Lending Club Experience

One Year of Lending Club: The (Getting) Ins and (Getting) Outs of Lending Club

2012-07-16T12:31:00.001-05:00

Well now, I was hoping to be further along before this post than I am. I intentionally (this time it really was) did not post last most. I considered it my quiet period as I was liquidating.

My one year experiment with Lending Club has led me to the following for those who do not live in a "funding state":

It is easy and quick to get going in Lending Club, although I would recommend buying in slowly to get the best performance
It is easy and very slow to get out of Lending Club (sold 150 Notes over two months)
Learn how to find Pre-Grace Period status of Notes
Don't hold on to Grace Period Notes and hold no hope for Late Notes (it's just better that way)
There are three very different markets: A/B, C/D, E/F/G. I focused on E/F/G most of the time. My conclusions may not hold as well for the other two markets.
Both High Yield To Maturity and Low Markup buying techniques work well
Lending Club's Net Annualized Return is only valuable to compare against other investors and to track historical changes, the number itself is pretty much meaningless

So yes, I am really liquidating my Lending Club account (just about finished now). This was an experiment with my play money and it is now time for me to pull all my cash together to buy my mother-in-law a house. I will invest in Lending Club again when all this house thing settles out.

I also wanted to be able to report on what it is like to get your money out of Lending Club (a concern for many). You can do it. It will take time. I am selling them off at about 2 to 3 Notes a day on average. I offer my Notes for sale at either 16% Cash-on-Cash-Return or a specific Markup, which ever leads to a lower price. I started with a 3.9% markup, and dropped it to 3.4%, 2.9%, 2.4%, 1.9%, 1.4% and now 0.9% markup. When I noticed that I was not selling 2 to 3 Notes a day, I would lower my Markup by 0.5%. I am not selling any of my Notes at a loss (except any Grace Period Notes, but those are becoming rare as my portfolio shrinks).

It is weird not going in and buying Notes anymore.

This has been a terrific experience. I have really enjoyed working with the P2P lending community, especially Peter Renton of Social Lending Network. There is so much great information out there to learn.

If you run across this post and are considering Lending Club as an investment, might I make a few suggestions:

Read all you can. My blog, Social Lending Network (BTW Peter has a course you can buy that should give you plenty of information), etc.
Start investing right away. Don't wait until you have all the details.
Start small. As you gain experience (and make mistakes) your educational process will accelerate. You will not learn enough from reading alone, and you want your mistakes to be with a small portfolio.
Make mistakes, but try not to make my mistakes (or Peter Renton's, etc. learn from us). Don't be afraid to make mistakes.
Share what you learn. Start a blog (free at blogger.com) and share what you are learning. Link to great sources of information you've found.
Get involved. The P2P lending community has several great leaders in it. Follow their twitter accounts. Read their blogs. Circle them on Google+. Comment. Share. Be part of the discussion.

This is not goodbye, but until next time. I've had a great time. I look forward to coming back and investing in Lending Club.

Signing off for now.

- Marc

Ten Months on Lending Club, Brutal Reality Hits

2012-05-15T09:00:00.004-05:00

I missed a month on reporting how my Lending Club experience was going. I could say I was extremely busy (I was) but it was probably more coming to grips with brutal reality. Right after I posted on my Eight Month Results, my NAR dropped to 6.0%. I think that was the result of my Defaults finally all going to Charge Off status.

I'm slowly climbing my way out of those Charge Offs. I've learned how to avoid them by avoiding any Note that even smells of a Late payment. I check the Loan Performance page for every Note that is Processing payment (sort my Notes by Payment Due Date and open each in a new Tab in Chrome). I don't buy Notes that are more than 20 days since last payment (saves me having to look at the Loan Performance page).

My portfolio has also changed quite a bit, not so much from trying to avoid Defaults, but due to a shift in strategy caused by using Lending Club Chrome Extension. Until I can bake into the Sale Price my risk factors (feature yet to be added), I don't buy as risky of Notes. Instead I look for discounted Notes. It turns out that the most discounted Notes tend to be Grades D, E and F (although F not quite as much).

