Steadfast FinancesTracking Performance of Lending Club Investment Returns

Tracking Performance of Lending Club Investment Returns

Filed in Banking , Investing 101 , Peer to Peer Lending 20 comments

After posting my Lending Club investment strategy and returns for over a year now, I thought today was as good as any to post a quick summary and track my net annual return volatility.

Summary

  • Outperforming Lending Club’s benchmark index of 9.7% by ~4.5%.
  • Loan payments generate ~$250/month of cash for reinvestment.
  • Defaults: 2 loans have defaulted and at least 2-3 more expected in the near future.
  • Corrective Actions & Preventative Actions: defaults will crush your NAR.
  • Winding down monthly deposits to lower amount.

Outperforming the Benchmark Index

Outperforming any financial benchmark in a single year is worth celebrating as any mutual fund or hedge fund manager will tell you, so I’m fairly happy with my investment return of ~14.1% NAR thus far.

It hasn’t been easy and I’ve burned more than my fair share of midnight oil filtering and reviewing each loan application one by one, but filtering the wheat from the chaff appears to have been worth the effort.

Reinvesting Principal & Interest

Even though my portfolio is in the low $8000 ballpark, it still generates a decent amount of cash to reinvest.

Allowing these funds to sit idle would hurt my NAR over the long haul, and since I have no interest in withdrawing funds or selling them on the FolioFN platform, it’s best to keep the high interest steamroller moving forward.

Defaults

Unfortunately for me, I don’t have a working crystal ball. Therefore, I can’t identify with a 100% degree of certainty that one borrower will repay their loan while a second borrower will default immediately after gaining access to their cash. Few investments, if any, work this way, and if they do, they’re probably FDIC insured.

So while some defaults are expected, I do as much forward thinking as possible to anticipate future potholes in the borrower’s path that might cause late payments, bankruptcy filings, or charge offs. Like any inexact science, as P2P lending appears to be, persistence and quickly adapting to new developments makes the difference between success and mediocrity.

Corrective Actions & Preventative Actions

Rule #1 of all of my investment theses is not to lose money, so now that the defaults and charge offs are beginning to pile up, it’s in my interest to review my strategy. That means reviewing what went wrong, why the borrowers chose to default (e.g. declaring bankruptcy making <10% of scheduled payments) versus couldn’t help but default (e.g. lost their job), and how best to filter these borrowers out in the future.

As of now, the only concrete conclusions I’ve came up with is to:

  • Avoid the lower income borrowers (< $50,000) with cash flow crunch potential.
  • Avoid those who don’t answer the Q&A section fully & completely.
  • Avoid the >1 delinquency crowd.
  • Avoid the high revolving credit balance crowd ($25,000+) where bankruptcy is a painful but profitable endeavor.

I’m sure this isn’t all metrics or warning signs to avoid, but considering that Lending Club has 250 to 500 loan applications in their database at any given day, I can afford to be highly selective in where my funds are invested.

Winding Down New Deposits

My investments at Lending Club began as a pilot scale experiment to see if my strategy is effective, if the time invested in an active management strategy was worth it, and if I had the endurance to keep reinvesting my profits (e.g. avoiding idle cash) over a time period of several years.

Now that my balance is in the $8000 range, I’m reasonably comfortable with saying that’s a healthy amount to accomplish my goals. This doesn’t mean I won’t be adding new funds, it just means I’ll be reducing them for the time being while reinvesting existing funds as borrowers repay their loans.

Please note that just because I’m reducing my deposits, members of my Lending Club investment club should not be affected as I will continue investing in 16-20 notes per month.

If you enjoyed this post, make sure you subscribe to my RSS feed!
Posted by CJ   @   3 March 2011 20 comments
Tags : , , , , , , , , ,

20 Comments

Comments
Mar 3, 2011
4:59 pm
#1 Mike :

Nice summary. Congrats on your NAR. Beating mine by about 400 basis points. Just out of curiosity, did either of your defaults involve a bankruptcy?

Mar 3, 2011
5:53 pm
#2 Matt SF :

Thanks Mike. One of the defaults was a Ch. 13 bankruptcy filing by a dual income family of police officers – only made 3 out of 60 payments. It was just moved to the charged off column a week or two ago, even though Ch. 13 involves restructuring debts with no/low interest rates, so it would appear that money just went poof.

The second is a gent who got behind, is still making payments, but his note was moved into the default column anyway. Not sure why.

I know I’ll have at least 1-2 more defaults as I have a second Ch. 13 bankruptcy from a Catholic school teacher (made 2 out of 60 payments), and a “lawsuit pending” against another borrower.

I’m as cynical as they come, but based on their professions, I never would have guessed a family of cops and a Catholic school teacher would be the ones that gamed the system.

Mar 3, 2011
6:16 pm
#3 Mike :

That’s assuming they were truthful about their respective professions. You have to wonder about declaring bankruptcy after two payments. Was that planned? We’ll never know.

