Friday, December 23, 2011

A Revelation On My Grace Period Epidemic

So for those just joining us, my Lending Club experiment was going well since August, in fact, very well. So well, that I shifted all my fun investment money over to Lending Club and have regular deposits. Then in November I started getting Late Notes. I figured it would happen sooner or later. Then I started getting a lot of Late Notes. I also noticed that Late Notes don't sell very well. So I started discounting Grace Period Notes. If it doesn't go into Grace Period, it won't be late.

I noticed that I had a lot of Grace Period Notes. Since I wasn't even keeping track of Grace Period before, I just figured it was that way all along and was common. I attributed the Late Note epidemic to the season (and possibly the economy). Now that I am discounting a lot of Grace Period Notes, I feel it is affecting my return. However, I think I could have avoided most of this mess if I just understood what Never Late meant.

The way I look for Notes is to use all Percentages and select Never Late and Now Current (disable the other Now Late checkboxes). Then I sort by Yield To Maturity. My assumption was that every Note in the list had always paid on time (never in Grace Period).

Today I was using my Cash to buy up Notes when I noticed a steeply discounted Note with the highest Yield To Maturity. When I investigated, I found the following:
In the Browse Notes list it showed it was Current. However, they were still trying to process the payment. It was steeply discounted because someone was watching their portfolio closer than just the status reported by Lending Club. I would consider this Grace Period, but at least now I know.

So now I will screen each Note before purchase (clicking on the Current or Issued link) to see if it really is Never Late. I expect that would cut down on my Grace Period epidemic.

Monday, December 19, 2011

Five Months and The Good Times Roll (For Those Who Ran Off With My Money)

(See other Monthly Status Updates)

So after five months I've had a great run, followed by an avalanche of Late notes. I think I've had a total of 13 notes that have gone Late. One of them I've been able to sell off.

Every one of the Notes that have gone Late have made payments, but none of them have made payments to me. They were never late and were current when I bought the Notes (assuming that is what those checkboxes mean when Browsing Notes).

When they give my return, they obviously don't take into account that the Late notes are as good as gone. The chart above shows that of the Notes that go past 31 days, you have basically a 50/50 chance of getting any money back (they don't specify how many were fully recovered versus partially recovered, and how much that partially is). The site reports my return as over 21%. They no longer show your percentile. When they did show it, I had dropped solidly into the 99% (before I was waffling between being in the top 99% and 100%). My own internal reporting needs to change. I've been calculating my account value as the sum of what I paid for all my notes. What I need to use is the lesser of what I paid or what I am asking. I believe that will more closely represent my account value.

Of course, it may be more representative to consider Late Notes to be $0. I don't know what the conversion rate from Grace Period to Late is, but from 16-30 Days Late to 30-120 Days Late has been 100% for me. I've been able to stem the tide of Late Notes by being more aggressive at selling Grace Period Notes. I've still had a few slip into Late status. 

I've been selling Grace Period Notes at 80% of P+I (rounded down to the nearest dollar), and dropping the price by $0.10/day. Some of these Grace Period Notes have received payment and then sold at this discount. At first I was disappointed, but then I realized I didn't want the notes where the borrower was willing to go into Grace Period.

Late 16-30 Days I sell at 75% of P+I (rounded down to the nearest dollar), and dropping the price by $0.10/day. Late 31-120 Days I sell at 50% of P+I (rounded down to the nearest dollar), and dropping the price by $0.10/day. Not that discounting Late Notes seems to work. I have only sold one Late Note, and none have returned from the grave. I may consider being more aggressive at selling Grace Period Notes just to prevent Lates, since they seem to be the land of no return.

Most of my Notes (almost 2/3) are still F Grade. If I read the numbers correctly, 76% of the F Grade Notes are still Active (Current or Late). Of the Active F Grade Notes, 95% of them are Current. 25% of my Late Notes are F Grade while the compose 63% of all my notes. It appears that F Grade Notes are a pretty sweat spot.

E Grade Notes have roughly the same Current, Late and Default rates. They are also about 25% of my Late Notes. However, they only comprise 6% of my portfolio. So apparently I've been really unlucky with E Grade Notes.