When I buy Notes, I look for Notes that meet the following criteria:

have a Yield to Maturity of 16+%
no more than $25 Outstanding Principal
no more than 20 Days Since Payment
I don't already own a Note of that Loan

I then get the most steeply discounted (or least marked up) Notes that meet that criteria. The Chrome Extension makes this really easy to filter for (even if there is a lot of clicking "Next").

Once I have my Notes, I immediately offer them up for a price that gives me (after taxes and fees) 18% annualized gain, unless the Note is in pre-Grace Period or Grace Period, in which case I discount it to sell. I was offering my Notes at 16%, but they were selling too quickly. At 18% I tend to offer my Notes at 1.5% to 3% markup (depending on what kind of Discount/Markup I had).

I divide my Notes into two main Portfolios (four actually, but most Notes are in two). My newly acquired Notes that have not made more than one payment (I call them Buttercup) grew tremendously when I offered my Notes to get 16% annualized return. Since raising my expected annualized return to 18%, the two portfolios have balanced out and are now about half each.

My Buttercup portfolio is mainly split between D and E Notes. It looks like before the D Notes hit their second payment, they have a 50/50 chance of selling at those discounts.

The other half of my portfolio (Wesley) contains Notes that have made at least two payments. These are mainly F Notes, followed by D and E Notes. I'm happy to see that the higher yield Notes are sticking around longer (they don't sell). To recover from those Charge Offs, I need an accelerated return, like the 19.41% Wesley brings in.

So in two months I raised my NAR from 6.0% to 9.36%. I've heard rumblings that NAR is pretty much meaningless. I think it is an easy way to measure the direction you are going in, but I agree it has no real world value. I wanted to find a better overall metric for myself. I settled on Annualized Cash on Cash Return. The way I calculate it is treat my account as a closed box bank account. If I put my deposits in a bank (and taking into account withdrawals) what APR would that account have to have the balance I have now.

The cash equivalent balance I have right now is an interesting thing to figure out. You can start with your Account Total (on your main Account page), but that doesn't take into account Notes you've purchased today (I tend to have a half dozen to two dozen purchases pending). The cash for those was transferred from Lending Club to FolioFN to purchase the Notes, but FolioFN hasn't reported the Notes back to Lending Club yet. So I add in the purchase price of pending purchase Notes.

This CCR calculation really opened my eyes as to how bad the NAR calculation is. My annualized CCR after ten months is -2.45%. If I were to sell my Notes for their Outstanding Principal + Accrued Interest and cashed out my account, I would have less money than I put in. Now 8 Charge Offs and dumping a bunch In Grace Period Notes to clean out your portfolio can have a devastating affect, but I was not expecting that. Now that I have a way to track my CCR, I'll be watching that. It does get better daily, so I like the direction it's heading in. What scares me is what it would have looked like two months ago.

So bottom line is I am digging myself out from the Late Notes that went to Default and clearing out a bunch of In Grace Period Notes at steep discounts. Things are getting better (noted by the NAR rising and the daily improvement in my CCR). I've got two months until my one year anniversary. We'll see what kind of CCR I can come up with in the meantime.

Lending Club Chrome Extension: Buying FolioFN Notes

2012-04-06T09:23:00.001-05:00

(See Other Posts about Lending Club Extension)

Version 0.3 of the Lending Club Extension has been released (see what changed). I am getting feedback that we need more detailed information about how to use it.

Install Note Browser Filter

(click on this link in Google Chrome)

The first step is to click on the link above and go through the installation process (you may need to click a button at the bottom of this page saying you trust me, you do trust me don't you?). After you have installed the extension, you will see a Lending Club icon in your browser window. Clicking on this will bring up a settings window. If it feels a bit cramped, you can get a bigger page with the settings by clicking on the wrench (spanner) in the upper right corner (shown in the image here) and selecting Tools -> Extensions.