Mar 3, 2011
6:32 pm
#4 Matt SF :

I know people who have leveraged themselves up to the hilt, then declared bankruptcy to avoid paying it. Granted this was early in the 2000s before student loan laws were rewritten and credit was as free flowing as oxygen, but pre-planned bankruptcy is definitely a realistic possibility.

Mar 3, 2011
8:46 pm
#5 Dan B :

Setting aside the whole “bankruptcy” argument for a moment, I think that at the end of the day, maybe 3-4 yrs from now,………you’ll find that the largest category within your charged off notes won’t be people who declare bankruptcy but rather people who just stop paying.

Mar 3, 2011
9:04 pm
#6 Mike :

Agreed. Although the bottom line is the same, the ones who file bankruptcy (especially soon after the loan is issued) bother me more than people who stop paying for whatever reason. Job loss, illness, divorce….those things can happen to any of us.

Mar 3, 2011
9:05 pm
#7 Matt SF :

I can go along with that. Probably have one of those in the pipeline labeled as a “drafting lawsuit”.

Mar 4, 2011
12:52 pm
#8 Kevin :

do you attempt to sell off your loans on the exchange when people get late on payments?

Mar 4, 2011
1:07 pm
#9 Matt SF :

No, I haven’t sold a note on FolioFN yet. Some people are having success with this strategy though.

Mar 6, 2011
1:33 am
#10 Dan B :

What would also be of interest is a breakdown of 3 year to 5 year loans. So out of curiosity, how would you determine if your strategy is “successful”? A snapshot view of today would certainly emphatically say yes, ………..but what about the snapshot at the end of this year when your NAR is below 10%??

I’m open to a side wager if you think I’m full of crap.

Mar 6, 2011
9:51 am
#11 Matt SF :

The 3 year to 5 year breakdown is 36% to 64%, respectively.

Success would equal outperforming the Lending Club benchmark. In my humble opinion, why invest all that time screening notes if your strategy can’t outperform the benchmark? If you can’t, just use the autopilot option and be done with it.

I would take your side wager, but unfortunately I have ethics… which means I know it’s possible to “game” the NAR results. By continually investing high yield notes, you can artificially boost your NAR over time. Defaults will crush it, but it does appear possible to push it back up. (I’m up 0.3-0.4% just in a month).

Mar 6, 2011
10:29 am
#12 Aaron G. :

Your lending club portfolio performance is impressive. I would like to share some of my experiences as a former prosper.com investor to provide some perspective on peer-to-peer lending.

I was attracted to investing in p2p lending for a few reasons:
1. It eliminates the administrative cost and middle-man profit-taking that would otherwise detract from results.
2. It encourages borrowers to build an online reputation and personal relationships with lenders that they would be less likely to break by defaulting.
3. And I was convinced that it was an arbitrage opportunity: that there was a degree of predatory lending in the unsecured credit industry that would drive good borrowers to seek double-digit interest rates from a p2p lender that were still very favorable to what they would otherwise pay a credit card company.

I engaged in a similar lending strategy to yours from 2007-2009, investing in borrowers with high credit quality. What I discovered was:
1. Borrowers in distress were just as willing to walk away from a p2p lender than from a bank. The reality is that there are many ways and places that people can obtain credit. None of the p2p sites has been in existence for long enough — or proven itself so durable — that borrowers value preserving this relationship more than others.
2. Some borrowers misrepresented themselves. They were not in control of their assets, were fronts for someone else, or were much more leveraged than their credit report or other disclosures would indicate.
3. Collection agencies are worthless. I never recovered a penny once a loan went into collection.
4. Past performance is no guarantee of future results. I wanted to believe that my first default was a fluke, but ended up having to write off about 15% of my total principal, in a steady stream of defaults and chargeoffs during the life of the loans.

That said, I was an investor during the credit crunch, and with all of the above I have still managed to break even. There are other investments I could have made and done much worse. And surely someone investing during the recovery would have better results.

But that’s my point: p2p lending has not proven to be significantly more transparent or rewarding than other investments. I would characterize it as just another way to invest in personal credit, albeit in just about the most volatile way possible short of lending to a single friend or family member.

Sorry for the long comment, but hope it provokes some thought and discussion.

Aaron G.

Mar 6, 2011
10:34 am
#13 Mike :

Wouldn’t it be nice if LC gave us breakdowns of how our notes are performing based on term or individual grade…

Mar 6, 2011
10:54 am
#14 Kevin :

My experience was similar, though I ended up losing a bit overall. Because of the whole default thing, I thought I was doing well right up until the 1+ year mark when suddenly all the “late payments” turned my +16% return into much less than that.

Defaults seem to cluster by time since loan started too, which made it hard to predict even based on the few that became late or defaulted early.

There was also a TON of fraud, which is why both prosper and lendingclub have overhauled things in a pretty major way since then and have gotten much better results with actually verifying income in most cases, etc.

Mar 6, 2011
11:22 am
#15 Matt SF :

Thanks Aaron. Appreciate your sage advice as an early adopter, and while I’d like to argue with your logic being a proponent of P2P Lending Investments, I really can’t find any serious discrepancies to latch on to as a Lending Club investor (since there are unique differences between LC & Prosper).

