? To me, it seems something is amiss. With places like fundingcircle, the rates do end up being somewhere in the region of 6% after bad debts which seems about right. But an asset backed platform such as Savingstream or fundingsecure offers twice as much interest AND seems more secure due to the assets behind them. Either the rates will have to go down (due to demand) or there are some unforeseen risks that haven't materialised themselves yet.
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Risk
Mar 11, 2016 19:53:50 GMT
Post by valueinvestor123 on Mar 11, 2016 19:53:50 GMT
Re bridging loans in general: have they always (historically) demanded such high interest rates? I am just trying to rationalise my investments and to some extent justify stock market investments too: there should be much more risk associated with stockmarket investments (often no assets at all...) yet it is very hard to get more than 8 or 10% return in the long term and usually you have to wait for 20+ years to actually harvest those returns. Given the risks, it seems assetbacked loans should command a much lower premium and perhaps it is just a matter of time until this will happen? Maybe that's the 'new paradigm' but gut-feeling tells me this can't last and some 'adjustment' is going to take place in risk re-pricing.
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cooling_dude
Bye Bye's for the PPI
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Risk
Mar 11, 2016 20:07:05 GMT
Post by cooling_dude on Mar 11, 2016 20:07:05 GMT
Re bridging loans in general: have they always (historically) demanded such high interest rates? I am just trying to rationalise my investments and to some extent justify stock market investments too: there should be much more risk associated with stockmarket investments (often no assets at all...) yet it is very hard to get more than 8 or 10% return in the long term and usually you have to wait for 20+ years to actually harvest those returns. Given the risks, it seems assetbacked loans should command a much lower premium and perhaps it is just a matter of time until this will happen? Maybe that's the 'new paradigm' but gut-feeling tells me this can't last and some 'adjustment' is going to take place in risk re-pricing. I think you're being a tad negative; however it is your money that you're investing, so I can understand your concerns to a certain extent..... Lendy Ltd requires our money to lend to borrowers; it is how they earn their money. However as you will currently see from the SM, it's not easy to attract investors; even with a 12% return. Any lower, and Lendy Ltd simply wouldn't attract the investors required to support their business model. It's worth pointing out that after fees, bridging loans can work out at 30% APR, so SS have plenty to offer us investors. However, if your gut feeling is telling you that SS is going to drop the rates offered to us; then hurry up and invest your money before they do so! They sure do need the money ATM, and the SM has plenty of pickings for you to invest your 6 figure sum
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Risk
Mar 11, 2016 20:22:26 GMT
Post by pepperpot on Mar 11, 2016 20:22:26 GMT
12% on SS feels about right for me. I wouldn't have nearly as much on there if it was 10%, and I guess that would be similar for other too meaning the SS loan book would only be a fraction of what it is now. re. bridging loans, 18% is not uncommon on 6/12month loans and that's before arrangement and exit fees i.e. the shorter the term the higher the effective rate. Moneysupermarket citation
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Risk
Mar 11, 2016 20:59:43 GMT
Post by GSV3MIaC on Mar 11, 2016 20:59:43 GMT
Yep, last time I talked bridges to a bank (which was back before 2008 meltdown) there was scant interest in even looking at it unless I was willing to sign up for 6 months or more, commit copious assets (apart from the property), and lick boots. Basically I don't think they can be bothered to mess with the paperwork (OK, so I was not into 7 figures). And even if they had wanted to play, the rates were not going to be single figure %ages, no siree .. plus fees, of course. Where's Shylock when you need him!!
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alanp
Member of DD Central
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Post by alanp on Mar 11, 2016 21:00:37 GMT
Personally I see P2P as a higher risk than a well diversified "collective investment" based stock market portfolio where there is a realistic floor to the downside. You can lose everything on a loan theoretically so there is no limit to the downside, the same as shares in an individual company, so the rewards need to reflect that level of risk.
I can shelter my equity investments from tax as well which is more difficult with P2P lending although this will become easier post April with the "tax free interest" and the Innovative ISAs coming in.
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Post by highlandtiger on Mar 11, 2016 21:23:33 GMT
I find it strange that the OP seems to find p2p like SS a risky proposition when they appear to be fans of investing through spread betting. (as seen in other posts made on the P2P forum.)
