2015 & recent loan quality

[Fred93]

Here's a chart showing delinquency (gross dollars delinquent divided by originally funded amount) for recent (the last 14 quarters) of LC loans.  (The legend is on the right.  Some of you will need to scroll to see it.)  This is plotted from data LC produced and distributed.  I've shown only 60 month loans.  I chose to do this because the curves get more smeared out if you include both 36 and 60 month loans in the same chart.  People normally chart this all the way out to 60 months, but I want to draw your attention to the left side of the chart.

By this measure, the last 4 vintages (2015Q3 thru 2016Q2) are each the worst among all their recent peers at their current age.  In other words, the four arrows point to dots that are each the highest so far.

https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FLC_delinquent_2016-10-10.png&hash=76ddb07ad7edf70c077d34985510a043" alt="" class="bbc_img" />

This situation is much easier to see in delinquency curves than in chargeoffs.  I believe that is because delinquency precedes chargeoff, so we're seeing the early warning here.  If that is right, chargeoffs for these vintages will be getting worse in coming months.

LC has acknowledged "pockets of underperformance" recently.  It is discussed in their Q2 earnings call slides.  They describe changes in underwriting designed to address this, and predict that Q3 loans will perform better.  They have not told us when these underwriting changes occurred, but looking at the data, I'd say they didn't arrive in time to improve the Q2 vintage.

 I hope to hear more on loan performance from them during the Q3 earnings call a few weeks from now.

[storm]

This chart certainly has me recontemplating my strategy.  Thanks for putting it together.

[Rob L]

Wow!. Very nicely done. I especially like that you have segregated 36 and 60 month loans. It's a pet peeve of mine when they are lumped together as you may know from comments I've made many times before. But accolades aside, delinquencies rather than charge offs are with out a doubt a canary in the coal mine. 16Q2 is specially disappointing. The $64k question is simply what is going on here? Can't see where things for average borrower has changed much the past year or two, yet we are all being handed our heads on a platter so to speak; from delinquencies through charge offs. "Something is rotten in Denmark" ... What could it be?

[jennrod12]

Thanks for the great chart!  What is included in "delinquent"?  Is that IGP + both late statuses + defaults?

Thanks,

Jenn

[PhilGD]

That chart is great but I think we need more clarity into the underlying borrowers. Have the loans written so far in 2016, on average, been assigned higher interest rates that would compensate investors for the higher delinquency performance?

[AnilG]

Average Interest Rate has been declining since 2013. https://www.peercube.com/histperf/index" class="bbc_link" target="_blank">https://www.peercube.com/histperf/index

https://forum.lendacademy.com/index.php?topic=4113.msg37907#msg88888888Quote"> from: PhilGD on October 10, 2016, 11:02:54 PM

[twigster]

Quote

[TravelingPennies]

https://forum.lendacademy.com/index.php?topic=4113.msg37906#msg88888888Quote"> from: jennrod12 on October 10, 2016, 10:08:50 PM

[TravelingPennies]

https://forum.lendacademy.com/index.php?topic=4113.msg37909#msg88888888Quote"> from: twigster on October 10, 2016, 11:40:53 PM

[TravelingPennies]

https://forum.lendacademy.com/index.php?topic=4113.msg37907#msg88888888Quote"> from: PhilGD on October 10, 2016, 11:02:54 PM

[rawraw]

Is this true across all grades or is this masking mixed performance by grade? Thanks for sharing, you continue to be one of the most valuable contributors

Sent from my SAMSUNG-SM-G935A using Tapatalk

[SLCPaladin]

This is perhaps the most detailed and understandable explanation of forecasting returns I have read on this thread. I am quite grateful for your insight. I kind of feel like a big wild card right now is the political climate we're in. We need some clarity on how policy might affect broader economic trends and how those might contribute to better, or worse, macro environment.

[TravelingPennies]

https://forum.lendacademy.com/index.php?topic=4113.msg37913#msg88888888Quote"> from: rawraw on October 11, 2016, 08:28:12 AM

[TravelingPennies]

Sometimes my memory is imperfect.  I went back and looked at what was in LC's slides from the Aug 8 2016 second quarter results presentation.

https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Ffred93.com%2Ffbi%2FCapture-sanborn-credit-changes-2016-08-08.png&hash=d2ad4f568469ce4103571a4c9d37c618" alt="" class="bbc_img" />

Here he does actually say what they changed and when they changed it.  Its the little list on the bottom left.

There's also something amazing at the top of this slide.  I thought I was going out on a limb a few messages ago when I projected that the last few quarters loans might end up at an all-LC average around 5% return.  Well, son of a gun, a similar statement is right there on slide 8.  He says "Portfolio level returns expected to increase from 4-5% to 6+% for vintages after June."  In other words, they seem to admit that recent vintages are headed toward around 5% returns (all-LC average).

Of course we don't know how the 2015Q3 thru 2016Q2 loans' performance will evolve, ie how bad they will actually end up.  Our projections are tentative, because after something has changed, so can't reliably use history to guide us.

The big thing we want to know is - How will 2016Q3 loans perform?  LC made an adjustment, and it will take a few months before we know if they got it right.  We'll get our first glimpse when Q3 loans are added to the historical file a few weeks from now.  Early Nov I think.  I suspect we won't have enough data in that release to make a judgement.  By the end of the year we should have enough payments (either paid or not paid) on these loans to plot some nice delinquency curves like above, and see whether early performance of the Q3 loans "pokes out" like recent quarters have.

Here's a fact that hints that maybe they have not fixed the problem:  The two changes they list above were made in April and June.  We don't know when it actually took effect, so lets assume mid-April.  Second quarter is April, May, June, so 80% of Q2 is after that change!  And yet... We know (although not enough time has elapsed to have really good data), 2016Q2 delinquency numbers are looking bad.  That's a thumbs down.  Then they made another change in June, but pulling in the DTI limit from 40% to 35% doesn't seem like it would be a major fix.  Count me skeptical.

On a related note: A quick look at Prosper shows that their recent quarters have suffered a similar reduction in quality.  I haven't done any detailed crunching on Prosper data tho.

[TravelingPennies]

I would think that if total portfolio returns stay in the 4-5% range for too long, LC is going to have a very difficult time attracting more capital to fund their loans, from whatever source. I don't think that is near enough of a risk premium for retail or institutional money. If they don't quickly bump their rates or get their underwriting back to where returns get back to around 7%, I won't matter that they hired a "Chief Capital Officer".