Half of my Late Notes are G Grade. Given that about 1/3 of my portfolio is G Grade and that the stats for G Grade notes is a bit worse (91% of Active Notes are Current as opposed to 95% for E and F) that is not surprising. About 8-9% of E and F Grade Notes are in Default. For G Grade Notes, it's 14%.

You would think that due to the very small place that E Grade Notes hold in my portfolio (and that they are statistically equivalent to F Grade Notes) that they would not hold such a prominent spot in my Late Notes.

It is also interesting to see what Lending Club is doing to attempt to reclaim my money from the Late Notes. Below is a chart of the latest action Lending Club has taken on the Late Notes.

Months OldPayments MadeLatest Action
32Sent email to borrower
47PAYMENT Failed
52Borrower contacted Lending Club
53Sent email to borrower (three notes for this loan)
84Borrower located (skip trace)
85Borrower provided Bankruptcy counsel information
96Borrower filed for Chapter 7 Bankruptcy
96Collections Agency attempted to contact borrower
128Drafting lawsuit
1916PAYMENT Failed (previously: Borrower provided Bankruptcy counsel information)

So now after my big Late Note hit, I'm making some changes. First, Grace Period Notes seem to sell. I think I need to discount them slightly more than I have been. I'll be discounting them to 75% of value instead of 80%. Late Notes don't seem to sell at all (especially 31-120 Days Late). I'm also adjusting my Risk Factor for Note Grade. I used to just convert the letter to a number and the trailing number to the fraction (ie A1 = 1.1, F4 = 6.4). Now I will be squaring that (ie A1 = 1.1^2 = 1.21, F4 = 6.4^2 = 40.96). This should cause my tool to more steeply discount G Grade Notes, as they will be rated 36% more risky instead of 17% more risky. This may also weight my portfolio more towards E Grade Notes. Given the lower return and about equal risk to F Grade Notes, I'm not sure how I feel about that (not to mention my propensity to have Late E Notes).

Also, of note may be the states my Late Notes are from: SC, AZ (2 Notes), NY, VA (3 Notes, same loan), CA, OH (2 Notes), OR, MN. I was already weighting the risk of Notes based on state, thanks to Nickel Steamroller. Currently I weight riskier than average the following states (riskiest to less risky): CA, FL, NE, IN, MS, TN, IA, ID, MT, UT. I also weight the following states less risky than average (least risky first): WY, ME, OK, LA, CT, KY, NC, WV, KS, AL. I am adding "riskier than average) to my Late Notes' states (although I already had CA as the riskiest, I considered the others as average risk). Since SC and OH have two Late Notes each, I made them as risky as CA and FL. The other states I put their risk about equivalent to TN or IA.

And yes, I have three Notes from the same Loan and the Loan went into Default. I have identified some holes in my detection of Notes from Loans I already own. This is the risk I was trying to avoid. I think I've worked out a way to avoid the hole that got me three notes from the same loan and I think I discount Notes which I have multiple from the same loan.

If I assume that all my Late Notes are worthless, I think I'm basically back to my original investment, so 0% return. So now that I've learned a lot of lessons, I'm starting from the beginning again, and hopefully will come back with a vengeance!

Monday, December 5, 2011

'Tis The Season, I Hope

 The first three months were great: August, September and October. Since then, I've had 12 loans go late. One was sold, the remaining 11 I still have (not by choice).

My thoughts right now are that as soon as a note goes into Grace Period, it's time to start discounting it. I was just giving a mild discount (Principal + Interest rounded down to the nearest dollar). This led to three more notes going late. I am now going to 80% below P + I for any notes that goes into Grace Period. This is based on the recovery rate from the chart below.

I still discount 16 - 30 day late notes 75% and 31 - 120 day late notes 50%. Grace Period, Late 16 - 30 and Late 31 - 120 I drop in price $0.10/day ($0.60/week). It may be that I've been once bitten, twice shy, but I'll find a happy medium as I experiment with discounting.

I'm hoping that it is the end-of-year season that is causing the larger number of Grace Period and Late notes, or at least due to fluctuations in the economy.

What I'd really like to see is someone blogging about their experience in taking discounted E, F and G Grace Period or Late notes and making some nice returns from those. If everyone followed the advice I post, no one would be there to pick up the notes I don't want anymore.

Monday, November 21, 2011

How do I choose loans?

I just received an email from Peter Renton, of fame, asking me a few questions about my use of FolioFN. I figured I would answer them in a blog post.

