LendingClub/P2P the next subprime credit debacle?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Gaff74
Posts: 90
Joined: Tue Mar 08, 2016 1:43 pm

LendingClub/P2P the next subprime credit debacle?

Post by Gaff74 » Thu Apr 28, 2016 11:36 pm

I put some "play money" at Lending Club, in a taxable account, mostly as an experiment. The emails that I now get from Lending Club are interesting, in a concerning manner. They are marketing themselves to "Financial Advisors" to help their clients "diversify". When I opened the account at Lending Club, it was immediately apparent that there is essentially no regulation going on in the P2P market. The vetting for an investor is a simple check box confirming that I have assets to feed and clothe myself if the loans head south, something along the lines of having $70k in assets not including home. I was not asked to offer up any sort of documentation. If "Financial Advisors" start pushing these items on clients, a lot of people can and will get burned with the next recession or major economic temblor. When the going gets rough, unemployment spikes again, etc, payments to unsecured loans will be the first thing that people drop. I predict that a lot of these loans will simply default. I'm surprised that there is not more (any) regulation coming from the Consumer Financial Protection Bureau or other agency, to at least make sure that it is not small time investors getting in over their heads chasing after higher returns than can be offered up with backing from the FIDC. Thoughts?

Solo Prosperity
Posts: 368
Joined: Mon May 11, 2015 2:53 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by Solo Prosperity » Fri Apr 29, 2016 12:07 am

Pretty sure there are funds now that invest in P2P loans so I would not be surprised to see them being "pitched" to advisors for clients. Especially in the current interest rate environment.

tbh, I would rather buy a levered FI CEF before I would buy a managed P2P Loan Mutual Fund.

mac808
Posts: 511
Joined: Mon Sep 19, 2011 8:45 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by mac808 » Fri Apr 29, 2016 12:17 am

My understanding is that LendingClub functions similar to a credit card company, say American Express or Capital One. They find and vet borrowers, and on the back end, instead of investing their own capital and earning a return on it, they bring in outside investors and take a cut. Since the whole process is more efficient, in theory, everybody should be a little better off (lower rates for borrowers, better returns for investors, relatively lower risk fees for LendingClub). This makes sense to me and fits in with the ongoing process of automation and dis-intermediation that new tech platforms are bringing to many sectors. If we repeat 2008 I would expect to lose money in P2P but then again, in that scenario, I would expect to lose money in anything except cash, and I would expect a similar risk-return-adjusted % of Amex, Cap One, etc, borrowers to be in default as well.

Whakamole
Posts: 1097
Joined: Wed Jan 13, 2016 9:59 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by Whakamole » Fri Apr 29, 2016 12:59 am

I know some who buy many LendingClub/P2P loans and think they've diversified away risk, but it reminds me of subprime MBS - a bunch of junk is still going to be junk when we hit a recession.

amphora
Posts: 204
Joined: Fri Jun 26, 2015 10:44 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by amphora » Fri Apr 29, 2016 2:13 am

Whakamole wrote:I know some who buy many LendingClub/P2P loans and think they've diversified away risk, but it reminds me of subprime MBS - a bunch of junk is still going to be junk when we hit a recession.
I think the risk is more similar to a junk bond crash than the subprime credit debacle. For one, if the P2P default rate increased significantly, there would be no systemic risk because the P2P market is much smaller than the mortgage market, the securities are not held by major banks, they haven't been securitized into credit default obligations and there aren't credit default swaps insuring them. So there's a risk of losing money if you invest, less of a risk of financial system collapse.

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Fri Apr 29, 2016 5:01 am

amphora wrote:
Whakamole wrote:I know some who buy many LendingClub/P2P loans and think they've diversified away risk, but it reminds me of subprime MBS - a bunch of junk is still going to be junk when we hit a recession.
I think the risk is more similar to a junk bond crash than the subprime credit debacle. For one, if the P2P default rate increased significantly, there would be no systemic risk because the P2P market is much smaller than the mortgage market, the securities are not held by major banks, they haven't been securitized into credit default obligations and there aren't credit default swaps insuring them. So there's a risk of losing money if you invest, less of a risk of financial system collapse.
In principle, on the facts I know, you are absolutely correct-- good analysis.

I cannot shake the feeling it's not this simple, that there are systemic risks growing up under there. The history of unregulated financial sector activities suggests that. Have these things yet been securitized into CDOs? (which could then attract CDS).

I just remember when (in the 1970s) lending to 3rd world governments was "risk free" because, after all, governments never default, they have the whole assets of a country to pay any loans. Of course this nearly brought down Lloyds Bank, Chase Manhattan etc.

Institutional investors now invest in Peer to Peer lending:

- do we know that individual investors still get a pick of the good quality creditors? Or do the institutions get to cherrypick?

- institutional investors tend to be shrewd (or lucky) the first ones into a new market-- superior risk adjusted returns. Then the "crowded trade" takes place as everyone jumps to take advantage

And when there is a bust, is there someone who needs to be bailed out? How about arbitrageurs who borrow from conventional financial institutions, invest in P to P, then go bust when P to P goes wrong (carry trade fails)? Then the deposit taking financial institutions have losses and they *are* protected by FDIC etc.

I am still puzzling this.

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Fri Apr 29, 2016 5:04 am

mac808 wrote:My understanding is that LendingClub functions similar to a credit card company, say American Express or Capital One. They find and vet borrowers, and on the back end, instead of investing their own capital and earning a return on it, they bring in outside investors and take a cut. Since the whole process is more efficient, in theory, everybody should be a little better off (lower rates for borrowers, better returns for investors, relatively lower risk fees for LendingClub). This makes sense to me and fits in with the ongoing process of automation and dis-intermediation that new tech platforms are bringing to many sectors. If we repeat 2008 I would expect to lose money in P2P but then again, in that scenario, I would expect to lose money in anything except cash, and I would expect a similar risk-return-adjusted % of Amex, Cap One, etc, borrowers to be in default as well.
Cash or CDs within FDIC limits? And US Treasury securities? They should all be safer?

