Greenwood2
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Post by Greenwood2 on Feb 8, 2017 10:55:13 GMT
Not sure what the graphs are showing in terms of loan grades, but the most risky D and E rated loans are not covered by the safeguard on Zopa, they are only included in the unprotected Zopa Plus account.
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Post by dualinvestor on Feb 8, 2017 14:14:52 GMT
Whilst I understand the angst over these changes there seems to be a lack of fundamental tenet of investing. Your reward should be commensurate with your risk.
The PF, resolution event, stabilisation event etc etc obfuscates that tenet. At the conclusion of your investment period do you expect the return on RS to be greater than that avaiable elsewhere for the same risk?
If, after stripping down the changes, you feel the risk has increased and you believe the potential reward is no longer worthwhile then sell out, fee free, if not find an alternative home for your money, ranging from near zero returns at an FSCS institution or the next favourite at Newmarket.
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james
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Post by james on Feb 8, 2017 17:55:29 GMT
Not sure what the graphs are showing in terms of loan grades, but the most risky D and E rated loans are not covered by the safeguard on Zopa, they are only included in the unprotected Zopa Plus account. Right. With raw interest rates around 20% and projected return on investment after bad debt between 9% and 14%. It's very like the original Zopa product. If they allowed people to pick their markets I'd be investing in their E market now. They don't, D and E will only be about 30% and the mandatory B,C and D lending pushed down the extpected returns to an uninteresting level, so I don't invest there at the moment.
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james
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Post by james on Feb 8, 2017 18:03:43 GMT
Whilst I understand the angst over these changes there seems to be a lack of fundamental tenet of investing. Your reward should be commensurate with your risk. Right. And that's why the correct strategy is to take this sell out offer. Then if you still want to be invested there, reinvest in new loans. The reason for this is the change in risk. If you have an old loan book, you've already lived through the time of high default rates and are now in the low rate period. This change will force you to take cuts due to the new and higher default rate loans, both due to them being new and to RateSetter increasing the overall risk level over time. Those with an extensive older loan book should be rejecting the increase in their risk level by taking the offer.
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james
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Post by james on Feb 8, 2017 18:19:38 GMT
Zopa don't seem to get the same level of scrutiny. For example these statistics imply they are heavily relying on the loan bad debt curves significantly tailing off over time, as they are currently on course since 2014 of spending more than the contributions (or collections performs well on defaulted loans). That's as it should be. The RateSetter system will make the lenders with a mature loan book pay for the defaults on younger loans. That's a pretty radical shifting of risk towards those older loans. And worse, the older ones probably have higher interest rates, so a 50% cut in interest makes those in an older book pay more for the losses being incurred by the newer and lower rate loans than the lenders invested in them are paying. It's a bad proposition for those with lots of older loans and the sensible thing to do is reject it and sell out. By contrast, there's far reduced risk transfer in the Zopa setup, since you get the risk of your own loans, lower now if you have lots of older loans. So it's not really an issue that merits a great deal of discussion compared to the new RateSetter approach. Assuming constant economic times you know that defaults generally start out at a higher rate then level off, so what Zopa are doing is sensible to avoid over-funding for defaults. I assume that you also did it and do or will in your new job because it's the right thing to do. Constant economic times is not a trivial assumption, though, and I got first hand experience of that at Zopa in 2008 lending when the default rate roughly doubled for the market where I did most of my lending. Whether Zopa are preparing sufficiently for a possible recession vs RateSetter is an interesting question.
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Post by deddington on Feb 8, 2017 20:16:09 GMT
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james
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Post by james on Feb 8, 2017 23:09:47 GMT
Yes stevefindlay is right that overall protection funds reduce returns for well diversified lenders. If tax effects and cross-cohort subsidies are ignored. But cross-cohort effects do matter, it's in part why lenders with older loan books should be taking the current free sell out option. Remember that older loans have lower current default rates and at present higher interest rates than new ones. This means that if there are cuts to interest rates or capital the lenders with older loan books will pay an unfairly larger portion of the cost. Different lenders can also have loan books with different risk levels and those with lower risk levels, all other things being equal, will end up subsidising those with higher risk books. Moderated a bit if the rates are higher on the higher risk loans. These are problems that the Zopa design doesn't suffer from so much, since if the fund can't pay what you get is just some of the risk of your own loan book.