How do you choose the loans?

I first started choosing notes to buy based in several criteria. I would scrutinize the notes, read over the application, really make sure I was buying a solid note. However, that was when I was going to hold every note until completion.

I always believe that if something is not dear to you (no note is really dear to me) it has a price that it can be sold for. For instance, on, I have a Make Me Move price. I'm not in the market to sell my house, but if someone were to offer that much, I'd be willing to move. The same thing with my notes. My personal rule is that every note should be up for sale, even if no one will bite. The reason is simple, if someone does bite, they take the risk away from me and give me my return.

As I saw how easy and fast you can sell notes, I decided to change my strategy to be in the business of buying just about any note, but sell my favorites at a premium and the less desirables for minimum returns.

So, for the technical aspects of buying notes:

1. Use FolioFN Note Browser to filter only notes that were Never Late and are Now Current.

2. Then click on the Yield to Maturity column twice (sorts by Yield with the highest first).

3. This is when my hand written tool comes in. I have a custom Python script that runs while I'm on Lending Club's site (and FolioFN) that scrapes the web pages I am viewing and puts together account information and displays more meaning information. For instance, it will show me notes that I currently own another note from the same loan (or a purchase is pending), or notes that are larger than a $25 slice of the loan.

When I'm down to too little cash to buy a new, high yield note (generally less than $20), I then sort by asking price and look for the best Yield to Maturity for the money I have left. This can be a bit tedious if I have more than $15, as there aren't many positive yield notes in the under $5, but for each dollar added, it appears the number of notes grows exponentially, so you have to wade through more pages to find the best return.

How do you find the interface?

I find the FolioFN interface lacking. This is sad because the state I live in does not allow me to fund loans directly, which means much of the nice data and interface from Lending Club does very little for me. Here is my wish list for FolioFN's note browser:

  • Download all notes for sale in a format that a spreadsheet can import (making many of the following unnecessary)
  • Filter out notes from loans for which you already own a note (or a purchase is pending)
  • Filter out notes by asking price (ie notes asking $12 or less)

Selling notes on FolioFN is about as good as it can be, although the two step process of selecting which notes to put up for sale is a bit annoying. I like the one-button that sets all to principal + interest and then the button repeated so you can do that for just an individual note.

I do wish the sale window was more than one week. I'd love to have my notes for sale for a month, maybe two. The problem you would run into is what to do when you get a payment. Reduce the asking price by the payment amount? Reduce it by the principal only? I'd like both those options.

While I would like these tools built into the FolioFN website, not having them gives me a slight edge. With my custom tool, I get at a lot of these features (however, not the long term sales) via my custom Python script.

Wednesday, November 16, 2011

Fourth Month and Seven Deadbeats

(See other Monthly Status Updates)

Well, I knew this day would come. I have had seven notes that have gone past the Grace Period into the Late Period. Lending Club states that those within the Grace Period, I have an 83% chance of getting some money back from. Those that are Late 16 to 30 days, 75% chance of getting some money back. Late 31-120 days yields 55% chance. Note that this does not state that you will get all your money back, but get some back.

I'm changing my pricing strategy a little. Any notes in the Grace Period, I am now selling for Principal + Interest. This means I could lose up to 7 days of interest if it sells on the seventh day from when I put it up, but given that there is a 17% chance I could lose the entire note, it's little to give up. Then when a note goes Late, I start decreasing it's sales price by $0.10/day.

Of the 7 notes that have gone into Late, I've sold one so far. This is my first chance to get real data (although not enough for statistical significance) as to who defaults. Of the six notes I still own that are Late here is the info (notice that I bought all of these notes right before they stopped making payments):

Months OldPayments MadeLatest Action
42Voicemail left
74Collections Agency attempted to contact
75Borrower provided Bankruptcy counsel information
86Borrower filed for Chapter 7 Bankruptcy
118Drafting lawsuit
1816Sent email to borrower

We'll see how this plays out as far as collections. However, I'm still optimistic. My account is currently worth 5.1% more than the money I put in. On notes I sell, I get a median return of 38.5%. On average I sell notes after holding them for two weeks. The notes in my portfolio I've held for an average of 40 days. So it looks like my strategy holds on to some notes and cycles through others.

