Are there any investors on here that utilize the FolioFN platform to mitigate loss of principal? I've done it with a fair amount of success and was curious the strategy of others.
For me, I pay attention to processing. Once a loan has been processing greater than 4 days, I look at the FICO trend and Original Note. Based on this financial information, I make the determination if I want to sell it. I immediately place it on FolioFN for a small discount, but normally still in the money for me due to past received payments. Generally they sell where I break even or make a slight bit of return.
I also monitor the FICOs of my portfolio weekly. I sit down and look at all the trends. I do mostly credit card refinancing loans. If I see the FICO trending downward or the new level of FICO no longer justify the interest rate (650 FICO whom got a Grade A loan), I'll sell these in the FolioFN as well. They sell quicker than the above loans, but I rarely take losses on either.
Anyone else have a similar strategy?
I do the first part of your strategy every day.
I haven't totally implimented the second part of your strategy, as I have yet to see a good enough correlation between the FICO decrease and what happens to the payments. I also have been selling smaller notes, though, and have been concentrating on the decreasing FICO notes.
My rational for #2 is since I'm doing revolving debt consolidation loans, FICO shouldn't be decreasing dramatically. I'm talking drop of like 100 or so points in a month or two.
How do you detect "Processing..." notes?
Do you really go through every loan every day and check the Payment History?
That must take a while.
if you sort your notes by Payment Due Date, its very easy to find the one's that are processing. They go into processing on the payment due date, but the payment does'nt usually get recorded for 4-6 days. And i don't really look at them except for the notes that are one day from Grace period, so the ones that are 6 days past the due date. At 7 days they go Grace period.
But notes that go onto payment plans show a higher chance of default, so ditching those may not be a bad way to go either.
Some notes appear to always pay in the grace period. Like I have one that is always past 4 days processing, but is paid on the 20th each month. I generally judge if I want to take the risk of not having a warning sign like normal notes. If the underlying note and FICO appear very sound, I let it. Otherwise, I try to sell it.
Sean, what day do they update? They would be useful to know for those of us who like to monitor it.
I have almost an identical system to the OP and it's been working well for me so far. I sell as soon as they go late or when they have a drastic FICO drop. (I don't worry about a small drop, but for example I had someone drop from 690 to 510, and that makes me feel like they are probably having a serious financial problem.) I bookmark the ones I sell with a note about why they were sold, and I check up on them every week or two just to see how my strategy is panning out.
So far, the results of the sell-offs were:
2 severe FICO drops have not seen any payment problems
5 missed payments, went into grace period, then paid and are now current
1 missed a payment, went 17 days late, paid, and is now current
2 are currently in grace period
1 never paid after I sold it and is now a week from being charged off
1 never paid after I sold it and is about 30 days into late period
Most of them were sold at par or a slight discount. One or two were sold at 10-20% discount and one was actually sold at a 50% profit - I'd picked it up absurdly cheap in grace period and flipped it in 24 hours. Overall I think I nearly broke even on what I paid for them and what I sold them for, as a group. And I suspect at least two of them are going to default soon and others are not looking great (multiple payments in grace period). So I think this is a strategy that is doing well for me. I don't have a single note that is so much as a day late because I'm aggressive about selling them.
The downside is that it's pretty work-intensive and you have to be checking in daily and micromanaging it a bit. I don't know if you would want to do it for a larger-scale investment.
My concern is that this type of information asymmetry probably won't last. You are getting an advantage in the secondary market. At some point the market maker will recognize that this is harmful to their business model long term and fix it so that anyone can look up anything about any loan, including pre-grace period, days "processing," etc.