To answer your bullet points:

1) Any nascent industry is going to have its troubles, but I do think Lending Club has differentiated itself from Prosper in both interest rate policy and underwriting requirements. Prosper was first to market (if memory serves), so like the first person walking through a landmine field, they’re probably going to lose a foot first. Same goes for early adopter investors, so if you had the misfortune of investing at the wrong time (like a investor in the stock market prior to the financial crisis), you’re going to get nailed.

2) I don’t know about Prosper, but Lending Club offers a “verified income” option where borrowers have to submit their paystubs, W2s, tax returns, etc. So while identity theft is always paramount, fudging documents from the IRS is probably harder to do.

3) Collections are the weak link, especially with a non-secured line of credit. If it’s secure, you can threaten to take that asset away (e.g. leverage). But if a person falls into collections on a nonsecured line of credit, there is nothing anyone can do but threatening to ruin their credit score. So losses just become part of a complex multivariable equation.

4) That’s the same in all investments and is listed in every prospectus I’ve ever read. Nice way of saying Caveat Emptor!

As far as transparency, I might argue that P2P lending (at Lending Club, I can’t speak for Prosper) is more transparent than investing in the stock market. Before anyone calls me a blasphemer, just look at the shenanigans that has taken place of the last few years: modern day accounting & balance sheet regulation is a joke, FASB 157, mark to market accounting no longer a requirement, etc. One could argue that lying is part of the new normal of investing.

Problem is, no one but a few insiders at a company really know what is on the balance sheet all in an effort to restore “investor confidence” and hide the crappy investments many companies made during a period of irrational exuberance and outright fraud (e.g. Inside Job).

At least with personal credit, you can see a borrower’s financial history, their personal finance metrics, have their paystubs verified, etc., and make an assessment on whether they’ll repay the loan.

I’m not trying to be difficult, but as an investor in both the equities markets and the P2P lending market, I’d argue Lending Club just as or more trustworthy than any corporate balance sheet at the present time.

Mar 6, 2011
11:30 am
#16 Matt SF :

How do you mean? Like in the summary page or a click-able link showing relative performance?

You can download your notes and note performance in spreadsheet form. You might have to do a little Excel work, but it’s fairly simple to do.

Mar 6, 2011
12:08 pm
#17 Dan B :

It’s precisely because you have some ethics that I’d offer you that bet. :)

Mar 6, 2011
12:30 pm
#18 Dan B :

@Matt…….Let me pose this to you. How much money did you put into the last stock you bought? Or the one before that? If you invest in a mutual fund, how much money did you put into that/those mutual funds?

I don’t even have to wait for your answer before saying that I know it’s got to be more than you’ve invested into any p2p note & very likely more than your entire p2p portfolio. Why is that?

Here’s the dilemma with p2p as I see it. You can spend a lot of time looking at notes & you “might” get a good return………..but it’s too much time spent for individual $25 investments. You can accumulate thousands of $25 notes, but then doing that almost guarantees an average return so what’s the point in spending the time. And yet none of us have the level of confidence necessary to enable us to put in the amount of money into each note & to make this anything but a curious experiment.

Mar 6, 2011
12:51 pm
#19 Mike :

I think they should have an entire heading dedicated to dissecting your ROI. I should be able to tell at a glance if my 36 month notes are performing better than my 60 month notes, within the same grade, of course. I also should be able to see how each of my loan grades are doing. Lending Club recently contacted me and we discussed how my various grades were doing within my IRA account. I asked them if they could do this for my taxable account, and they said they were just providing that information for the 2000 largest accounts, and my taxable account didn’t qualify. When I said that it would be nice for everybody to have this info, the rep said ‘they’re looking into it’. I’m not holding my breath. While I’m discussing my wish list, it shouldn’t be too difficult to be able to access my two LC accounts with one log-in. As of now, I have to log-in separately to each account, and their site is slow enough as it is without this additional hassle. Maybe that would be a topic of a future post: What would you like to see change at LC with respect to the web site?

PS. Yes, I realize I can do the work with Excel, but I don’t have to do any extra work to view my gains and losses with my brokerage account. Why should I have to do it for LC?

Mar 24, 2012
8:04 am
#20 Bill :

I did my own ROI analysis of my Lending Club portfolio and found their return number to be wildly inflated in my case. I would like to see others do the same. Including my one default, and taking into account the timing of my several cash investments, I found their stated return on my portfolio to be very inaccurate. Their website says that my return is about 10.5% but the actual ROI is 8.7%. If you know how to calculate this for your own portfolio, please do so and let’s see if that is a 1-time glitch or a systematic over-estimation of returns. You’ll need a spreadsheet to do this. If you don’t knwo how, I’ll be glad to share mine, both to help others do this and to invite peer review to be sure my spreadsheet is accurate.

Leave a Comment

Name

Email

Website

Previous Post
«
Next Post
»