bg
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Post by bg on Aug 14, 2017 14:49:56 GMT
Ok...it seems that I haven't done my DD about this business model. Oops. Then I'm OUT. ASAP. I thought this was a two-sided risk if LTV estimate was wrong. But it seems like heads-they-win-tails-I-don't-win. It's not though. You are being paid 13% interest to take this risk and the borrower is paying you for it. You have to judge if that is a good risk/reward balance. This is not a business model specific to FS. It's how bridging loans work - thats both with P2P companies and banks.
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Post by martin44 on Aug 14, 2017 15:11:38 GMT
Ok...it seems that I haven't done my DD about this business model. Oops. Then I'm OUT. ASAP. I thought this was a two-sided risk if LTV estimate was wrong. But it seems like heads-they-win-tails-I-don't-win. It's not though. You are being paid 13% interest to take this risk and the borrower is paying you for it. You have to judge if that is a good risk/reward balance. This is not a business model specific to FS. It's how bridging loans work - thats both with P2P companies and banks. The borrower only pays you for this risk if he is prepared to meet his obligations and cough up on time, invariably this is not happening, and every time it does not happen, it means we the borrowers are taking all the risk's and receiving nothing in return, while fundingsecure have little if anything to lose as their cost's are covered in the fees they charge the borrower up front. I'm not sure if this is a model only specific to FS , Are their others that only pay the interest when the loan is concluded?
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bg
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Post by bg on Aug 14, 2017 15:18:53 GMT
It's not though. You are being paid 13% interest to take this risk and the borrower is paying you for it. You have to judge if that is a good risk/reward balance. This is not a business model specific to FS. It's how bridging loans work - thats both with P2P companies and banks. The borrower only pays you for this risk if he is prepared to meet his obligations and cough up on time, invariably this is not happening, and every time it does not happen, it means we the borrowers are taking all the risk's and receiving nothing in return, while fundingsecure have little if anything to lose as their cost's are covered in the fees they charge the borrower up front. I'm not sure if this is a model only specific to FS , Are their others that only pay the interest when the loan is concluded? Well if you like you can go with the other model (like with Lendy etc) where a little bit more is borrowed from the lenders and held back to pay the interest back to the borrowers over the loan period (so effectively you are paying yourself). All amounts to the same thing in the end.
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Post by diversifier on Aug 14, 2017 16:36:23 GMT
Ok...it seems that I haven't done my DD about this business model. Oops. Then I'm OUT. ASAP. I thought this was a two-sided risk if LTV estimate was wrong. But it seems like heads-they-win-tails-I-don't-win. It's not though. You are being paid 13% interest to take this risk and the borrower is paying you for it. You have to judge if that is a good risk/reward balance. This is not a business model specific to FS. It's how bridging loans work - thats both with P2P companies and banks. Oh, I agree that it's up to me to judge risk/reward. And I failed to understand the risk, which is my mistake. But which risks.... I'm prepared to take 13% interest for the following major risks that I had understood: 1) The LTV being insufficient to pay for the transaction costs of selling 2) The valuation estimate being sufficiently wrong that the actual value of the item is less than the sales value But I *thought* that: 3) The borrower had a strong incentive *not* to default I now think the borrower has a strong incentive to default, because actually *we* are guaranteeing the *borrower* a market-price that we can't predict. To the extent that the value-at-risk exceeds the amount invested. That's *really* bad. 4) If the borrower *did* default - which is under their control, not mine - there seemed a potential upside for me I assumed that FS would take any profit, and this was reducing the *platform risk* It seems I was wrong.
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bg
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Post by bg on Aug 14, 2017 16:49:10 GMT
It's not though. You are being paid 13% interest to take this risk and the borrower is paying you for it. You have to judge if that is a good risk/reward balance. This is not a business model specific to FS. It's how bridging loans work - thats both with P2P companies and banks. Oh, I agree that it's up to me to judge risk/reward. And I failed to understand the risk, which is my mistake. But which risks.... I'm prepared to take 13% interest for the following major risks that I had understood: 1) The LTV being insufficient to pay for the transaction costs of selling 2) The valuation estimate being sufficiently wrong that the actual value of the item is less than the sales value But I *thought* that: 3) The borrower had a strong incentive *not* to default I now think the borrower has a strong incentive to default, because actually *we* are guaranteeing the *borrower* a market-price that we can't predict. To the extent that the value-at-risk exceeds the amount invested. That's *really* bad. 4) If the borrower *did* default - which is under their control, not mine - there seemed a potential upside for me I assumed that FS would take any profit, and this was reducing the *platform risk* It seems I was wrong. I may have missed it but im not aware of the specific loan you have this issue with. I was talking in general terms. If the valuation of a loan is correct then the borrower does have a strong incentive not to default. If they do default it will cost them serious cash. We are not guaranteeing the borrower anything. The receivers duty is to get the best price they can....that is irrespective of any valuation. If they can only get 30% of the valuation then so be it..as long as they have followed procedure and realised the best possible outcome there is nothing the borrower can do. If you want the potential upside you thought you would be getting you are better off investing in equity instead of debt.