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Post by stevefindlay on Feb 9, 2017 8:45:40 GMT
We don't normally comment on other platform's boards - but I wanted to add a couple of things here as we've been quoted above: Our analysis that we don't like Provision Funds is based on two key assumptions: (1) The lender is well diversified - i.e. 50+ loans, and not all P2P lenders have the capacity or time to be this diversified (2) The lender doesn't want to swap a lower return for a dampened volatility in their returns - which some investors may well prefer (i.e. see Sharpe Ratio) Also, our PF analysis shouldn't be seen as "bashing" Ratesetter: - RS have done a lot to enable consumer lenders to access P2P Lending more easily - The RS PF is (we believe) a well intended addition to the market place (see comment on diversification above) - We are not making any assertion that the RS PF is over-funded, under-funded or exactly right.
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dandy
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Post by dandy on Feb 9, 2017 9:05:44 GMT
Whilst I understand the angst over these changes there seems to be a lack of fundamental tenet of investing. Your reward should be commensurate with your risk. Right. And that's why the correct strategy is to take this sell out offer. Then if you still want to be invested there, reinvest in new loans.The reason for this is the change in risk. If you have an old loan book, you've already lived through the time of high default rates and are now in the low rate period. This change will force you to take cuts due to the new and higher default rate loans, both due to them being new and to RateSetter increasing the overall risk level over time. Those with an extensive older loan book should be rejecting the increase in their risk level by taking the offer. I do not understand this. If you have existing loans at say 6%+ why would anyone want to sell out for free and then reinvest at 3-4% on newer loans? There is no difference in risk to lenders (between new/old loans) as risk is covered by the PF in first instance and where PF is depleted all lenders are pooled anyway. So surely it is like for like except for the rate. What am I missing?
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spiral
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Post by spiral on Feb 9, 2017 9:45:58 GMT
Right. And that's why the correct strategy is to take this sell out offer. Then if you still want to be invested there, reinvest in new loans. The reason for this is the change in risk. If you have an old loan book, you've already lived through the time of high default rates and are now in the low rate period. This change will force you to take cuts due to the new and higher default rate loans, both due to them being new and to RateSetter increasing the overall risk level over time. Those with an extensive older loan book should be rejecting the increase in their risk level by taking the offer. james , I can see why the risk of older loans is lower because their higher default period has passed, so can see your point about how these loans (because of being a higher rate) would pay more cash into the PF during a haircut. What I can't understand is why you state "And that's why the correct strategy is to take this sell out offer. Then if you still want to be invested there, reinvest in new loans." If you invest in new loans at a lower rate, yes your actual haircut would be lower, but the return is still greater on the older loans. e.g. a 6% loan book taking a 100% interest haircut for 1 month would drop to about 5.5% p.a. whereas a 5% loan book would drop to about 4.6% p.a. 6% with some haircut must be better than 5% with some haircut regardless of whether the (more recent) 5% loans are more responsible or not.
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mason
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Post by mason on Feb 9, 2017 12:32:32 GMT
james , I can see why the risk of older loans is lower because their higher default period has passed, so can see your point about how these loans (because of being a higher rate) would pay more cash into the PF during a haircut. What I can't understand is why you state "And that's why the correct strategy is to take this sell out offer. Then if you still want to be invested there, reinvest in new loans." If you invest in new loans at a lower rate, yes your actual haircut would be lower, but the return is still greater on the older loans. e.g. a 6% loan book taking a 100% interest haircut for 1 month would drop to about 5.5% p.a. whereas a 5% loan book would drop to about 4.6% p.a. 6% with some haircut must be better than 5% with some haircut regardless of whether the (more recent) 5% loans are more responsible or not. I might be wrong on this, but I think this logic assumes RS would sell the loans on the open market at a price reflecting current loan yields (i.e at a premium), then pass on the full proceeds to the original lender. The capital gain would offset the reduction in interest rate caused by crystallising and reinvesting. However, I think it is unlikely RS will pass any premium onto the lender who is selling out. I have never seen any accounting for prevailing rates in the normal sellout calculations I've requested.