In the extensions list you'll see Lending Club FolioFN Note Filter (I need to change that name). The image below shows what it looks like (except it will be version 0.3 and it won't say (Unpacked)).

If you click the Options link you'll get the same options you would get by clicking the Lending Club icon at the top of the window, but you'll have more space to look at things like Help.

There are two main features that this extension helps you with, Buying Notes and Selling Notes.

Buying Notes (or Note Filters)

When buying Notes on the FolioFN platform, you'll see a table that looks something like the above. When the Lending Club extension is working, the table will have green rows (if not, there will be blue rows). There are some limited, though helpful, filters already available on FolioFN, seen in the box before the table. I usually choose the Never Late checkbox and uncheck the rest and leave everything else as is. Once you search with the FolioFN filters, then it's time to pull in the extension filters.

Clicking on the Lending Club icon at the top of the window will reveal a window with the extensions filters. They mostly match the column headers (and in the same order) as seen in the Browser Notes list above.

Some values have a Min/Max, for instance Days Since Payment. Let's say that you want Notes that are about to make a payment, but not so close that it is processing just yet. You would enter a Min of 18 and a Max of 24 (I've seen some Notes start processing 25 days after the last payment).

Any Notes that have Days Since Payment at 18 through 24 will be left untouched. If the Days Since Payment falls outside that range, the extension will look at the Out Of Range Color box to decide what to do.

Clicking on the popup menu next to the Out Of Range Color box for Days Since Payment will reveal options for actions to take. By default (empty box) the filter is disabled, meaning it will do nothing if it is outside the range. You can Hide Notes that are outside the range (you won't even see them). This will fill in the Out Of Range Color with six 0's (000000).

The rest of the options for Out Of Range Color are actually colors. These set the background to the selected color. The value that is filled in the Out Of Range Color box is of the format RRGGBB for the Red, Green and Blue value in web format (two digit hexadecimal values). Don't worry, you don't have to know what any of that means, you can just select from the menu the background color you want. The numbers and letters in the boxes are for those who want absolute control over the colors. Feel free to play around with them (6 characters either 0-9 or A-F).

There are four items that do not have a Min/Max, Duplicate Loan, Loan Owned, Note Owned and Imperfect Status.

Duplicate Loan

The second time (or more) a Loan Number is seen on a page, the Out Of Range Color will be applied. This helps prevent purchasing multiple Notes from the same Loan.

Loan Owned

If you own a Note from this Loan (either this Note or another Note) the Out Of Range Color will be applied. The is another help to prevent buying Notes from Loans you already own.

Note Owned

These are the Notes you actually own. Lending Club replaces the checkbox with a little blue circle so you can't select them anyway. If you select Hide Note (000000) for the Out Of Range Color then this noise will be removed from the table (you can't buy it anyway).

Imperfect Status

There are two statuses that are considered perfect, Current and Issued, anything else is considered Imperfect. This allows you to highlight or remove Notes that are In Grace Period or Late.

The selections above are what I use when I am hunting for Notes to buy. I remove all chances (well, nearly all) that I will buy two Notes from the same Loan (Duplicate Loan, Loan Owned, Note Owned). I don't care if Term is 36 or 60 months, so I leave that alone. I only want Perfect Status, so I hide all Imperfect Statuses. I don't want to buy Notes that are processing a payment, so I highlight in Light Red any Notes 25 days or more since the Last Payment (this helps filter out people selling Notes in Pre-Grace Period). I always want a Yield To Maturity of at least 16%.

What settings do you use? Are you having any problems or something is not quite clear? Have a suggestion to improve the extension? Leave a post below and I'll see what I can do.

Lending Club Chrome Extension Version 0.3

2012-04-06T08:36:00.001-05:00

(See Other Posts about Lending Club Extension)

It's taken longer than I expected (partly because I got sucked into Empire Avenue, ticker MARCPAGE). Then Peter Renton (of Social Lending Network fame) pointed out that the extension doesn't work well when selling Notes that have been Funded as opposed to Purchased on FolioFN. As I am in a state that I cannot fund Notes, I wasn't sure exactly how to handle this. With Peter's help we've come up with a pretty nice solution.