I've been bouncing around between 99% and 100% for my investor percentile. We'll see how that pans out over the next several months as we see what happens with these Late notes. Currently, I'm guessing I'm really in the 99.5% and the rounding gets me to 99% or 100% depending on the day.

The main thing I've been focusing on is keeping my time to a minimum on handling my account. My routine is to spend about 5 to 10 minutes a day each morning buying and selling notes.

Lending Club reports that I have a return of 21.22% (average is 9.64%). I think my Late notes will affect this, but I'm hoping my Grace Period and Late note selling strategy will minimum the impact on my return.

I'm still a small investor. I am over the 100+ Note range but not quite to the 400+ Note range. Of the 100+ Note investors, if I can stay in the top 6.5% of investors, I will still have a 15%+ return. My target is 16% per year, so 21.22% gives me some wiggle room.

So I think the changes to my strategy will be to:

#1 Do not buy notes that are in Grace Period
#2 Sell notes that reach Grace Period at value
#3 Discount Late notes by $0.10/day

This is where it gets really fun, how to mitigate risk and still make a good return. When I said I've been lucky so far, this is where we see what the real possibilities of Lending Club are.

Thursday, October 13, 2011

Third Month and Going Strong

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Three months down and my luck is holding. Lending Club reports that I am getting over 20% (my target minimum is 16%). This appears to put me in the top 1/2%. I say that because I've been fluctuating between top 99% percentile and 100% percentile. I think they are rounding it. I can't seem to find how many investors there are on lending club, so I'm not sure if I'm in the top 5 or top 50.

I'm still trying to figure out where the problem is with about 1/3 of the notes I sell being sold for less than 16%. Of the notes that sell for less than 16%, they all sell for 1.7% to -100% (annualized). I'm hoping it's my tool. I now review my sales to make sure that I at least ask for the principal and interest.

I may also have my first default here soon (16-30 days late).

My strategy hasn't changed. Buying: I prefer to hold notes that have just been issued or are within the first year (the earlier the better). I only buy $25 fractions. I try not to buy notes from loans from which I already have a note. I want loans that are Now Current and Never Late. Then I look for the highest Yield to Maturity. Selling: I offer all my notes for sale. I set the sales price such that with taxes, fees, payments and purchase price taken into account I would get 16% to 32% annualized return if the note sold in 7 days.

I have a formula that determines the risk of a note using 30 different criteria (which my tool grabs from the original loan information and the note information pages):

Accounts Now Delinquent Amount Requested Credit Score Change
Credit Score High Credit Score Low Debt To Income
Delinquencies (Last 2 yrs) Delinquent Amount Expected Final Payment
Fraction Grade Gross Income
Home Ownership Inquiries in the Last 6 Months Interest Rate
Issue Date Last Payment Date Late Fees Received
Length of Employment Length Monthly Payment
Months Since Last Delinquency Next Payment Date Open Credit Lines
Public Records On File Purpose Revolving Credit Balance
Revolving Line Utilization Status Total Credit Lines

The more favorable these criteria are, the closer to 32% (I want to hold the note longer). This way I lower the price on riskier notes to have them (hopefully) sell before there are problems while less risky notes are held to collect payments until they start getting in the risky category.

As you can see I mainly have F and G notes (highest Yield to Maturity) as well as mainly 5 year notes.

This mix seems to jive with Lending Club's reported Return by Credit Grade. Grade F notes get the best return generally, with Grade G being slightly behind. Grade E notes are even further behind, which may be why I only have a handful of them.

While I have over 100 notes, Lending Club doesn't know about all of them. In the "Your Investment Numbers" chart above, it reports I only have 99 notes. The rest of my notes are being held in Foliofn. It takes a business day (sometimes more) for trades to settle. So at any point I may have a half dozen to several dozen notes bought or sold and pending settlement. It is a little confusing at times having notes and cash in the Lending Club account and pending sales or purchases in Foliofn.

So apparently my strategy can, at least in the short term, put me in the top 1.35% of all those with 100+ notes. On this chart they state that it takes a minimum of $2,500 to get to 100 notes. While that is not technically true (you could buy 100 notes near the end of their term for $5 to $15 each), you probably won't get the best returns buying those notes. Remember that the early payments are mainly interest, while the last payments are mainly principal. The value in a note for sale is the principal plus the next interest payment. However, the longer term value is the principal plus all future interest.