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Greenwood2
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Post by Greenwood2 on Feb 9, 2017 12:59:00 GMT
Rates may also go up to reflect lenders perception of increased risk. Recent loans have been matching up to 5.2% (may be higher if you try).
I am slightly concerned that the changes in terms will eventually result in borrowers and lenders sharing the funding of the PF, rather than RS increasing charges to borrowers. If that is the case I would prefer to pay a known fee rather than have interest and/or capital taken in an unpredictible way. At some point RS might decide to take 1% (or more, there seems to be no limit in the T&Cs) of my capital. I don't think I want to take that risk with the amount I have in RS at the minute, I might risk it for a lower amount and see how things pan out. If rates stay at 5%+ I wouldn't be much worse off in terms of my overall interest rates on RS and I have other places to put the funds I withdraw at probably higher rates than RS.
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elliotn
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Post by elliotn on Feb 9, 2017 15:26:57 GMT
I don't think I want to take that risk with the amount I have in RS at the minute, I might risk it for a lower amount and see how things pan out. If rates stay at 5%+ I wouldn't be much worse off in terms of my overall interest rates on RS and I have other places to put the funds I withdraw at probably higher rates than RS. This is the reason I might consider coming back at, say, a 1/3 of my current investment (made when loans were consumer only and RS continuation depended on a rudely robust PF). Other platforms are available should they not wish me to invest at higher risk for lower rates tho
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james
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Post by james on Feb 9, 2017 16:44:54 GMT
Right. And that's why the correct strategy is to take this sell out offer. Then if you still want to be invested there, reinvest in new loans.The reason for this is the change in risk. If you have an old loan book, you've already lived through the time of high default rates and are now in the low rate period. This change will force you to take cuts due to the new and higher default rate loans, both due to them being new and to RateSetter increasing the overall risk level over time. Those with an extensive older loan book should be rejecting the increase in their risk level by taking the offer. I do not understand this. If you have existing loans at say 6%+ why would anyone want to sell out for free and then reinvest at 3-4% on newer loans? There is no difference in risk to lenders (between new/old loans) as risk is covered by the PF in first instance and where PF is depleted all lenders are pooled anyway. So surely it is like for like except for the rate. What am I missing? You'd only reinvest if the rates made sense. 3-4% doesn't, unless you're ignoring RateSetter's competition. But just because it's offering poor rates today that doesn't mean that it will always offer poor rates. As you say, the protection fund masks the difference between risk profiles of the loans and encourages investors to ignore risk. Older loans will be further into their default curve, so now defaulting at lower rates. Meanwhile the newer loans are both in the earlier higher default rate part of their life and also start out with higher risk level because RateSetter has increased the risk level of new lending over time. When it comes to the fund being under-funded, the cuts are percentage-based. A person receiving 6% is going to lose 3% of their return while one receiving 4% is only going to lose 2%. Just because they lent at different times one is made to pay more than the other even though the one paying more has loans that are placing a lower cost burden on the protection fund. It's a fundamentally unfair approach.
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james
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Post by james on Feb 9, 2017 16:54:19 GMT
What I can't understand is why you state "And that's why the correct strategy is to take this sell out offer. Then if you still want to be invested there, reinvest in new loans." If you invest in new loans at a lower rate, yes your actual haircut would be lower, but the return is still greater on the older loans. e.g. a 6% loan book taking a 100% interest haircut for 1 month would drop to about 5.5% p.a. whereas a 5% loan book would drop to about 4.6% p.a. 6% with some haircut must be better than 5% with some haircut regardless of whether the (more recent) 5% loans are more responsible or not. When making the decision to reinvest or not I expect someone to look around at the competition, not just at RateSetter. At the moment you can do better than RateSetter so today I wouldn't expect the money to go there. But that's today, rates could be more competitive later. Today it's a case of selling out of 6% less possible cuts then reinvesting above 6% because above 6% is readily available. BondMason for example is quoting expected returns in the 7-8% range with lending well diversified around many platforms with not a lot of work for the investor to do to get that. But there are plenty of other places to consider.
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