Install Note Browser Filter
(click on this link in Google Chrome)

First, a little background. When selling or repricing Notes, the extension will add two extra columns, one for Annualized Return and one for Markup. The Annualized Return is the return you would get if that Note was sold between now and the Order Expiration Date for the given price, taking into account how long the Note has been held. In other words, if you put the money into a bank account with an APR of the Annualized Return, and left it in there for the same period of time as you held the Note, you would get your Asking Price when you withdrew the money.

In order to do this calculation, the extension needs to know when you acquired the Note. If you purchased the Note this month via FolioFN, it will get this information from the My Account page (just visiting this page will get these dates). If you purchased the Note in a previous month, you can find the purchase date in the Trading Statements at the bottom of the FolioFN My Account page (change Showing Notes to All). again simply loading these pages once the extension will store off the purchase dates for the calculation.

However, if you did not purchase a Note from FolioFN, I now get the acquired date from the Loan Performance page (just about every Note on any page has a link to this page, see the Current links in the images below). Loading the Loan Performance page will store off the Issue Date for use in the calculation.

In version 0.2 there was a bug where if we could not find the purchase date, the two extra columns would be added, but they would be left blank. Now we will fill in the Markup right away (we can calculate that from the data on the page). While loading the acquisition date we now let you know what we are doing. Once we have finished our search for the acquisition date, we simple state "Purchase Date?" to let you know that the extension has not seen any page that lists the Issue Date nor the Purchase Date. At the point you can go to the My Account page and then the appropriate (or all) Trading Statement(s).

If an Issue Date is found but not a Purchase Date then the Annualized Return will be blue to let you know that it hasn't seen evidence that you purchased it, so it is assuming you funded the Note (plus an extra row will be added to the top of the table letting you know what blue means).

Lending Club Chrome Extension Version 0.2

2012-03-17T17:00:00.000-05:00

(See Other Posts about Lending Club Extension)

After using it myself for almost a week, I'm proud to announce version 0.2 is available for install (see Alright, I'm Ready To Share for original announcement).

Install Note Browser Filter
(click on this link in Google Chrome)

So let's start in with some of the changes. Next to the Out of Range Color boxes there is now a popup that allows you to choose from preselected colors, hide the matching Note or disable that filter altogether.

I've found this handy when I want to temporarily disable a filter and then reenable it, specifically when I have change left over in my account, I don't expect to get 16% Yield to Maturity on $12 Notes.

You'll notice there are a few more links. These each open a section on this page. Opening the Preferences section allows you to set your Short Term Tax Rate (with a link off to a site where you can look it up), your Minimum Preferred Gain and the discount you want to give on Grace Period and Late Notes (in my experience all Late Notes are the same, hard to sell). Why would the extension need to know this information? Glad you asked.

Now when you Sell or Reprice Notes, two new columns are added giving you the Annualized Return and the Markup. As you modify the values, those columns also update with the new values. The Annualized Return is based on the date you bought the Note (more about that later, see Caveat below) the Order Expiration Date (at the top of the table) the Asking Price, the Payments To Date, the Maintenance Fees, the Sell Fee and estimated Taxes (see Can Someone Check My Math? for details on the calculation).

As an example of what happens when you change the values, the snapshot of the table below is identical to the table above except I pressed the Principal + Interest button at the top of the table. Notice all the Markups went to zero and the returns were adjusted accordingly.

Another cool feature is that if any of the Asking Price fields are every empty (deleted) they will be filled in with the value that will give you your Minimum Preferred Gain from the Preferences. For the Sell Notes page, this will automatically fill in every Asking Price (since they start out blank) with a value that will give you your Minimum Preferred Gain (or Discount based on Grace Period or Late of the Note). When Repricing Notes, just delete the value in the Asking Price box and it will fill it back in with the appropriate value. This feature alone saves so much time. When you have 80 Notes you want to put up for sale, determining what you want the sales price to be and then entering it in can be mind numbing.