After three months I'm still having beginners luck. I'm still getting more than twice the average return. Still no defaults (although I have about a 25% chance that one of my notes will default). Still working it.

Thursday, September 29, 2011

I'm No Longer On Top

I knew it had to happen. I am no longer the top dog on Lending Club as far as Net Annualized Returns. I dropped from 21.54% to 20.56% and dropped from the top 100% to the top 99%. I imagine that all this time I wasn't really the #1 investor, but the 99.5% top investor.

I've now fully invested all the money I've transferred in. I did it slowly, so as to not affect prices too much. I noticed that I did raise the low end for the notes I was investing in.

If you browse the notes for sale, and look at All Rates and only Never Late and All Current (no past due notes) and then sort by Yield to Maturity (high to low), of the top 60 notes listed, I either own a note from that loan or it is more than a $25 share of the loan (except for 2 notes).

For a while there, if you looked at 15.5% and higher notes (again Never Late and All Current only) and then sorted by Markup/Discount (sorted low to high) of the top 60 I would own about 80% of them. After three days of only buying notes to replace sold notes and now I only own three of the top 60 discounted notes (15.5% and higher Never Late and All Current).

So now I have been humbled. It probably wasn't as big a drop as it seems (I wish they'd show an extra decimal place on the percentile). I'm still near the top. The average return is about 9.5%

The notes that I currently hold I've held about 7.3 days average. Given that I bought the bulk of them in the last two weeks due to my increased investment, that makes sense. I've paid an average of $24.63, or in other words I generally buy $25 fractions early in their lifetime. This gives me the most interest for my investment (at the end payments are mostly principal, at the beginning they are mostly interest).

I mostly hold F grade notes (53%), followed by G grade (38%). The D and E grade notes are usually the notes I buy when I have a little money left (less than $20). The best deals there seem to be in the D and E grades.

Right now I've got 2.4% more in my account than I put in. Since the bulk of that money was put in in the last two weeks, that would be more than a 50% return per year, if I can keep it up.

I've sold around half as many notes as I currently hold. I've held them for an average of 11.7 days before I sell them. The median Annualized Return on notes I've sold is 59.1%.

Looking over the notes I've sold, about 25% of them have been less than 16% Annualized Return, and most of those have been between -14% to -99%. Some of these have been typos. Some have been an error in my sell calculation (I think). However, given that the other 75% get 17.5% or higher Annualized Return and over 40% of my sales have been at over 100% Annualized Return, I'm still doing pretty well even considering the little glitches and mistakes.

It's interesting that even though I am now over the $1,000 mark (also over the 100 Note mark) that I am still compared to investors with less than $1,000. I think they only take into account notes you've actually funded (which is illegal for me to do in my state).

Now that I've crossed the first milestone (100+ notes) we have some statistics on people who hold that many notes. Almost 83% of those with 100+ notes make between 6% and 18%. It looks like around 10% make 3% to 6%. This leaves 7% to be divided among the -5% through 3% and the 18%+. It looks like more of that 7% is in the -5% through 3% range. So let's say 3% of those with 100+ notes make 18% or more.

You'll note on the image here that they state that 100 Notes can be purchased with a minimum investment of $2,500. Of course, if you are using the secondary market (Foliofn) you can get 100 Notes for less than that. However, the less you spend on the 100 Notes, the less your return will be. Remember that early in the life of a Note, you get more interest per payment. The smaller the note (the more payments have been made on it), the less interest you'll get in the payments, and hence a lower return also.

Update: I figured out how to get some more information on the 18%+ bracket for 100+ notes. So of those with 100+ notes, I'm in the top 1.31%. The average investment is $19,094 (I'm not quite there yet) and the average number of Notes is 274, or an average of $69.69 per Note.

It was interesting to see the average Note value for 100+ Note holders by return. If you are getting between 0% and 3% return and you have 100+ Notes, chances are you hold $250 Fractions (smallest fraction is $25). That means you are banking a lot on a few loans.

Even if you have a lot of Notes, they may still be from the same loan (my tool filters out Notes from loans I already hold).

It looks like most of the 9%+ return crowd go for higher notes. I can understand, as without some tool to manage your notes, it can be a pain to handle a bunch of notes. If you double or triple the size notes you hold, you cut in half or third the number of notes you have to deal with.