Not clear that LC debtors (borrowers) are of same credit quality as Amex, Cap One. I realize that's a bold statement given the known consumer credit problems of many consumer finance companies, but it's nonetheless true ie that higher underwriting standards are not guaranteed?

Credit card receivables are often securitized. Has someone done that with P2P lending?

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Fri Apr 29, 2016 5:05 am

Whakamole wrote:I know some who buy many LendingClub/P2P loans and think they've diversified away risk, but it reminds me of subprime MBS - a bunch of junk is still going to be junk when we hit a recession.
I think this is absolutely true, although I don't know if the underlying credit quality is "junk" (whereas a lot of car loans now, are clearly).

When the market started you could get return not necessarily compensated for by higher risk (classic case of entrepreneurship opening up a new market). But now? This has been around quite a few years-- that lending "alpha" should have been fully (or at least partly) arbitraged away.

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Fri Apr 29, 2016 5:07 am

amphora wrote:
Whakamole wrote:I know some who buy many LendingClub/P2P loans and think they've diversified away risk, but it reminds me of subprime MBS - a bunch of junk is still going to be junk when we hit a recession.
I think the risk is more similar to a junk bond crash than the subprime credit debacle. For one, if the P2P default rate increased significantly, there would be no systemic risk because the P2P market is much smaller than the mortgage market, the securities are not held by major banks, they haven't been securitized into credit default obligations and there aren't credit default swaps insuring them. So there's a risk of losing money if you invest, less of a risk of financial system collapse.

In a portfolio sense one is definitely taking on equity risk, not just fixed income risk (or rather credit risk which is correlated with equity risk *and* recovery rates are lower when default rates are higher (in the bond space, and here, too, I would imagine).

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Fri Apr 29, 2016 5:10 am

Gaff74 wrote:I put some "play money" at Lending Club, in a taxable account, mostly as an experiment. The emails that I now get from Lending Club are interesting, in a concerning manner. They are marketing themselves to "Financial Advisors" to help their clients "diversify".
And the FA has to make a margin somewhere? Which further lowers returns for investors?
When I opened the account at Lending Club, it was immediately apparent that there is essentially no regulation going on in the P2P market. The vetting for an investor is a simple check box confirming that I have assets to feed and clothe myself if the loans head south, something along the lines of having $70k in assets not including home. I was not asked to offer up any sort of documentation. If "Financial Advisors" start pushing these items on clients, a lot of people can and will get burned with the next recession or major economic temblor. When the going gets rough, unemployment spikes again, etc, payments to unsecured loans will be the first thing that people drop. I predict that a lot of these loans will simply default. I'm surprised that there is not more (any) regulation coming from the Consumer Financial Protection Bureau or other agency, to at least make sure that it is not small time investors getting in over their heads chasing after higher returns than can be offered up with backing from the FIDC. Thoughts?
Such are new market opportunities. Eventually the arbitrage opportunity (return without compensating risk) closes. See

- Liar's Poker by Michael Lewis
- Frank Partnoy's book on the financial history of the 80s and 90s
- When Genius Failed by Roger Lowenstein (Long Term Capital Management's failure)

All 3 cover the fate of the bond arbitrage group at Salomon (and later LTCM). They had brilliant strategies but they couldn't stay secret forever.

I believe at times in the 80s and early 90s the bond arbitrage group was making more than 100% of Solly's profits.

JDot
Posts: 365
Joined: Fri Apr 24, 2015 10:15 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by JDot » Fri Apr 29, 2016 7:35 am

I recently joined Lending Club. Recently, as in the funds haven't cleared yet. The biggest reason I've decided to give it a shot is because of a single contributor here who I trust and have a great deal of respect for, EmergDoc from WhiteCoatInvestor.com

If you haven't already, I highly recommend you check out his site for tips he uses in picking individual loans. That is, assuming you want to pick your own. I'm looking forward to playing around on the site. Within a few moments I found a CEO who grosses $14.5k a month seeking a loan.

I think it will be interesting and time consuming for me.

retiredengineer
Posts: 8
Joined: Sun Jun 21, 2015 8:31 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by retiredengineer » Fri Apr 29, 2016 10:04 am

The subprime loan debacle resulted from a massive housing inventory surplus driven by speculative building due to rising home prices and minimal down payments. When the bubble burst, housing prices fell dramatically and construction essentially stopped. The resulting layoff of construction workers and secondary workers pretty much equaled the drop in employment which was the "Great Depression". I don't see any parallel with the Lending Club loans.

If there is a significant recession, those who own stocks will likely see a significant drop in their portfolio value. Those who invest in Lending Club will see an increase in defaults which will lead to a drop in net interest (interest minus defaults) which for me over the past three years has ranged from 10% down to more like 5% annualized in recent months. If the net interest return drops to zero or even minus 5% because of a significant recession, the effect on the portfolio value would be much less than if the money were invested in stocks. But the returns have dropped to the point that additional loans are less appealing and may soon reach the point of being undesirable.

JDot
Posts: 365
Joined: Fri Apr 24, 2015 10:15 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by JDot » Fri Apr 29, 2016 11:41 am

retiredengineer wrote:The subprime loan debacle resulted from a massive housing inventory surplus driven by speculative building due to rising home prices and minimal down payments. When the bubble burst, housing prices fell dramatically and construction essentially stopped. The resulting layoff of construction workers and secondary workers pretty much equaled the drop in employment which was the "Great Depression". I don't see any parallel with the Lending Club loans.

