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.