Still beginners luck. Still no defaults. Still playing the game. Until next time …

Friday, September 16, 2011

Second Month Of Lending Club

(See other Monthly Status Updates)

So it's been two months and things are still looking pretty good. I've had a 4.5% growth in the funds I deposited. 58 Days ago I bought my first notes. I've been adding a little money to my account over the last two months, but if I had put it all in at the beginning, that would be an annualized rate of 32%. Since my minimum target is 16% per year, I think double is a good rate.

I've moved from a Google spreadsheet to a custom tool I developed that grabs the data directly from Lending Club's website. This way I am not limited by the amount of data I am willing to copy into a spreadsheet, it cuts down on the time I spend entering data (none) and I have more flexibility with what I do with the data. I now can spend less than 10 minutes a day to sell dozens of notes and buy at least a half dozen notes.

In a previous post I stated that I was going to change my strategy to cut down on the number of trades I do. This was mainly to cut down on the time. Every note that I bought I would enter a limited set of data into a spreadsheet. For each not I sold, I would add some more data about the sale. All this manual entry was time consuming. Now with my new tool, I can trade more frequently with less time being taken to enter data. Buying notes still takes a bit of time to find the right notes to buy. I wish Foliofn had better filters (like "only show notes with Yield to Maturity greater than X").

So I am still Top of the Class. My Net Annualized Rate dropped to 21.79% (or 22.01%, depending on where I look). The lowest it has been was 21.68%. Lending Club reports that for "Investors Like [Me]" 100% have a NAR less then me. Less than 4% of all Lending Club investors get over 18%.  "Investors Like [Me]" dropped to 5.56% NAR and overall average remains at 9.64%.

I'm still not convinced this is more than beginners luck. I am, however, transferring a larger chunk of funds into my account.

Currently I am holding about 1/3 of the notes I've ever held. Or, in other words, I've sold twice as many notes as I currently hold. The notes I sell I hold for an average of about two weeks. The average return is really high because I've sold some notes for a premium (I really wanted to hold them) the day after I got them. When you annualize that, it gets pretty crazy. However, my median annualized return from selling notes is 43.7%. The notes I am currently holding I've held for an average of about two weeks. The purchase price of the notes I am holding now average $18.27.

I still haven't had a default. I focus on buying high interest rate notes in their first year with either the highest Yield to Maturity or the lowest Markup (roughly equivalent). I want the notes to be $25 fractions of the overall loan. Then I sell the note for somewhere between 16% and 32% annualized (assuming it sells in 7 days). Since I don't hold notes for more than two weeks on average, that means no note really even has a chance of defaulting. That and I choose notes in the first year, which is the least likely time to default on a note (in my opinion).

I've found that there is a limited number of low Markup (or high Yield to Maturity) $25 fraction notes for sale. There are several in the range of $250 fraction, but the minimal ones tend to have a higher markup. The opportunity is there to take the lowest Markup $25 fraction notes and mark them up higher. If I can continually buy all the lowest Markup $25 fraction notes, and make sure the lowest ones are the ones I am reselling, then it increases the demand for my notes. At least that's the theory.

Saturday, August 20, 2011

Tax Rate

As I was writing about how I determine the sales price of my notes, I realized that I had the tax rate at 15%. Why 15%? That is that value i was using for my stock spreadsheet. Short term gains are basically regular income. To be on the safe side, I should probably use 25%.

Of the notes I've sold, one had a -6% APY (because of tax). I think this one was a typo when entering the sales price.

The rest were over 16%. Many much over 16%.

So I made a mistake with the tax rate calculation, but because of my margins of safety, I'm still getting more than 16% APY overall.

Strategy Change After One Month

I think I've mentioned that I require a minimum of 16% APY on my investments. So after the first month I'm getting 24% to 46% return, why would I change? My other priority, time.

I'd like to spend less than 30 minutes a week with account maintenance. I was selling more than three notes a week, which didn't take much time to turn around and buy a new note, but I'd like to spend less time churning notes.

Ideally I'd sell one, maybe two, notes a week. That way I don't feel like I've got a lot of money "sitting on the couch" waiting until I refresh to sell orders.

