Thursday, October 13, 2011

Third Month and Going Strong

(See other Monthly Status Updates)

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.