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Post by sanmiguel on Aug 1, 2017 15:53:20 GMT
just spotted another, total 4 now all downgraded 1-ccj 2-liquidation 3-re-financing supposedly 4-liquidation, again may i point out i have already gained more interest than i may have lost in these loan parts, its the way ive ended up with them that i find hard to swallow.
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Post by spiker on Aug 1, 2017 16:54:02 GMT
i genuinely didnt know investors could flip these loans to make profit and sell out before they think the 1st 2nd or 3rd payment will be missed or sell on loans that look like they are going bad and they would be picked up by a novice investor like myself innocently using autobid, maybe they should be making the loans instead of the fc loan arrangers as they seem to be very clever. I think you've missed the point altogether... Its not clever at all, its a blanket strategy that applies to everything. (and they don't know they are going to default).
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Post by dan1 on Aug 1, 2017 17:51:46 GMT
i genuinely didnt know investors could flip these loans to make profit and sell out before they think the 1st 2nd or 3rd payment will be missed or sell on loans that look like they are going bad and they would be picked up by a novice investor like myself innocently using autobid, maybe they should be making the loans instead of the fc loan arrangers as they seem to be very clever. I think you've missed the point altogether... Its not clever at all, its a blanket strategy that applies to everything. (and they don't know they are going to default). - it's not so much 'clever' as an arbitrage, and where there's an arbitrage in a liquid market it will be closed sooner rather than later.
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Post by sanmiguel on Aug 1, 2017 20:16:25 GMT
Ah the pennies dropped, thanks i understand now, thanks for the replies, very helpful.
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markr
Member of DD Central
Posts: 766 
Likes: 426
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Post by markr on Aug 1, 2017 22:28:48 GMT
Yes, there's nothing sinister or even especially clever going on here, it's just a popular "strategy" on FC is to buy lots of parts on the primary market, hold them for a small number of months and then sell them. This lowers their chances of encountering a default at the expense of putting in the effort to constantly recycle their funds.
It isn't even all that profitable. Consider a flipper who buys 60 month C parts and sells the day before the first payment. Autobid will only buy at par or better, so we assume the flipper sells at par. Over the course of a year, they'll get the 13.5% interest from the loans, but they'll have flipped 12 times, incurring a 0.25% charge each time, so it will cost 3%. Even if the flipper sells exactly on the last day and always immediately reinvests in a new loan, and never suffers any first-month defaults, they will make 10.5%.
Someone who just buys 60 month C parts on the PM and holds them, reinvesting returned capital as it comes back will expect to make 13.5% less the estimated annual default rate of 3.3% for this band, or 10.2% overall if FC's loss estimates hold out.
Someone who buys the above flippers parts (and then holds them) will do slightly worse because they are effectively paying a "fee" of the first month's interest for each loan part they buy. Since the loans are amortising this isn't easy to work out, but it's unlikely to make much more than 0.1% difference, so let's say this group make 10.1%.
So why do the flippers do it? Well, the profits are better for D and E, but these loans are rarer and flippers will generally have to fall back on some C and even B loans. They may also hold for 2 or more months, which reduces the number of 0.25% fees per year but exposes them to more risk. Some will do it because they don't believe FC's loss estimates and think that the losses will exceed 3.3%.
There's also nothing foolish about being a lazy investor. As smart people have often pointed out here, if you value your time the meager extra returns wouldn't come close to paying minimum wage for your time, unless you invest the time or cash upfront to write/buy a bot. If endless fiddling with FC doesn't float your boat, autobid will do very nicely and let you enjoy something else instead.
There's also unintended consequences. Those flippers paying 0.25% for each churn are effectively paying more of the borrower's interest back to FC, improving FC's finances and making the platform more secure. Remember, even with this activity FC aren't profitable yet; without it FC may have to increase lender fees for everyone to keep their investors happy.
And, it's not all doom and gloom, some downgraded loans carrying on paying, some even have their bands re-instated (not often, admittedly). The re-finance sounds like a property loan, apart from a handful of infamous examples, these generally turn out ok in the end.
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Post by spiker on Aug 2, 2017 8:25:02 GMT
It isn't even all that profitable. Consider a flipper who buys 60 month C parts and sells the day before the first payment. Autobid will only buy at par or better, so we assume the flipper sells at par. Over the course of a year, they'll get the 13.5% interest from the loans, but they'll have flipped 12 times, incurring a 0.25% charge each time, so it will cost 3%. Thats worst case scenario, I would say I sell 70%+ loan parts at a premium (albeit most sell at +0.1%, +0.2%, +0.3% etc) This helps to offset the 0.25% selling fee somewhat. The bigger problem is having the money sitting around and not immediately re-invested. (sometimes takes a day or two) I'm really confused by FC's dashboard percentages, as 'Annualised return (after fees and bad debts)' seems to be a much higher percentage than that of manually taking the monthly Net earnings and expressing this as percentage of total funds (which is clearly the true and useful percentage). I am well aware that the FC Annualised return is since you joined FC, but I've only been a member for 4 months, so I would have expected that percentage to be closer to reality than what it is (its currently about 5% out...)
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Post by sanmiguel on Aug 2, 2017 9:41:57 GMT
It seems a lot of work for what seems little reward, i thought they would be making a lot more profit and at least avoiding defaults, having read on here that some of them have been stung by defaults before they could sell and for what seems large amounts it doesn't seem worth the effort to me.
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Post by spiker on Aug 2, 2017 9:54:03 GMT
Most flippers will be using automated software.
So its no effort, for obtaining on average 10-15% profit
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markr
Member of DD Central
Posts: 766
Likes: 426
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Post by markr on Aug 2, 2017 11:28:10 GMT
Thats worst case scenario, I would say I sell 70%+ loan parts at a premium (albeit most sell at +0.1%, +0.2%, +0.3% etc) This helps to offset the 0.25% selling fee somewhat. The bigger problem is having the money sitting around and not immediately re-invested. (sometimes takes a day or two) Autobid won't buy these, though (the OP's original complaint was that flippers are dumping bad loans on to autobid users). I sell almost everything at par; liquidity of £20 par parts is phenomenal at the moment. When a C loan appears on the PM (unless it's a tiny one), I can rummage through my back catalogue, find bits to sell, list and sell them and get re-invested in the new loan within ~5 minutes. In fact, these days my first port of call before the PM is the loan parts page to see is I can pick up some loans I missed from other "par flippers" doing the same thing. I end each day with no idle funds, and if I'm away for a few days, no matter, it just looks after itself. I'm a slow flipper, though, reducing my holdings over 6 months or so, so the sale fees aren't too bad. I'm left holding most of the early defaulters though, my worse loss is 35126, I must have overlooked it and was left holding more than I normally would be when it missed the 4th payment. Your calculation is only correct if you deposited all your funds at the start and invested them immediately. Imagine if you had £1000 invested for a year, then deposited another £1000. By your calculation, you'd immediately half your annual return - hardly fair on FC! FC's calculation will be a true reflection of the performance of your invested funds, but ignores uninvested cash. There's more detail about the calculation on FC's page here.
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