So to compensate, each week I increase my target APY for my sale price calculation. Currently it's at 18% instead of 16%. Remember that is the minimum annualized gain if the note sells seven days after I put the sell order in, so the gain will be higher.

Basically I feel I am pricing my notes too low so they are selling too fast. I need to create less demand for them by increasing the price, which will allow me to spend less time managing my account. It also has the side benefit of higher return per sale.

So now my strategy is this:

1. Buy high return, high risk notes within the first year of being issued.
2. The riskiest of my notes get offered for sales for whatever rate (currently 18% APY) sells less than 10% of my notes per week.
3. As money accumulates in my account (payments, interest, sales proceeds) look to buy notes. For small amounts I'm not so picky about the risk/interest rate.

Friday, August 19, 2011

My Initial Lending Club Strategy

I look for a minimum of 16% return per year. So my strategy with Lending Club was initially to fund a bunch of F rated notes (default/return rates: A 1%/6%, B 3%/8%, C 5%/10%, D 6%/11%, E 6%/13%, F 8%/14%, G 11%/15%). I looked at the data and decided I could get 16% holding those notes. I was glad there was a way to cash out, trading notes, but wasn't interested in trading frequently.

Then I found out I lived in a state that does not allow funding of notes. So I stated to look at buying notes. My strategy became to look for notes that are not, and have never been, behind, with the lowest premium, and the highest return. Pickings can be slim if you are picky.

And speaking if picky, I do look at the notes to see what is behind them. I look for people paying off, or consolidating credit cards or other debt. Lending Club stats show these to be low default loans. I also look for home owners, although info let in renters some times. I'll buy notes other than consolidation, but I really shy away from "start a business" and purchases.

When looking to buy a note, I filter out anything that is less than 17% and sort by premium. You can buy notes worth hundreds, or even thousands, but I'm looking for anything up to just over $25. Initially it was to diversify my default risk, but it has come to be key to my trading strategy.

I try to make sure all of my money is in a note at all times. Your money can't work for you if it's sitting on the couch.

I'm also a big fan of a concept, Make-Me-Move. The idea is that you are not emotionally tied to your house (or in this case note) and would sell it, for the right price. So my spreadsheet calculates at what price I could sell each note for in a week and get a 16% return per year rate, taking into account selling fees (1%), taxes (15%) and payments received so far. This is then my Make-Me-Sell price, the idea being I could get a guaranteed 16%+ return without worrying about default.

My theory is that defaults generally don't happen at two times, the beginning of a loan and the end. At the beginning they have full intention of paying every month for three or five years. But then after a while, life happens. If they survive life hapenning, they get to the exciting time of "It's almost payed off!" the most dangerous years in a loan are the middle ones (or one in the case of a three year note).

So if I can buy new notes or notes about to finish out, I'll lower my risk of default. Hence why I set all my notes to a Make-Me-Sell price.

My spreadsheet also has a risk calculation. It is based on several factors, but determines how risky I think the loan is. The riskier notes I set their Make-Me-Sell price for 16% APY. The notes I'd like to keep, I still have a price, but it could be up to 80% APY. In other words, I don't want to be a day trader, but if you really want it, you're going to pay a high premium.

You may be asking why I set a 16%-80% return if sold at the end of the week. Why not month (which is what I do for stocks)? I'm not fond of the small window, I'd much rather a month. Foliofn only allows sell orders to remain in effect for seven days. This is ok when you have 15 notes, but not 800 (or for that matter 80). I think I will sort my spreadsheet by risk factor when the number gets unwieldy, and only offer my 15, or 30 most riskiest loans for sale.

This cycling through of my worst loans helps me ward off the most likely defaulters (assuming my risk calculations have any real world worth) and lock them in at 16%+ APY. The + comes in because the calculation of price assumes it is sold in seven days. However, when they sell it is usually not on the last day. Time value of money makes the actual APY more than 16%. Of course the longer I hold a note, the less those seven days makes a difference.

That is the basics of my initial strategy. Within a month of actually acting on this strategy, I saw some things that needed to change. So next up, how I'm changing up my strategy for month two.

What Is Lending Club

In general I want nothing less than 16% per year returns on investments. So when I started looking at Lending Club, I saw a potential for 16% return.