If there is a significant recession, those who own stocks will likely see a significant drop in their portfolio value. Those who invest in Lending Club will see an increase in defaults which will lead to a drop in net interest (interest minus defaults) which for me over the past three years has ranged from 10% down to more like 5% annualized in recent months. If the net interest return drops to zero or even minus 5% because of a significant recession, the effect on the portfolio value would be much less than if the money were invested in stocks. But the returns have dropped to the point that additional loans are less appealing and may soon reach the point of being undesirable.
Can you explain your last sentence for the less informed of us?

kosomoto
Posts: 483
Joined: Tue Nov 24, 2015 8:51 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by kosomoto » Fri Apr 29, 2016 12:10 pm

Gaff74 wrote:I put some "play money" at Lending Club, in a taxable account, mostly as an experiment. The emails that I now get from Lending Club are interesting, in a concerning manner. They are marketing themselves to "Financial Advisors" to help their clients "diversify". When I opened the account at Lending Club, it was immediately apparent that there is essentially no regulation going on in the P2P market. The vetting for an investor is a simple check box confirming that I have assets to feed and clothe myself if the loans head south, something along the lines of having $70k in assets not including home. I was not asked to offer up any sort of documentation. If "Financial Advisors" start pushing these items on clients, a lot of people can and will get burned with the next recession or major economic temblor. When the going gets rough, unemployment spikes again, etc, payments to unsecured loans will be the first thing that people drop. I predict that a lot of these loans will simply default. I'm surprised that there is not more (any) regulation coming from the Consumer Financial Protection Bureau or other agency, to at least make sure that it is not small time investors getting in over their heads chasing after higher returns than can be offered up with backing from the FIDC. Thoughts?
Lending club returns remained positive during the market crash and recession. I would argue that makes lending club one of the safest investments around. Too bad interest is taxed so high.

User avatar
Rainier
Posts: 1450
Joined: Thu Jun 14, 2012 5:59 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Rainier » Fri Apr 29, 2016 12:24 pm

Not in the sense that it will take down the economy. But the rates people are earning do not compensate for the risk.

Now, if people started making levered bets on these loans that far exceeded the entire P2P market that would be interesting.

JDot
Posts: 365
Joined: Fri Apr 24, 2015 10:15 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by JDot » Fri Apr 29, 2016 12:24 pm

kosomoto wrote:
Gaff74 wrote:I put some "play money" at Lending Club, in a taxable account, mostly as an experiment. The emails that I now get from Lending Club are interesting, in a concerning manner. They are marketing themselves to "Financial Advisors" to help their clients "diversify". When I opened the account at Lending Club, it was immediately apparent that there is essentially no regulation going on in the P2P market. The vetting for an investor is a simple check box confirming that I have assets to feed and clothe myself if the loans head south, something along the lines of having $70k in assets not including home. I was not asked to offer up any sort of documentation. If "Financial Advisors" start pushing these items on clients, a lot of people can and will get burned with the next recession or major economic temblor. When the going gets rough, unemployment spikes again, etc, payments to unsecured loans will be the first thing that people drop. I predict that a lot of these loans will simply default. I'm surprised that there is not more (any) regulation coming from the Consumer Financial Protection Bureau or other agency, to at least make sure that it is not small time investors getting in over their heads chasing after higher returns than can be offered up with backing from the FIDC. Thoughts?
Lending club returns remained positive during the market crash and recession. I would argue that makes lending club one of the safest investments around. Too bad interest is taxed so high.
This is exactly what I read.

randomguy
Posts: 8537
Joined: Wed Sep 17, 2014 9:00 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by randomguy » Fri Apr 29, 2016 12:59 pm

kosomoto wrote:
Gaff74 wrote:I put some "play money" at Lending Club, in a taxable account, mostly as an experiment. The emails that I now get from Lending Club are interesting, in a concerning manner. They are marketing themselves to "Financial Advisors" to help their clients "diversify". When I opened the account at Lending Club, it was immediately apparent that there is essentially no regulation going on in the P2P market. The vetting for an investor is a simple check box confirming that I have assets to feed and clothe myself if the loans head south, something along the lines of having $70k in assets not including home. I was not asked to offer up any sort of documentation. If "Financial Advisors" start pushing these items on clients, a lot of people can and will get burned with the next recession or major economic temblor. When the going gets rough, unemployment spikes again, etc, payments to unsecured loans will be the first thing that people drop. I predict that a lot of these loans will simply default. I'm surprised that there is not more (any) regulation coming from the Consumer Financial Protection Bureau or other agency, to at least make sure that it is not small time investors getting in over their heads chasing after higher returns than can be offered up with backing from the FIDC. Thoughts?
Lending club returns remained positive during the market crash and recession. I would argue that makes lending club one of the safest investments around. Too bad interest is taxed so high.
Gold had positive returns during that period also and gets taxed at LTGC. Would you really want to extrapolate that it is one of the safest investments possible?:) We have very, very limited data on P2P loans. We know that during 2007-2009 that the default rate hit something like 30%. Next time we have a bad recession (and they can last much longer than the 2008-9 one did. See Europe) image we get those results AND you are getting 5% less in interest (more buyers bid down the interest rates) and you can come up with drastically different results.

I think p2p can be good investments from a diversification point of view. I would really hesitate to place too much faith though in the safety aspect.

NOVACPA
Posts: 104
Joined: Mon Apr 28, 2014 4:13 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by NOVACPA » Fri Apr 29, 2016 1:05 pm

Everyone understands that retail "investors" don't own the payment streams from borrowers, right?

The first question in lending is... Who is the counterparty...?

I bet it's not who you thinks it is with P2P lending.

Many believe that they are buying the note and the credit risk is with the borrower. However, a bank actually underwrites the loan and funds it. Lending Club then purchases the loan from the bank. It uses the site as a way to "sell" the loan.

However, LC doesn't sell you the loan. It takes your money, and you are an unsecured creditor of Lending Club. If you owned the note, it would be held in trust, in a bankrupt remote entity, and possibly with cash collateral. See the image below and you can see it is not. The loan stops with LC.

They make money 4 ways:

1: Servicing the loan. At least 50 bps.
2: Spread. The note is likely at least 100 bps higher than what the "investor" is buying.
3: Gain on "Sale": It likely collects about 300 bps for each loan, but the rights of the loan stay with LC.
4: Fees. The borrower pays fees for the loan.

"Investors" are taking a risk that LC will pass through all the funds to the investor.

"Investors" are unsecured creditors and are second to last in line if LC defaults. Common stock holders are last. The bank is a secured creditor to LC and thus will take possession of the loans if LC defaults and be first in line.

