Thursday, February 16, 2012

How I Use Lending Club Portfolios

In my January post Six Months and I'm Reaching A State of Peace, I stated:

I feel like I'm emerging from the Fire Swamp, and now it's time for Prince Humperdinck, I mean Tax season. (Maybe I will name my portfolio Buttercup).
Well, I took that suggestion and segmented my Notes into Princess Bride themed Portfolios.

The Humperdinks are the Late, Default and Charged Off Notes. These are the Notes that you know you don't want around but you probably can't get rid of them. The Rugen Portfolio holds the pre-Grace Period and Grace Period Notes. These are insidious Notes that don't sound all that bad, but can lead to more Humperdinks.

Then we have the Buttercup Portfolio. These are the newly acquired Notes that have no or one payment. They have not proven themselves. Then there is the Wesley Portfolio. These are the Notes that have never had payment problems and have payed me at least twice.

This segmentation helps me avoid looking at Humperdink Notes (Late or Charged Off) while paying attention to the insidious Rugen Notes (Pre-Grace Period or Grace Period). And I can look through my good Notes (Buttercup and Wesley) for Pre-Grace Period Notes by sorting by Payment Due Date and look at the Notes for Collection Logs at the bottom.

Seven Months In And Things Are Slowing Down

(See other Monthly Status Updates)

Seven months have passed and I am now starting to feel the results of the Late Notes that are now Charged Off in my Net Annualized Return. 16.36% is still in the neighborhood of my target 16%. I still have six Late Notes that I am steeply discounting, but it appears that they rarely sell.

I've received enough interest to offset the complete loss of the Charged Off and remaining Late Notes assuming they are all worthless. The total interest I've received amounts to 6% of the money I deposited. Now we are on to start growing again (back to the beginning).

I've sold 2.7 times as many Notes as I currently hold (of course using the proceeds to buy more Notes). My median annualized return on Notes sold is 32%. If you weight the annualized return by days held (the longer held the more weight you give to it's annualized return) my Notes Sold have an average of 58%. This sounds great, but the raw gain, Cash Received (Sale + Payments) vs Cash Paid, is 1.9%. This has probably been impacted most by by selling off of Grace Period and pre-Grace Period Notes at a discount and buying a bunch of pre-Grace Period Notes at a premium before realizing they were pre-Grace Period.

When ranking the risk of my Notes (which I use to determine asking price when selling, 16% - 32%), I weighted most heavily (5 times the weight of the least weighted):

  • Accounts Now Delinquent
  • Delinquencies in Last 2 Years
  • Delinquent Amount
  • State (Bad: SC, OH, CA and FL Good: WY, ME, with other rated in between)
  • Inquiries in the Last 6 Months
  • Months Since Last Delinquency
  • Status of the Note (Issued, Current, Fully Paid, Grace Period, etc)
  • Public Records on File
  • Revolving Line Utilization. I am adding to that 

I am now increasing the weight of the Grade of the Note to the same level (was weighted the least, now weighted 5 times higher). I have an uncomfortable number of G Grade Notes. I would rather sell those than hold on to them.

Lending Club has also been making some changes, or rather FolioFN, specifically to the way Browse Notes works. On the positive side they got rid of the confusing checkboxes for Rate and replaced it with a Range. Much better.

On the downside, they now no longer include Issue Notes when viewing Never Late. This makes me sad. I really like Issued Notes, and now they are hard to find. Well, they are hard to find the way I was looking for Notes.

I now choose Notes by looking at everything. I sort first by Yield to Maturity (click once to sort ascending) and then I sort by Remaining Payments (click twice to sort descending). This gives me newly issued Notes with the highest Yield to Maturity. I then look for the Accrued Interest over $0.50, meaning the Note will soon (hopefully) make a payment. This way I get the first payment (which is mostly interest) and hold it just a short period of time before I get that interest. Then if it sells, I get a (mostly) interest only payment, get my Principal back and a premium in a small period of time.

I am not buying exclusively Issued Notes, as there are some great deals in the rest of the Notes. Those I just chose Never Late only and sort by Yield to Maturity. I'm not sure how much of a mix between Issued and Current Notes I'm going to buy. I'll still need to play with that.

Bottom line is that I have taken some lumps (and still waiting for 6 more Notes to be Charged Off) and am still at my minimum target. I look forward to clawing my way back up above 18%.