The idea behind Lending Club, and other Peer-To-Peer lending companies, is that individuals get together and offer to loan small amounts to people, which together makes one big loan for the borrower. Each borrower is funded by dozens or even hundreds of small loans from individuals.

For investors, this means that the risk of default is higher (exposed to more potential defaulters) but the default amount is limited. it also means higher returns, since Lending club just takes 1% of the monthly payments. For borrowers it means they get a lower interest rate. It's a win-win.

I've looked at another Peer-To-Peer lending company before, Prosper, but by the time I got around to funding an account, Texas regulated them out of the state, at least for funding loans (you can still borrow from them).

I started to look into Lending Club, and opened an account. Turns out, in Texas, you can't fund loans on Lending Club either. However, you can buy notes others have funded. This gives the Funder liquidity, and people in Texas the opportunity to participate.

I'm kind of glad I was introduced to Peer-To-Peer lending through the loan trading platform. By getting in through loan trading, I avoided the unfamiliarity barrier to getting started in trading loans, which is now an integral part of my investment strategy.

Lending Club had done a great job of analyzing loans, defaults, returns, etc. You can also download a giant spreadsheet of all sorts of loan data. The data isn't current, it only goes through the end of last year, but it is a lot of data if you want to analyze it.

Lending Club uses Foliofn for note trading. I this is really where the best returns lie. There are a limited number of people who can "write" (fund) notes (not us in Texas, for example). Those who cannot fund notes can only participate via trading, ie we need to buy notes. There aren't many whose only option is to trade notes, which creates a demand for notes. The raises the premium paid for notes (supply and demand).

Lending Club has set the "ideal" bar at 8,000 notes, which they say you will have a guaranteed positive return. So there is a high demand for notes. Those who can write, or fund, notes may not be comfortable with trading notes. Usually, I think, people get started in Lending Club funding notes, intending to hold them for the duration of the loan (3-5 years). They know they can sell their notes at any time in case they need to liquidate, but don't consider trading notes to be anything more than a liquidation strategy.

I think there are some whose only strategy is to fund loans, and then turn around and sell them. They never receive their first monthly payment. The also don't have to worry about defaults, because they don't hold the loans long enough (you can't default until you miss a payment).

So, in a nutshell, that is my view of Lending Club. It's a win-win-win for lender, borrower and Lending Club.

One Month Of Lending Club

(See other Monthly Status Updates)

Well, I was surprised today. I had a little extra money come my way, so I wanted to try a new investing platform, peer-to-peer lending. I'll discuss in another post more about my philosophies and the difficulties of government regulations in trying to get started in peer-to-peer lending, but I wanted to give some stats after the first month (more for me to look back and say, "What a fool I was.").

Currently I am using a Google docs spreadsheet to track my notes and my performance. I started out looking for a minimum of 16% per year average return. After the first month (mid-July to mid-August), Lending Club reports that my Net Annualized Return (NAR) is 24.20%, which puts me in the top 18% of lenders at lending club. More specifically, of those who have invested less than $1,000, I'm in the top 100%. The average return for the less than $1,000 invested crowd is 5.72%. The average for all investors in 9.64%.

I'm afraid this is more of beginner's luck than experience. As much as I'd like to say that it is my investor savvy, with the little bit of money and few notes I have, I'm afraid I've just gotten lucky so far (no defaults, but investing in the riskiest notes).

So, so stats from my spreadsheet:

I have 15 Active notes right now. I've purchased those notes with $340. The scheduled monthly income from those notes (principle and interest) is $10.46, or around 3% per month (at which rate it will take about 2 1/2 years to recover my investment). I do put every note up for sale, at an annualized 16%+ interest rate (more on the + when I post about my philosophies). I've sold 17 notes so far, although I'd rather not sell notes. My median annualized return on selling notes is around 46%. I average about 3 1/2 notes sold per week. I'd like to get this down to 1 1/2 notes sold per week. Apparently 16%+ is too low an asking price. If you annualize the proceeds from the sale of the notes (minus tax) I'm getting about 18% per year on selling notes. The notes that sell I hold for of an average of about 2 weeks.

I haven't had a default yet. Of the notes that I currently hold, I have one each of A, B, C and E. I have two F5 loans. The rest are G loans. I paid an average of $22.65 per note.

So there is the snapshot of my first month. I look forward to seeing how this data changes over time.