Being the second lowest in the capital position is no place to invest, as a creditor. If you does want to invest like that, buy some High Yield junk bonds or common stock in LC.

Image
screenshot windows

NOVACPA
Posts: 104
Joined: Mon Apr 28, 2014 4:13 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by NOVACPA » Fri Apr 29, 2016 1:21 pm

From the Prospectus...
WebBank is the true creditor for all member loans to borrower members, which allows our platform to be available on a uniform basis to borrower members throughout the United States, except that we do not currently offer member loans in certain states. WebBank disburses the loan proceeds to the borrower member who is receiving the member loan.
At the closing of the borrower member’s loan, we execute an electronic promissory note on the borrower member’s behalf for
the final loan amount under a power of attorney on behalf of the borrower member. WebBank then electronically indorses the
promissory note to us and assigns the borrower member’s loan agreement to us without recourse to WebBank.
The promissory note and the loan agreement contain customary agreements and covenants requiring the borrower members to
repay their member loans and acknowledging our role as servicer for member loans.
If we were to become subject to a bankruptcy or similar proceeding, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited and suspended or stopped. The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding Loans or the proceeds of those corresponding Loans. The recovery, if any, of a holder on a Note may be substantially delayed and substantially less than the principal and interest due and to become due on the Note. Even funds held by us in accounts “in trust for” the holders of Notes may potentially be at risk.
In a bankruptcy or similar proceeding of us there may be uncertainty regarding whether a holder of a Note has any priority right to payment from the corresponding Loan. The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding Loan or the proceeds of the corresponding Loan.
You can't make this stuff up...

https://www.lendingclub.com/info/prospectus.action

renue74
Posts: 1806
Joined: Tue Apr 07, 2015 7:24 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by renue74 » Fri Apr 29, 2016 1:41 pm

P2P is risky. I put $1500 of test money into this last November. Within 2 months, I had one note default.

I look at this almost like a payday loan. or a buddy loan to a family member or somebody at work. It's unsecured notes. There's never ever recourse to get your $25 back.

So how many buddy loans do you want to risk for 5 to 15% return? Me....not many. :(

And we all know that when the economy starts going south, these unsecured loans will be the first loans that people stop making payments on. They have nothing to lose, except a bad mark on their credit report. Nobody's kicking them out of their homes or taking their cars away.

kosomoto
Posts: 483
Joined: Tue Nov 24, 2015 8:51 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by kosomoto » Fri Apr 29, 2016 1:58 pm

randomguy wrote:
kosomoto wrote:
Gaff74 wrote:I put some "play money" at Lending Club, in a taxable account, mostly as an experiment. The emails that I now get from Lending Club are interesting, in a concerning manner. They are marketing themselves to "Financial Advisors" to help their clients "diversify". When I opened the account at Lending Club, it was immediately apparent that there is essentially no regulation going on in the P2P market. The vetting for an investor is a simple check box confirming that I have assets to feed and clothe myself if the loans head south, something along the lines of having $70k in assets not including home. I was not asked to offer up any sort of documentation. If "Financial Advisors" start pushing these items on clients, a lot of people can and will get burned with the next recession or major economic temblor. When the going gets rough, unemployment spikes again, etc, payments to unsecured loans will be the first thing that people drop. I predict that a lot of these loans will simply default. I'm surprised that there is not more (any) regulation coming from the Consumer Financial Protection Bureau or other agency, to at least make sure that it is not small time investors getting in over their heads chasing after higher returns than can be offered up with backing from the FIDC. Thoughts?
Lending club returns remained positive during the market crash and recession. I would argue that makes lending club one of the safest investments around. Too bad interest is taxed so high.
Gold had positive returns during that period also and gets taxed at LTGC. Would you really want to extrapolate that it is one of the safest investments possible?:) We have very, very limited data on P2P loans. We know that during 2007-2009 that the default rate hit something like 30%. Next time we have a bad recession (and they can last much longer than the 2008-9 one did. See Europe) image we get those results AND you are getting 5% less in interest (more buyers bid down the interest rates) and you can come up with drastically different results.

I think p2p can be good investments from a diversification point of view. I would really hesitate to place too much faith though in the safety aspect.
Gold is the definition of a safe investment. But I wouldn't hold it as the returns are too low. If the recession was worse like you mention, then stocks and bonds would have also fallen further.

randomguy
Posts: 8537
Joined: Wed Sep 17, 2014 9:00 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by randomguy » Fri Apr 29, 2016 2:32 pm

kosomoto wrote:
randomguy wrote:
kosomoto wrote:
Gaff74 wrote:I put some "play money" at Lending Club, in a taxable account, mostly as an experiment. The emails that I now get from Lending Club are interesting, in a concerning manner. They are marketing themselves to "Financial Advisors" to help their clients "diversify". When I opened the account at Lending Club, it was immediately apparent that there is essentially no regulation going on in the P2P market. The vetting for an investor is a simple check box confirming that I have assets to feed and clothe myself if the loans head south, something along the lines of having $70k in assets not including home. I was not asked to offer up any sort of documentation. If "Financial Advisors" start pushing these items on clients, a lot of people can and will get burned with the next recession or major economic temblor. When the going gets rough, unemployment spikes again, etc, payments to unsecured loans will be the first thing that people drop. I predict that a lot of these loans will simply default. I'm surprised that there is not more (any) regulation coming from the Consumer Financial Protection Bureau or other agency, to at least make sure that it is not small time investors getting in over their heads chasing after higher returns than can be offered up with backing from the FIDC. Thoughts?
Lending club returns remained positive during the market crash and recession. I would argue that makes lending club one of the safest investments around. Too bad interest is taxed so high.
Gold had positive returns during that period also and gets taxed at LTGC. Would you really want to extrapolate that it is one of the safest investments possible?:) We have very, very limited data on P2P loans. We know that during 2007-2009 that the default rate hit something like 30%. Next time we have a bad recession (and they can last much longer than the 2008-9 one did. See Europe) image we get those results AND you are getting 5% less in interest (more buyers bid down the interest rates) and you can come up with drastically different results.