Caveat

In order for the Annualized Return (or the Asking Price) to be calculated, the extension has to "see" the purchase date on one of FolioFN's web pages. If you visit FolioFN's My Account and the Note shows up there as purchased (this month) then it will have seen the purchase date. However, if you purchased the Note in a previous month, you'll need to go to the bottom of the My Account page and look at the Trading Statement for the month that you purchased the Note and then change the Showing Notes to All.

All you have to do is view these pages after installing the extension. It will remember the purchase dates of all the Notes it sees. What I did to get things kicked off is open each Trading Statement in a new tab and then went to each tab and changed Showing Notes to All. Then I closed all the tabs. Do that once and the extension will remember all the purchase dates.

Feedback and Donate

I've added to other links, Feedback and Donate. The Donate link just gives an Amazon.com affiliate link you can use to show your support for the extension (or alternately PayPal information). I've spent all the time I really need to for my needs on this. I'll be using the donations as a gauge of how much time I'll spend adding requested features and improving the extension.

The Feedback link will send you back to this blog. For suggestions, problems, questions, etc. just leave comments on this blog.

I hope this helps make FolioFN a more usable part of the Lending Club experience (especially for those of us that FolioFN is the main part of Lending Club we can use). Let me know what you think.

Eight Months on Lending Club

2012-03-15T09:56:00.000-05:00

(See other Monthly Status Updates)

Already another month. My NAR keeps dropping like a rock as Lending Club is coming to terms with those Late Notes that will never pay as they move them to Default and Charge Off. I had almost a dozen Notes that went Late. One completely paid the Note off. One came back into payments (and then I was able to sell the Note). I think I sold another couple.

Even though the graph looks depressing, I am optimistic. I have realized what I have done wrong, and how to prevent future Late Notes (which nearly inevitably lead to Defaults and Charge Offs). Since the first wave I have only had one more Note go Late.

As I peruse the other P2P Lending Blogs (see several excellent ones to the right) it seems that 12% NAR is considered pretty good. It's definitely better than than the Stock Market (see Why You Should Invest in the Stock Market) but my target is 16% or higher, mainly to offset the effects of real inflation (see Not All Inflations Are Created Equal). I'm confident I can get back to 16%.

Once I learned the ropes of Lending Club, I wanted to make sure that the time I was spending on investing was not offsetting my gains (unless your time is worthless, you need to consider this). Now that I have the Chrome Browser extension (see Alright, I'm Ready To Share), I feel like I have finally been able to bring down my time spent to a reasonable amount. Before I used this extension, I was only looking at Lending Club 3 days a week to cut down on the time I spent investing. Selling Notes used to be my biggest time consumption, and that was manually entering dozens (even more when I went to 3 days a week from 6) of sell prices from my spreadsheet. Now my extension enters them all for me (coming in version 0.2).

I'm back to 5 to 6 days a week, but it is a 5 minute checkup as opposed to 10 to 15 minutes. And the time spent will not grow dramatically as I scale up my portfolio. I was having a hard time seeing 400 let alone 800 Note portfolio before. Now I can easily see it.

I've now sold 3 times the number of Notes I currently hold (churn). My Notes held average $24.88 and I've held them on average for 2 1/2 months. The Notes I've sold I've held for just over 3 weeks. My median return on sold Notes is 28.8% annualized, or 38.2% days weighted annualized (the longer the Notes been held, the more weight it is given in the average).

The average rate for my Notes held is over 21%. This is a snapshot. I tend to sell off higher Interest Rate Notes, so my held Notes is a little lower, but we'll get to that later.

Almost all my Notes are 60 month Notes. I prefer it this way. I try to buy Notes with a lot of Principal left, which means that the payments are mainly Interest. 60 month Notes have even more Interest since the Principal is spread out over a longer period.

