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Does LC Suffer Fools Gladly?

Started by Peter, January 21, 2017, 11:00:00 PM

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Rob L

From the most recent Loan Stats File for 2016 Q3 (policy 1 code loans only):" alt="" class="bbc_img" />

I'm reasonably sure LC makes most of its money from origination fees. My understanding of banks is that they are going with the sure thing A's. Maybe they drop to the B's; I dunno. Let's call the C's "no man's land" (or "many man's land"). Too risky for banks to put on their books but seen as reasonably conservative to individual investors and perhaps others. Finally there's the D, E, F and G "land of extreme risk" or as some would say "the land of the intellectually challenged". These extreme risk loans represent about 25% of LC's current originations. No small amount and I would guess almost exclusively retail investors fund them. LC has described retail lenders as "sticky money". It would be most unfortunate if they had the misconception that we are "dumb money". That said, I do not think LC has yet done enough to protect its "extreme risk" lenders. Many months have passed and our ship is still sinking. Additional actions are needed to "right the ship" or the "intellectually challenged" money funding 25% of LC's loans will dry up.


I've experienced declining returns for several quarters which is why I'm looking into real estate crowdfunding now.


Yes, the cost to service consumer credit is not the same across the credit spectrum.  But LC charges a flat fee, which gives some of the lower grade notes higher returns than they should have.

Are your investments so short term that you have to sell when they decline?  If not, then it is easy enough to pick safe bank stocks.  Just because your LC portfolio isn't marked to market in a crisis doesn't make it safer.  I promise you a portfolio of LC loans would have been selling at similar discounts.

I think buying the last one is the wrong conclusion. I almost started a thread on this but stopped.  Instead of chasing returns, decide the rules that govern your LC investment.  And just stick by them


I'm not so sure FHN is a good example.  A good rule of thumb is that any bank with C&D loans >20% is not a safe bank stock (I doubt they had this much for the tech crash etc).  Unfortunately it seems like all the real estate fintech guys are jumping into C&D lending. I sure hope it isn't a train wreck.

I'm not suggesting that large swings in stocks are easily ignored.   But just like we  don't check our LC's mark-to-market daily, we do not have to check our stocks either.  If you are worried about not taking a loss in a financial crisis, LC loans are probably not where you should be either.  But the point still remains that if you want someone else to make those decisions, I guess you can buy a LC fund or another financial.

Where does 6% come from?  But I agree with your conclusion about lower grade notes. I don't see much incentive to invest in them.
LC is subject to the market, which is highly competitive for consumer loans.  Especially  lately.    When a company's ability to live comes from originations and they don't hold the paper, they tend not to be incentivized to miss out on volumes.   Where as another type of lender could choose not to grow or even shrink slightly and earn money off of existing loans, LC is reliant on origination fees so they have to move with the market or give up a lot of profit.  Anil used to bring this up in the past, but I think it is essential to understanding how the dynamic will work over time. 


The part I find really interesting with all this is that on Jan 10 I decided I needed to sit down and make a decision.  Start pulling out or start investing again.  After not reinvesting for 2.5 months I had a decent amount sitting there.  I decided to set up an extremely strict filter targeting only B and C loans.  It's grabbing about 80% B 10 C so far.  I've decided to not reenable my folio buyer.  I just want to say good buy to all 2015 and 2016 even if they look good.  Hopefully this semi gut reaction works out.


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