I think p2p can be good investments from a diversification point of view. I would really hesitate to place too much faith though in the safety aspect.
Gold is the definition of a safe investment. But I wouldn't hold it as the returns are too low. If the recession was worse like you mention, then stocks and bonds would have also fallen further.
So you think an investment that can go on a 20 year losing streak and lose over 60% of its nominal value is a safe investment? What the heck do you consider a risky one?:)

And no I don't think our recession laster longer would have resulted in lower stock prices. The markets over reacted to the housing crisis hence the big bounce back 6 months later. Once the panic left (that was only loosely correlated with the recession), stock prices were going back up.

Again the basic point is drawing conclusions from one event is stupid.
Here is the performance of one asset class over the last 2 crashes
2000-2 13.77%
2007-march 2009 -36%

Some in 2003 would have looked back and say damm that is a safe investment. Person in the middle of 2009 had a different experience. Again I have no problem investing in them. But don't delude yourself into thinking these are low risk investments.

Topic Author
Gaff74
Posts: 90
Joined: Tue Mar 08, 2016 1:43 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by Gaff74 » Fri Apr 29, 2016 2:51 pm

JDot wrote:I recently joined Lending Club. Recently, as in the funds haven't cleared yet. The biggest reason I've decided to give it a shot is because of a single contributor here who I trust and have a great deal of respect for, EmergDoc from WhiteCoatInvestor.com

If you haven't already, I highly recommend you check out his site for tips he uses in picking individual loans. That is, assuming you want to pick your own. I'm looking forward to playing around on the site. Within a few moments I found a CEO who grosses $14.5k a month seeking a loan.

I think it will be interesting and time consuming for me.
This is how I learned about LC as well. The more people that are checking out those tips/screens for "the best" loans, the higher demand for those loans. It follows that the rates will decline, since more folks are lining up to lend the money. So in the end, you are left off no better in terms of risk/reward balance. As more large institutions get involved, this will be even more evident. With regards to the time involved to screen the loans, it was interesting for me for about the first 1-2 dozen loans. Loan underwriting, as a hobby, may hold some appeal, for some of us, for a while. As a long-term strategy, it cannot work for me. I'm also uncertain just how much to trust what the borrowers are writing down, in terms of their income/ability to repay, as well as the reason for the loan. For some loans, it seems the only thing verified is what is on the credit report. If the borrower just lost their job and needs more money to support the cocaine habit that got them fired, the loan may not be as safe as the credit report suggests...

retiredengineer
Posts: 8
Joined: Sun Jun 21, 2015 8:31 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by retiredengineer » Sat Apr 30, 2016 10:30 am

JDot wrote:
retiredengineer wrote:The subprime loan debacle resulted from a massive housing inventory surplus driven by speculative building due to rising home prices and minimal down payments. When the bubble burst, housing prices fell dramatically and construction essentially stopped. The resulting layoff of construction workers and secondary workers pretty much equaled the drop in employment which was the "Great Depression". I don't see any parallel with the Lending Club loans.

If there is a significant recession, those who own stocks will likely see a significant drop in their portfolio value. Those who invest in Lending Club will see an increase in defaults which will lead to a drop in net interest (interest minus defaults) which for me over the past three years has ranged from 10% down to more like 5% annualized in recent months. If the net interest return drops to zero or even minus 5% because of a significant recession, the effect on the portfolio value would be much less than if the money were invested in stocks. But the returns have dropped to the point that additional loans are less appealing and may soon reach the point of being undesirable.
Can you explain your last sentence for the less informed of us?
I first invested in a Lending Club loan portfolio managed by Lending Club in September 2012. The Lending Club portfolio of which I was a small percentage owner was a rolling multimillion dollar mixture of 3 and 6 year duration loans, spread over a variety of risks.

Over the first year my net return was 8.1%. In the following months my returns increased with 1 month giving a 10% net return after defaults and fees. Recently the returns have fallen due to an increase in defaults, particularly with the more risky loans, to an annual average of 5% with an average loan duration remaining of 1.87 years I took some of my money out of the Lending Club portfolio somewhat as a result.

So far I've had a return of close to 30% on my original investment. But if the defaults increase further and net returns decline further I'll reduce my investments further. If defaults increase to the point that returns are below something like 4% net after defaults, I'll find another home for this money.

User avatar
unclescrooge
Posts: 4204
Joined: Thu Jun 07, 2012 7:00 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by unclescrooge » Sat Apr 30, 2016 10:34 am

QuietWealth wrote: tbh, I would rather buy a levered FI CEF before I would buy a managed P2P Loan Mutual Fund.
I totally agree with you.These P2P loans have not been through a down cycle yet.

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Sat Apr 30, 2016 1:03 pm

retiredengineer wrote:The subprime loan debacle resulted from a massive housing inventory surplus driven by speculative building due to rising home prices and minimal down payments. When the bubble burst, housing prices fell dramatically and construction essentially stopped. The resulting layoff of construction workers and secondary workers pretty much equaled the drop in employment which was the "Great Depression". I don't see any parallel with the Lending Club loans.
A wee bit more complex than that. See "the Big Short".

The US had not had a synchronized housing bubble bust since the 1930s.

Looking at what distinguished the worst hit states (the big ones from memory were California, Nevada, Arizona, Colorado, Ohio-- one other; notably *not* Texas, and that's key*) it was loose consumer lending standards.

But where did the money come from? That was the genius of the CDO (and the CDO squared, and cubed, and the synthetic CDO) that could repackage all of that mortgage debt, of increasingly low quality, off the balance sheets of the originator financial institutions, and into high credit rating bonds which could be sold all over the world. To add to the fund, the Credit Default Swap (CDS) then allowed the intermediaries, the Fixed Income divisions of the investment banks, to offload their risk in an opaque way-- as we found out, to AIG in particular.

That increased flood of money went straight back into the housing market. To make more money, you had to originate more mortgages, and so it went.