This is a natural side effect of how I choose Notes. I look for Notes with good Yields, and 60 beats out 36 just about every time.

Overall Composition

I always get concerned when I look at this chart. I really don't like holding G Grade Notes, but I have more G Grade than E Grade (I'd rather the reverse). I do like to see that the majority of my Notes are F Grade (in my opinion best Risk/Return balance).

The D and B Grade Notes are the stragglers when I have less than $25 left to invest, then I go find a good Yield Note with less Principal and these can often be lower Grade Notes.

The nice thing about having portfolios is that you can analyze your Note in different segments (see How I Use Lending Club Portfolios). You'll recall I had separated out my fairly newly purchased Notes from those that I had received at least 2 payments from (my Buttercups and Wesleys, respectively). This helps me see how my buy and sell strategy plays out. I buy irrespective of the Note's information just on it's raw Yield or Discount. It could be a Note that has a plunging credit score, lives in Florida, leveraged to the hilt, only on the job for a month, high debt-to-income G Grade Note, and I'd still buy it because it has a good Yield to Maturity.

However, when I sell is when I look at the details of the Notes. That G Grade Note will get sold for near 16% annualized return markup. While the Notes I would rather keep, the F Grade 10+ year employed, home owner, from Oklahoma, get a higher, closer to 32% annualized return markup. So let's see how that affects my portfolios.

Buttercup

The Buttercup portfolio are the Notes I've recently purchased (and haven't gone bad in any way). As you can see, it skews highly towards the G Grade Notes. This is a symptom of buying Notes based solely on Yield To Maturity.

If you compare this graph to the overall composition graph, you'll notice that I sell many of the G Grade Notes before they reach a second payment.

Wesley

My Wesley portfolio are the Notes that I've held for at least two payments and have not started missing payments. This is what I like to see in my portfolio. Overwhelmingly F Grade Notes, followed by E Grade and a few G Grade Notes (and a smackling of smaller Grade Notes).

Notice I still have an over 20% Weighted Average Rate, but I am more heavily invested in F Grade Notes, which have a lower Default Rate than G Grade, and have a higher average Yield (see Low Risk, High Return Lending Club Strategy).

Strategy Change

I have three buying strategies I use. The first is Newly Issued High Yield to Maturity 60 Month Notes (see the bottom of Seven Months In And Things Are Slowing Down). The second is High Yield to Maturity only. The third is Highly Discounted over 16% Yield to Maturity.

I used the second strategy the most heavily for the longest and have been using all three lately. However, until I get my extension to add risk factors to selling prices, I'm probably going to have to focus on the third strategy (Highly Discounted). Many of the seasoned veterans use this method (although not necessarily limiting it to above 16% Yield to Maturity) and have called into question the High Yield to Maturity model. Without my risk based selling prices, I think I'm going to have to agree with them. Plus Now I have a tool that allows my to visually see Discount vs. Yield to Maturity (see Discounted Notes on Lending Club's FolioFN).

Conclusion

So the effects of the Late Notes from the end of last year are finally starting to show in my Net Annualized Return. We'll see when I actually hit bottom on that. As long as I can prevent future Late Notes (which eventually lead to Defaults and Charge Offs), which so far has been pretty successful and will only get better with the Chrome Browser extension, I think I can climb back up to 16%.

I'm excited about the time savings I am getting from using the Chrome Browser extension. It makes the process so much more fun (less tedious) and cuts my time spent "investing" dramatically. It cuts the time down so much, I feel like I still need to do something when I'm done, 5 minutes is not very long.

Discounted Notes on Lending Club's FolioFN

2012-03-13T00:37:00.002-05:00

On Peter Renton's blog post Changes Today to the Lending Club Trading Platform on SocialLending.net, user @stilltrackin noted that discounted Notes seemed to be harder to find as of February 2012. After I started using my Chrome browser extension I added discounted Notes to my buying strategy. I hadn't been buying discounted Notes for around 6 months and noticed that they seemed to be a bit thin.