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Post by diversifier on Aug 14, 2017 19:51:39 GMT
Maybe you are legally correct. It's very difficult to tell the law from googling. It's even more difficult to tell how this pans out in practice with P2P. But this is definitely more legally complex than "I have lent you money, now you owe me back"
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bg
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Post by bg on Aug 14, 2017 22:18:32 GMT
Maybe you are legally correct. It's very difficult to tell the law from googling. It's even more difficult to tell how this pans out in practice with P2P. But this is definitely more legally complex than "I have lent you money, now you owe me back" It's the same as any secured loan. If you have a mortgage on your house and stop making payments, the bank can reposess your house and sell it to recover their money. Any excess after fees and interest gets returned to you. Things have to be reasonable though. If your house is worth £1m and there is a £100k mortgage, they can't just sell it the next day for £150k (as that covers capital, fees and interest) and wipe their hands of it. They have to try and get the best price for it which is fair on everyone (ie they market it for a reasonable period, accept a reasonable offer and take appropriate legal advice). The receiver must act in good faith. Generally before this happens the bank will work with you to see if there is a way forward that does not involve such drastic action. The problem with such high risk bridging loans is that the assets can often be highly illiquid. You may say a commercial property or country house is worth £1m but if noone wants to buy it it's irrelevent. Market value is always an estimate. The receiver has to try and get the best outcome for all parties involved. If it becomes apparent that the best outcome is to sell the asset for £500k then that is what will happen. There isn't much the borrower can do about this. They can't say the estate agent said it was worth £1m so the receiver has to achieve that price, if however he can prove that the receiver was negligent in conducting their duties then he can sue them.
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Post by diversifier on Aug 14, 2017 23:25:28 GMT
Hmm, I did a bit of googling, and see what you mean. The receiver's first duty is to protect the loan amount for mortgagee (investor), but second is to get fair value for mortgagor (borrower). I now agree, the primary risk to us (apart from valuation risk) is then the illiquidity.
Thanks for pushing me in the right direction.
I would still prefer if the borrower didn't still stand to come out ahead in default in a rising market, but you're right that's equity, not debt
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rgog
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Post by rgog on Aug 15, 2017 11:10:22 GMT
Check your mortgage documents, if you walk away from your mortgage and the property does not cover the outstanding amount you are still on the hook to the mortgage company for the remainder.
With the bridging loans they seem largely to be to SPV's which have no other assets. Perhaps FC needs to do more cross collateralisation to a company with real assets or impose a personal liability (jointly and severally liable) on all the directors of the SPV?
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Liz
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Post by Liz on Aug 15, 2017 11:54:25 GMT
Check your mortgage documents, if you walk away from your mortgage and the property does not cover the outstanding amount you are still on the hook to the mortgage company for the remainder. With the bridging loans they seem largely to be to SPV's which have no other assets. Perhaps FC needs to do more cross collateralisation to a company with real assets or impose a personal liability (jointly and severally liable) on all the directors of the SPV? I pay 2.5% on my mortgage, these companies pay around 20%. You are comparing apples with goldfish.
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spyrogyra
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Post by spyrogyra on Aug 15, 2017 15:08:04 GMT
It's quire different with residential mortgages. First, in case of a default, the borrower will be in a very difficult situation to secure future loans and banks will be after the borrower in case of a shortfall. While here the collateral is the pawned asset and a personal guarantee which is hard to persuade,costly and by the time things come to the PG, the borrower has no valuables. Banks cover many aspects of the recovery process using in house staff costing them considerably less. The amount of money banks lend is staggering and the percentage of defaulting residential mortgages is much lower. Banks can borrow at a almost 0% of interest.
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stevio
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Post by stevio on Aug 15, 2017 15:56:14 GMT
Check your mortgage documents, if you walk away from your mortgage and the property does not cover the outstanding amount you are still on the hook to the mortgage company for the remainder. With the bridging loans they seem largely to be to SPV's which have no other assets. Perhaps FC needs to do more cross collateralisation to a company with real assets or impose a personal liability (jointly and severally liable) on all the directors of the SPV? I pay 2.5% on my mortgage, these companies pay around 20%. You are comparing apples with goldfish. I want ot know where the 20% goldfish is?
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ozboy
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Mine's a Large One! (Snigger, snigger .......)
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Post by ozboy on Aug 15, 2017 18:07:26 GMT
Or just maybe the Valuation and LTV are correct for once and FS know Capital & Interest will be returned? So what? And this is a genuine question I have about FS. The pawnshop model is NOT to only take the outstanding debt. If the borrower fails to redeem, the pawnshop gets to keep the whole value of the security, right? How/why is FS different? Sure, there is a cost to defaulting the loan, because there is a cost-to-sell, and also you are crystallising a risk on the LTV. But if RS has got the LTV correct, surely if the loan defaults, then minus selling costs, the residual is profit? Who gets that profit? Given the fixed-interest model, my assumption is that it is FS itself. But that doesn't seem to square with their reluctance to actively default loans. So, what gives? When the LTV is accurate and/or low, and there's good "meat" in the deal, FS tend to pounce fast.When the LTV is laughably/woefully wrong, and it's bare bones, FS tend to sit on it. This shouldn't happen at all of course with reasonable Valuations, and Investors are wising up. The Valuation Game is true of most Platforms and will be the slow death of those who engage. And as has I believe been already pointed out, all residual monies left after the deduction of lenders capital, interest, costs of sale, etc have to be returned to The Borrower.
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ozboy
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Post by ozboy on Aug 15, 2017 18:20:16 GMT
Apologies, my points have been covered already by more learned folks.
This will teach me to read the full thread before posting.
I thank you.
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Post by martin44 on Aug 15, 2017 19:13:36 GMT
Apologies, my points have been covered already by more learned folks. This will teach me to read the full thread before posting. I thank you. Apology accepted, You've had your weeks holiday, now you need to get back in the groove.  
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