The CDO spread the risk of all this activity all over the global financial system. German financial institutions went down because of exposure to US mortgage debt. And it increased the size of the bubble by a significant factor. Also it is "pass the parcel" it encouraged slack underwriting standards (no questions asked-- brilliantly portrayed in both the book and the movie) ie asymmetric information-- the packager and seller of the securities knows more about the risks than the buyer. The late, great, Tanta, on Calculated Risk blog (one of the first economics blogs to call the bubble, along with Dean Baker at the EPI) had a beautiful description of all this, which I believe is still linked from there.

And so the US economy got inflated-- housing related activities became 4.5-5.0% of GDP (from memory). They would eventually fall to around 2.0%.

So far, so bad. A not pleasant recession. It was the financial shocks, and in particular the default of Lehman Brothers (a thinly capitalized investment bank with a large position in Mortgage Backed Securities) which led to a collapse in the system.

The "shadow banking system" and the liquidity from money markets which make modern banking and finance possible, essentially froze after September 13, 2008. It was, for those of us watching, a truly terrifying experience-- as well as more than slightly vertiginous.

Many of the world's largest financial institutions were effectively bankrupt (in fact, they *all* were bankrupt, pretty much, for a couple of weeks in September-October). In particular RBS and HBOS (now Lloyds) in the UK, some of the American money center banks (such as Citi), the Irish banking system (and later, much of the Spanish one). Northern Rock and a couple of other ex Building Societies in the UK. But Barclays had to raise money in a hurry, and so did many other banks. The US home mortgage giants Freddie and Fannie went down (before Lehman) and so too did AIG, the world's largest insurance company (and not coincidentally, at one time the largest writer of CDS protection on CDOs for investment banks).

World trade fell faster from October 2008 to March 2009 than it had during the 1929-1931 period which saw the Wall Street Crash and the failure of the World Monetary system (bankruptcy of Credit Anstalt in Austria in 1931). The order went out in most (all?) of the world's big corporations to 1). get any cash in that they could and 2). not pay it out-- ordering of raw materials and inventory just *stopped*.

This was no ordinary recession. It wasn't even a Canada early 90s or New England at the same time type recession. No, this was a full blown Depression (now called The Great Recession to distinguish it from the 1929-30s and 1871 events) with which we are still dealing with aftereffects.


* as a result of the S&L debacle in the late 80s-early 90s, Texas had relatively tight home lending laws. It just wasn't possible for the bubble to build up, and so the housing price drop was also much less dramatic.
If there is a significant recession, those who own stocks will likely see a significant drop in their portfolio value. Those who invest in Lending Club will see an increase in defaults which will lead to a drop in net interest (interest minus defaults) which for me over the past three years has ranged from 10% down to more like 5% annualized in recent months. If the net interest return drops to zero or even minus 5% because of a significant recession, the effect on the portfolio value would be much less than if the money were invested in stocks. But the returns have dropped to the point that additional loans are less appealing and may soon reach the point of being undesirable.
net interest = interest - defaults + recoveries?

At least in the UK it has become a crowded space with a lot of institutional money coming in, that has driven down returns.

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Sat Apr 30, 2016 1:04 pm

unclescrooge wrote:
QuietWealth wrote: tbh, I would rather buy a levered FI CEF before I would buy a managed P2P Loan Mutual Fund.
I totally agree with you.These P2P loans have not been through a down cycle yet.
That is the key. And whether there is leverage here (on the lender side?) that we cannot see. That's when you get shockwaves of liquidation on the downcycle, leading to falling asset prices and defaults, leading to more losses, and so on ad infinitum.

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Sat Apr 30, 2016 1:05 pm

retiredengineer wrote:
Over the first year my net return was 8.1%. In the following months my returns increased with 1 month giving a 10% net return after defaults and fees. Recently the returns have fallen due to an increase in defaults, particularly with the more risky loans, to an annual average of 5% with an average loan duration remaining of 1.87 years I took some of my money out of the Lending Club portfolio somewhat as a result.

So far I've had a return of close to 30% on my original investment. But if the defaults increase further and net returns decline further I'll reduce my investments further. If defaults increase to the point that returns are below something like 4% net after defaults, I'll find another home for this money.
Interesting. Thank you.

The defaults rising are a significant warning sign.

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Sat Apr 30, 2016 1:07 pm

NOVACPA wrote:Everyone understands that retail "investors" don't own the payment streams from borrowers, right?

The first question in lending is... Who is the counterparty...?

I bet it's not who you thinks it is with P2P lending.

Many believe that they are buying the note and the credit risk is with the borrower. However, a bank actually underwrites the loan and funds it. Lending Club then purchases the loan from the bank. It uses the site as a way to "sell" the loan.

However, LC doesn't sell you the loan. It takes your money, and you are an unsecured creditor of Lending Club. If you owned the note, it would be held in trust, in a bankrupt remote entity, and possibly with cash collateral. See the image below and you can see it is not. The loan stops with LC.

They make money 4 ways:

1: Servicing the loan. At least 50 bps.
2: Spread. The note is likely at least 100 bps higher than what the "investor" is buying.
3: Gain on "Sale": It likely collects about 300 bps for each loan, but the rights of the loan stay with LC.
4: Fees. The borrower pays fees for the loan.

"Investors" are taking a risk that LC will pass through all the funds to the investor.

"Investors" are unsecured creditors and are second to last in line if LC defaults. Common stock holders are last. The bank is a secured creditor to LC and thus will take possession of the loans if LC defaults and be first in line.

Being the second lowest in the capital position is no place to invest, as a creditor. If you does want to invest like that, buy some High Yield junk bonds or common stock in LC.

Image
screenshot windows
I did not understand this (in fairness, I have never looked into the UK equivalent).

Both this post and the next one you made are incredibly helpful -- thank you.

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Sat Apr 30, 2016 1:08 pm

NOVACPA wrote:
However, LC doesn't sell you the loan. It takes your money, and you are an unsecured creditor of Lending Club. If you owned the note, it would be held in trust, in a bankrupt remote entity, and possibly with cash collateral. See the image below and you can see it is not. The loan stops with LC.
s[/url]
So one is completely dependent on LC having enough equity. In other words, it's a bank, but without FDIC protection for depositors.

