Tuesday, May 15, 2012

Ten Months on Lending Club, Brutal Reality Hits

I missed a month on reporting how my Lending Club experience was going. I could say I was extremely busy (I was) but it was probably more coming to grips with brutal reality. Right after I posted on my Eight Month Results, my NAR dropped to 6.0%. I think that was the result of my Defaults finally all going to Charge Off status.

I'm slowly climbing my way out of those Charge Offs. I've learned how to avoid them by avoiding any Note that even smells of a Late payment. I check the Loan Performance page for every Note that is Processing payment (sort my Notes by Payment Due Date and open each in a new Tab in Chrome). I don't buy Notes that are more than 20 days since last payment (saves me having to look at the Loan Performance page).

My portfolio has also changed quite a bit, not so much from trying to avoid Defaults, but due to a shift in strategy caused by using Lending Club Chrome Extension. Until I can bake into the Sale Price my risk factors (feature yet to be added), I don't buy as risky of Notes. Instead I look for discounted Notes. It turns out that the most discounted Notes tend to be Grades D, E and F (although F not quite as much).

When I buy Notes, I look for Notes that meet the following criteria:

  • have a Yield to Maturity of 16+%
  • no more than $25 Outstanding Principal
  • no more than 20 Days Since Payment
  • I don't already own a Note of that Loan

I then get the most steeply discounted (or least marked up) Notes that meet that criteria. The Chrome Extension makes this really easy to filter for (even if there is a lot of clicking "Next").

Once I have my Notes, I immediately offer them up for a price that gives me (after taxes and fees) 18% annualized gain, unless the Note is in pre-Grace Period or Grace Period, in which case I discount it to sell. I was offering my Notes at 16%, but they were selling too quickly. At 18% I tend to offer my Notes at 1.5% to 3% markup (depending on what kind of Discount/Markup I had).

I divide my Notes into two main Portfolios (four actually, but most Notes are in two). My newly acquired Notes that have not made more than one payment (I call them Buttercup) grew tremendously when I offered my Notes to get 16% annualized return. Since raising my expected annualized return to 18%, the two portfolios have balanced out and are now about half each.

My Buttercup portfolio is mainly split between D and E Notes. It looks like before the D Notes hit their second payment, they have a 50/50 chance of selling at those discounts.

The other half of my portfolio (Wesley) contains Notes that have made at least two payments. These are mainly F Notes, followed by D and E Notes. I'm happy to see that the higher yield Notes are sticking around longer (they don't sell). To recover from those Charge Offs, I need an accelerated return, like the 19.41% Wesley brings in.

So in two months I raised my NAR from 6.0% to 9.36%. I've heard rumblings that NAR is pretty much meaningless. I think it is an easy way to measure the direction you are going in, but I agree it has no real world value. I wanted to find a better overall metric for myself. I settled on Annualized Cash on Cash Return. The way I calculate it is treat my account as a closed box bank account. If I put my deposits in a bank (and taking into account withdrawals) what APR would that account have to have the balance I have now.

The cash equivalent balance I have right now is an interesting thing to figure out. You can start with your Account Total (on your main Account page), but that doesn't take into account Notes you've purchased today (I tend to have a half dozen to two dozen purchases pending). The cash for those was transferred from Lending Club to FolioFN to purchase the Notes, but FolioFN hasn't reported the Notes back to Lending Club yet. So I add in the purchase price of pending purchase Notes.

This CCR calculation really opened my eyes as to how bad the NAR calculation is. My annualized CCR after ten months is -2.45%. If I were to sell my Notes for their Outstanding Principal + Accrued Interest and cashed out my account, I would have less money than I put in. Now 8 Charge Offs and dumping a bunch In Grace Period Notes to clean out your portfolio can have a devastating affect, but I was not expecting that. Now that I have a way to track my CCR, I'll be watching that. It does get better daily, so I like the direction it's heading in. What scares me is what it would have looked like two months ago.

So bottom line is I am digging myself out from the Late Notes that went to Default and clearing out a bunch of In Grace Period Notes at steep discounts. Things are getting better (noted by the NAR rising and the daily improvement in my CCR). I've got two months until my one year anniversary. We'll see what kind of CCR I can come up with in the meantime.