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Post by funtimedave on Jan 26, 2017 19:15:20 GMT
Hello I have found this forum a wealth of information so firstly thanks for those who have contributed. Now with the pleasantries out of the way, hopefully it allows me to ask a no doubt stupid questions  Trying my best to phrase it right First confusionFor P2P companies that have 'safeguard' or 'Provision' funds then how does that work. I thought I understood but some of my reading on here has confused me. The bits in Italics are where I am a bit woolly My understanding was as follows - I invest in Loan A at say £1,000 with a LTV of 60% with payback over 12 months at 10%. - The lending schedule being that the borrower pays back the principal at the end of the term - Four months pass and the interest is being paid all well and good - Then let's say the borrower defaults after month four - The P2P platform then talks to the borrower and tries to sort something out for a set period, if this period expires then the P2P platform tries to recover the debt based on the security?- If they get it back via the security then everyone gets their capital back but no further interest?- If they don't get it back via the security or the LTV was wrong and under valued then the P2P uses it's safeguard fund to pay everyone back their capital but no more interest?Given the above is the risk here with safeguarded P2P platforms have underestimated their bad debt risk or overvalued the security of the assets?
Second confusion
I read on certain sites that they have always paid back their investors even for defaulted loans. Does that include all the capital and not just the interest? This question has stemmed from people on the board stating they have lost money on bad loans? Would this only be the case for 'unprotected' sites? I fully appreciate past performance / situations in no way reflect the future As you can see I am easily confused and feel like a johnny latecomer to this whole thing. Think I have got my head round some of it but would appreciate the help understanding some of the risks Thanks - hope it is not to rude my first post being lots of questions |
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Post by GSV3MIaC on Jan 26, 2017 19:49:44 GMT
/mod hat off
No P2P site that I am aware of guarantees you'd get your capital &/or interest back, even with a PF. Some sites have managed 'no losses' (capital + interest) so far but the PFs are usually hedged about with many T&Cs, and may not be
able to cope in future, especially if the economy nosedives.
I have lost money on unsecured loans, on sites with no PF (which is most sites) and seen folks lose (normally less, %age wise) money on secured loans (again on sites with no PF). Afaik, nobody has yet lost money on RS or SS (the two main players with a PF of one sort or another) but the past is a lousy guide to the future. The SS PF is 2% of the loan book, but discretionary, and the RS one is larger (see the RS forum for more discussion than you want) but hardly bullet-proof.
My advice .. treat a PF as a possible optional extra, but don't rely on it.
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Post by funtimedave on Jan 26, 2017 20:13:55 GMT
Thanks for the reply - it makes sense and gives a bit of clarity.
Have been reading the RS thread with interest.
As per another thread this P2P can be a bit addictive - I have already started to build my own spreadsheets and pie charts representing transactions and diversification of my portfolio.
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Post by bracknellboy on Jan 26, 2017 20:38:16 GMT
....- If they don't get it back via the security or the LTV was wrong and under valued then the P2P uses it's safeguard fund to pay everyone back their capital but no more interest?Given the above is the risk here with safeguarded P2P platforms have underestimated their bad debt risk or overvalued the security of the assets?..... Yes that is the risk. And yes you SHOULD ASSUME that they have. But do you ? And do enough of us (including me) ? Its more easily said than it is truly absorbed 'into the bones' by any other than those that have the finance industry as their profession (of which I am not one). The desire to get a better return on our money is a strong one. As someone on this forum far more savvy than I am intermittently points out, p2p (certainly in the UK) has developed during a period of extremely benign conditions. Perhaps with the exception of Zopa, there is no history of how a loan book acquired during good times will perform during bad times on any of the platforms, as they haven't been through that economic cycle. Its a huge vote of faith to assume that e.g. a 2% of loan book PF is going to be anything other than a sticking plaster on a severed limb; or that a projected loss rate of x.x% on SME loans of [platform specific, opaque criteria] yy Credit Band will bear any resemblence to the currently projected / advertised. That is not to say that any of the platforms are being deliberately disingenuous - but their desire to make a better return on their investment captial is as strong as us lenders, if not far more for multiple reasons. If you feel confused, keep asking questions. Rule 1: never stick money into stuff you don't (at least mostly) understand. That's the sane thing to do . Oh, and if you feel like a johnny latecomer...well maybe that should be a red flag for all. I was once told/read - and I understand why - that the time to avoid or sell out of a specific stock/industry sector/stocks in general was the point that there was close to unanimous agreement of the analysts/brokers etc. that you should be buying in. When even the previous bears felt obliged to follow the herd of bulls was the time to run in the other direction.... :-)
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pikestaff
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Post by pikestaff on Jan 27, 2017 8:25:54 GMT
... if you feel like a johnny latecomer...well maybe that should be a red flag for all. I was once told/read - and I understand why - that the time to avoid or sell out of a specific stock/industry sector/stocks in general was the point that there was close to unanimous agreement of the analysts/brokers etc. that you should be buying in. When even the previous bears felt obliged to follow the herd of bulls was the time to run in the other direction.... :-) That advice really relates to equities. I think they are very toppy at the moment, especially in the US. If I had the courage of my convictions I'd be shorting the US market big time, but I don't. But it's also relevant to property. To date the rate of losses on p2p property lending, even without a provision fund, has been very low compared to SME lending. Property has been on a long bull run fuelled by cheap money. Sooner or later there will be a property crash and things will even out. I'd not want to be in SS then. I think it's an accident waiting to happen.
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nick
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Post by nick on Jan 27, 2017 9:32:18 GMT
The FCA's recent interim report on P2P specifically highlighted its concern that the use of provision funds may obscure the underlying risk to investors, which may result in investors believing that platforms are providing an implicit guarantee of the loans they facilitate. Your questions seem a perfect illustration of this.
In respect of your first question, the main purpose of provision funds is help mitigate investor losses in the event of default. I do not believe there is any intention that the provision funds are meant to fully compensate investors in all circumstances. I believe that the size of the provision funds that are created as such that they should cover the bulk of losses under normal/expected conditions. I think the provisions will not be of sufficient size to compensate all losses in the event of any significant deterioration in credit conditions. It is important to note that we have now experienced a long period of very benign credit conditions and extremely low interest rates. As we move out of this cycle, defaults and resulting losses will increase - this will be the real test for P2P. SS provide 2% against gross lending. This seems reasonable and adequate under current conditions, but the loss rate could easily rise above this should credit tighten (borrowers will find it more difficult to refinance) and/or rates rise (prices may soften and higher LTVs demanded - again increasing refinancing risk).
Compensation via provision funds is usually discretionary (I'm only familiar with SS) to avoid any explicit guarantee. I would expect most platforms to act fairly cautiously in respect of initial defaults, particularly any large ones, given the lack of default rate history so to "leave powder dry" and not disadvantage others than suffer losses at a later date. As a result, I would be surprised if the provision funds would fully compensate accrued interest at this stage unless the amounts involved are fairly small or the provision fund has a large surplus above target.
In respect of your second question/confusion, some platforms have fully or partially compensated investors on losses that did not benefit from a provision fund. This would have been completely discretionary and I suspect to maintain/boost confidence in the platform. I would not expect this to continue (hardly a sustainable business model), particular as platforms mature and investor become more comfortable with the platform.
In summary, provision funds do provide a degree of protection and lower overall risk to losses suffered on defaults, but your capital is still at risk. I'm personally against the use of provision funds for the very reasons raised by the FCA - it does obscure the overall risk and far to much reliance may be placed on them by others......
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