Right. That would put me right off right there.

jogren
Posts: 37
Joined: Mon Jan 10, 2011 10:12 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by jogren » Tue May 10, 2016 4:56 am

Timely thread. Although not as nearly far reaching as the subprime crisis (the article states P2P lending accounts for less than 1% of loans and 10% of installment loans) individuals using these services should be aware. Of course it's interesting to note that it seems investment banks are worried and demand for the securitized loans is drying up.


http://www.nytimes.com/2016/05/10/busin ... icism.html

Valuethinker
Posts: 39276
Joined: Fri May 11, 2007 11:07 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by Valuethinker » Tue May 10, 2016 5:09 am

jogren wrote:Timely thread. Although not as nearly far reaching as the subprime crisis (the article states P2P lending accounts for less than 1% of loans and 10% of installment loans) individuals using these services should be aware. Of course it's interesting to note that it seems investment banks are worried and demand for the securitized loans is drying up.


http://www.nytimes.com/2016/05/10/busin ... icism.html
Given the financial, legal and regulatory risks, I imagine the investment banks and ratings agencies are a good deal more cautious re securitizing loans than they were during the lead up to 2008.

I *do* have concerns re sub prime car loans-- that smells like a repeat of the sub prime mortgage fiasco, with the same victims.

With P2P there will be a credit cycle. That cannot be escaped. The quality of loans will fall during the boom, and then they will get hit.

The investing structures outlined above would scare me witless though-- the investor is not really Peer to Peer lending, in terms of what happens if it goes wrong, they are just an unsecured creditor.

That's a bit like buying preference shares issued by a bank: capped upside, but 100% downside risk.

hiddenace
Posts: 11
Joined: Mon Apr 20, 2015 12:54 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by hiddenace » Tue May 10, 2016 8:12 am

There are some interesting charts on loan performance going back to 2008. Yes the financial crisis created more defaults and returns for loans originated in 2008 performed the worst, but the system didn't "collapse."

Take a look at the fifth graphic down:
https://www.lendingclub.com/info/demand ... ile.action

LC notes won't diversify against economic shocks like Treasuries or cash would. I'd treat them like intermediate high-yield debt. Risk of default is high, but duration risk is moderate. I made some decent money through Lending Club and I've used the proceeds to invest in some real estate. I'm under no illusions that either investment shares a decent correlation with equities.

edge
Posts: 3452
Joined: Mon Feb 19, 2007 7:44 pm
Location: NY

Re: LendingClub/P2P the next subprime credit debacle?

Post by edge » Tue May 10, 2016 8:42 am

These things have serious growing pains before they are viable.


1). The brokers like LC have little to no credibility
2). These investments are risky and investors don't really have the tools to assess and manage the risk.
3). The capital structure of many of these startups will fall over at the first breeze of a crisis.

User avatar
powermega
Posts: 1165
Joined: Fri May 16, 2014 12:07 am
Location: Colorado

Re: LendingClub/P2P the next subprime credit debacle?

Post by powermega » Tue May 10, 2016 3:11 pm

The biggest problem I see with the P2P market is that nobody really knows how it will perform in a recession. Yes, technically speaking, LendingClub/Prosper/etc did exist in 2008, but they were microscopic compared to what they are today. I imagine that in a scenario where someone has hit hard times and will need to default on a loan, these P2P loans will be the very first loans to take the hit. A rational person will pay the mortgage, car loan, and even a credit card before paying a P2P loan.

That said, I do think this kind of investment can play a role in one's portfolio. The P2P market does seem to have a low correlation with the stock and even the bond markets. P2P can provide a diversification. At least that seems to be true in a non-recession economy. There are certainly plenty of posters around here that have had some decent or even good results with the P2P market.
Even a stopped clock is right twice a day.

User avatar
ClevrChico
Posts: 1596
Joined: Tue Apr 03, 2012 8:24 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by ClevrChico » Tue May 10, 2016 3:24 pm

I agree. It feels similar lending money to a friend, who you know won't pay up if they hit hard times.

Average returns are listed around 5.25 - 8.5%, which I believe is taxed as ordinary income. A balanced portfolio return is in the middle of that and is very tax efficient. So, why bother with P2P lending?

User avatar
FelixTheCat
Posts: 1692
Joined: Sat Sep 24, 2011 12:39 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by FelixTheCat » Tue May 10, 2016 3:29 pm

ClevrChico wrote:I agree. It feels similar lending money to a friend, who you know won't pay up if they hit hard times.

Average returns are listed around 5.25 - 8.5%, which I believe is taxed as ordinary income. A balanced portfolio return is in the middle of that and is very tax efficient. So, why bother with P2P lending?
To me, P2P is no different than a bank handing out credit cards. If it wasn't profitable, would the banks hand out unsecured lines of credit?
Felix is a wonderful, wonderful cat.

renue74
Posts: 1806
Joined: Tue Apr 07, 2015 7:24 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by renue74 » Tue May 10, 2016 3:39 pm

I played around with Lending Robot, which is a layer above LendingClub and uses and algorithm to pick LendingClub notes.

All in all, I added $2000 and out of about 70 notes, I've had 2 go into "late" status since November. My "forecast" return is 6.5% and I'm mainly in A,B,C loans with a few lower.

I don't feel like it's a good fit for my tolerance level. I feel like there are folks out there who are gaming this system just like any other system. First, the institutional investors are getting the 1st pick of new notes and secondly, it's unsecured and it really does feel like I went in together with a couple hundred other people to give this person some cash......so they are getting $35,000 and if they stop paying, they get a hit on their credit score. Oh nos...that'll scare them. #notreally

Each monthly, I'm pulling my cash out from note payments and will tuck it back into my taxable account.