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mikes1531
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Post by mikes1531 on Mar 11, 2016 21:44:34 GMT
samford71 in particular has some quite sobering things to say about LTVs and distressed asset sales. There are a some good examples over at AC. Loans #45 and #79 are refinances of previous loans, where the amount lent previously was based on a value far higher than that at the time of the AC loans. The former lenders took significant losses to get out of their loans. There are also a couple of defaulted AC loans (#129 and #132) where receivers have been called in, and investors have been asked to approve sales of the security for prices considerably below the valuations produced at the time the AC loans were made. The proceeds from those sales -- if they actually progress to completion -- won't be enough to cover lenders' capital and accrued interest. Whether investors ultimately will suffer losses won't be known until attempts to pursue the borrowers' PGs or other assets reach a conclusion. Which brings up another point, and that is that there's likely to be a long wait for matters to be resolved and investors may not be able to access the funds they've invested for some considerable time. (ISTM that both of these AC example loans defaulted over a year ago, and resolution is still some way away.) ... gut-feeling tells me this can't last and some 'adjustment' is going to take place in risk re-pricing. I have similar feelings, especially with a tsunami of IFISA money expected. I'm treating the situation as a case of 'make hay while the sun shines'.
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Post by Deleted on Mar 11, 2016 22:25:06 GMT
Re bridging loans in general: have they always (historically) demanded such high interest rates? I am just trying to rationalise my investments and to some extent justify stock market investments too: there should be much more risk associated with stockmarket investments (often no assets at all...) yet it is very hard to get more than 8 or 10% return in the long term and usually you have to wait for 20+ years to actually harvest those returns. Given the risks, it seems assetbacked loans should command a much lower premium and perhaps it is just a matter of time until this will happen? Maybe that's the 'new paradigm' but gut-feeling tells me this can't last and some 'adjustment' is going to take place in risk re-pricing. I think you should first do some research on bridging loans: www.moneysupermarket.com/loans/bridging-loans-guide/www.gocompare.com/loans/bridging-loans/The interest paid by borrowers to SS is LOWER than what they usually pay to traditional bridging financing solutions. The rapidity and flexibility required with these type of loans is not compatible with most banks extremely slow and unflexible terms. Differently from a traditional loan, here borrowers can usually get large sums in a week or so and can repay part or all the loan as soon as they have their sales done (or other financing in place). In some cases there has been extensions and longer periods here on SS, but in other cases these are quite short terms.
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Risk
Mar 11, 2016 22:31:51 GMT
Post by valueinvestor123 on Mar 11, 2016 22:31:51 GMT
Personally I see P2P as a higher risk than a well diversified "collective investment" based stock market portfolio where there is a realistic floor to the downside. You can lose everything on a loan theoretically so there is no limit to the downside, the same as shares in an individual company, so the rewards need to reflect that level of risk. I can shelter my equity investments from tax as well which is more difficult with P2P lending although this will become easier post April with the "tax free interest" and the Innovative ISAs coming in. This is interesting. But it seems 'the floor' with asset-backed investments is the asset and in Savingstream's case and other property-based investments, unless the houseprices go to 0 (or if there is outright fraud, but this wouldn't matter if diversified), there should also be a floor. However Savingstream is special in that we are lending to them rather than to the assets that they hold, if I understand it correctly (I may not, I invest across 10 different platforms). With companies, shareholders are last in line to get anything and usually in administration, there is nothing to be had. But you are right, it is rare (though not totally impossible) that a market will collapse completely but it can be close enough. The Great Depression lost investors about 90% from peak to through in real terms from memory (I wasn't around, I just remember reading about it).
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cooling_dude
Bye Bye's for the PPI
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Post by cooling_dude on Mar 11, 2016 22:36:28 GMT
This is interesting. But it seems 'the floor' with asset-backed investments is the asset and in Savingstream's case and other property-based investments, unless the houseprices go to 0 (or if there is outright fraud, but this wouldn't matter if diversified), there should also be a floor. However Savingstream is special in that we are lending to them rather than to the assets that they hold, if I understand it correctly (I may not, I invest across 10 different platforms).With companies, shareholders are last in line to get anything and usually in administration, there is nothing to be had. But you are right, it is rare (though not totally impossible) that a market will collapse completely but it can be close enough. The Great Depression lost investors about 90% from peak to through in real terms from memory (I wasn't around, I just remember reading about it). Not with the new T&Cs. All the loans that come under the new T&Cs state that we (the investor) are lending to the borrower, not SS. I HIGHLY recommend you study the platform BEFORE you invest in it.
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