TomCat96
Posts: 852
Joined: Sun Oct 18, 2015 12:18 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by TomCat96 » Tue May 10, 2016 3:41 pm

amphora wrote:
Whakamole wrote:I know some who buy many LendingClub/P2P loans and think they've diversified away risk, but it reminds me of subprime MBS - a bunch of junk is still going to be junk when we hit a recession.
I think the risk is more similar to a junk bond crash than the subprime credit debacle. For one, if the P2P default rate increased significantly, there would be no systemic risk because the P2P market is much smaller than the mortgage market, the securities are not held by major banks, they haven't been securitized into credit default obligations and there aren't credit default swaps insuring them. So there's a risk of losing money if you invest, less of a risk of financial system collapse.

This hits it right on the head. I don't understand why further discussion is necessary. A google search indicates that total P2P loans amounted to 6.6 billion in the US. This is like asking what would happen if AAPL fell by 1.5%. The size of the market is just too small to make a difference.

P2P lending is more of a toy at this point than a serious investment vehicle.

User avatar
ray.james
Posts: 1185
Joined: Tue Jul 19, 2011 4:08 am

Re: LendingClub/P2P the next subprime credit debacle?

Post by ray.james » Tue May 10, 2016 3:50 pm

FelixTheCat wrote:
ClevrChico wrote:I agree. It feels similar lending money to a friend, who you know won't pay up if they hit hard times.

Average returns are listed around 5.25 - 8.5%, which I believe is taxed as ordinary income. A balanced portfolio return is in the middle of that and is very tax efficient. So, why bother with P2P lending?
To me, P2P is no different than a bank handing out credit cards. If it wasn't profitable, would the banks hand out unsecured lines of credit?
However there is difference between bank being personally responsible for getting payment and collections. They book the losses on their accounts. In this case lending club is platform. It diversified the risk to investors -- us. My view is lending club is pretty much an adviser/discount broker . It wants people to view it as collection agency too, but I doubt so. Risk is borne by investors and they are liable for it.

In the last recession credit agency were fined since they categorized some debt as BB instead of C or junk. They paid fine and were off the hook.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

bryantwfox
Posts: 27
Joined: Sat Feb 22, 2014 11:32 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by bryantwfox » Tue May 10, 2016 9:17 pm

Valuethinker wrote:
jogren wrote:Timely thread. Although not as nearly far reaching as the subprime crisis (the article states P2P lending accounts for less than 1% of loans and 10% of installment loans) individuals using these services should be aware. Of course it's interesting to note that it seems investment banks are worried and demand for the securitized loans is drying up.


http://www.nytimes.com/2016/05/10/busin ... icism.html
Given the financial, legal and regulatory risks, I imagine the investment banks and ratings agencies are a good deal more cautious re securitizing loans than they were during the lead up to 2008.

I *do* have concerns re sub prime car loans-- that smells like a repeat of the sub prime mortgage fiasco, with the same victims.

With P2P there will be a credit cycle. That cannot be escaped. The quality of loans will fall during the boom, and then they will get hit.

The investing structures outlined above would scare me witless though-- the investor is not really Peer to Peer lending, in terms of what happens if it goes wrong, they are just an unsecured creditor.

That's a bit like buying preference shares issued by a bank: capped upside, but 100% downside risk.
The subprime car loan thing is so overblown it is ridiculous. Please explain the similarities in asset classes and where the credit risk truly lies. Please tell me the modeling assumptions that assume used car vehicle prices will continue to rise. Look at subprime auto compare to the mortgage market in size and interparty risk levels. Nowhere near the same thing.

NOVACPA
Posts: 104
Joined: Mon Apr 28, 2014 4:13 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by NOVACPA » Wed May 11, 2016 6:28 pm

What I keep seeing over and over and over again is people think they are LENDING TO the borrower. However, the Lending is to Lending Club with a payout defined by an underlying index the "investor" gets to pick (the borrower). If there are no credit events, the lender gets paid. If there is a credit event, the lender doesn't get paid. But what if the counterparty has a credit event?

What this really is more akin to is akin to is a credit linked note. "The purpose of the arrangement is to pass the risk of specific default onto investors willing to bear that risk in return for the higher yield it makes available. The CLNs themselves are typically backed by very highly rated collateral, such as U.S. Treasury securities"

https://en.m.wikipedia.org/wiki/Credit-linked_note

An analogy and a pop culture reference may make this easier to understand:

How many legs does a dog have if you call it's tail a leg?






Four. Just because you call something, something else doesn't make it true.

Saying your Lending to the borrower doesn't make it true.

In the movie, "The Big Short", there is a scene with the Selena Gomez and an economist at the poker table (The borrowers). There are people behind them that bet on the outcome of their performance at the table (Lending Club). You would be the people in the second row.

Lending to Lending Club who lends to the borrower who pays back Lending Club who pays back you, if the borrower doesn't default.

(I'm so mad I know Selena Gomez and not the economist)

I screen companies that manufacturer loans that my company buys. If there was a defect in the manufacturing process, I have to be positive the seller of the loan can make us whole because they made certain representations and warranties to us about the characteristics of the loan.

I'm not sure Lending Club has the financial capacity to do that. For those that have borrowers that defaulted, did you check that everything in the initial screening was verified when they defaulted? The Prospectus is on their website with that data.



sophie1
Posts: 127
Joined: Thu Apr 18, 2013 1:58 pm

Re: LendingClub/P2P the next subprime credit debacle?

Post by sophie1 » Thu May 12, 2016 7:34 am

I also put some "play money" into a taxable Lending Club account in 2013, investing strictly in high grade notes and relying on diversifying to smooth out the effects of defaults. I've been getting >12% so far, but I expect to drop to around 9-10% eventually. My notes at this point are a mix of new notes (higher returns, more volatility) and notes in the 2nd half of their payment schedule (lower returns, less risk of default).

A 9-10% overall return, if it holds up through recessions and over, say, the next 10 years or so, is worth a serious look as a viable asset class. This is comparable to total stock market returns, but with far less volatility. P2P may well correlate with the stock market, but so do corporate bonds, and for that matter so do most total bond funds.

Of course as pointed out...manager risk is very high. I'm curious about why no new P2P lenders have come on the market, given its popularity.

Post Reply