When I view Notes, I filter out Notes with principal less than $15 or more than $25, Notes from the same Loan and Notes with less than 16% Yield to Maturity. With those filters, in 1,300 of the most discounted Notes (22 pages at 60 each), I only found 42 that met that criteria and were marked up less than 3%. There seemed to be a pattern so I threw the values into a spreadsheet and came up with this graph, which shows Yield to Maturity on the Y-axis and the discount on the X-axis.

Remember that this is a selection of what I consider premium Notes (see the criteria I mentioned above). It is interesting that there are a handful of Notes right around par and then nothing until around 2%. It is possible that someone is rapidly snatching up everything under 2% markup.

Now let's look at the Notes from 14% to 16% Yield to Maturity. There are 59 Notes in the same 1,300 or so Notes that have this Yield to Maturity. In this range there is nothing below 1% available. The distribution looks very different than the 16%+ distribution. I stopped at 14% because the number of Notes starts getting larger the smaller Yield to Maturity you get.

If you stack the two graphs you can start to see a boundary of Discount for each Yield to Maturity. I think this is the balance between two Lending Club investment philosophies, Yield to Maturity vs Discount. 19% Y2M Notes seem to sell well at a markup of 2% or less because both types of investors are looking for them (has a low Discount and a high Yield to Maturity). It seems 15% is the low end for markups as high as 2%. I would need more data to be sure (note the three near-zero markup 18.5% Y2M Notes).

This will be one of the things I will start tracking and posting about. When I have more time, I'll delve more into the lower Yield to Maturity Notes.

What are your thoughts?

Update 03/13/2012 @ 12:17pm Central

So I pulled data from the top 1,200 discounted Notes with Yield to Maturity of 6%+. The data is in the graph above. There are a little over 600 Notes from unique Loans that have never been Late, over 6% Yield to Maturity and under 3% markup. The blank spots to the left of the graph probably indicate good markups for quick sales, as there is little competition in that area.

What conclusions do you draw from the chart above?

Can Someone Check My Math?

2012-03-10T23:54:00.000-06:00

(See Other Posts about Lending Club Extension)

In my last post I announced the first release of a Lending Club Chrome Browser plugin I am writing. I am using it myself and making several improvements. One of the improvements is when you offer a Note for sale it will calculate the annualized return range for a given sales price (range because it could be sold any day from today to up to 7 days later). When I was converting my calculation from my Python script, I noticed I was not happy with the original calculation.

I'd really like to have your feedback on the calculation, and have a math check on it.

In precalculus I learned from Ms. Delores Dean that the basic formula when dealing with compounding interest, or rates of return, is:

A = P (R + 1) ^T

which reads Amount equals Principal times Interest Rate increased by One raised to Time in years. I also wanted to add in Tax, Fees and Payments made. So my final formula was:

S + P (1 - M) - T (S + P (1 - M) - I - FS) - FS = I (G + 1)^Y

The variables are as follows:

S - Sales Price
P - Payments Made
T - Tax Rate (ie 0.395)
I - Initial Investment
F - Fee Rate (ie 0.01) on Sale
G - Annualized Gain
Y - Years Held
M - Maintenance Fee Rate

If you love a simple math problem that requires algebra, please stop reading here and solve for S. If you love a math problem that requires algebra and a little precalculus, please stop reading here and solve for G.

Now an explanation of the equation above. So the actual amount of money you are left with (A in the first equation) is the Sales Price plus Payments Received minus Tax you'll have to pay minus Sales Fee. The Tax would be your Tax Rate (for a conservative estimate of your tax, I recommend using your short term capital gains rate) multiplied by the sum of your Sales Price and Payments Received minus your Initial Investment minus your Fees Paid. And of course the Fee Paid is Fee Rate times Sales Price.

Of note, I assume that the Payments Made needs to be reduced by the Maintenance Fees Paid. Lending Club states that this is 1%, but remember that it is rounded up, usually $0.01 for $25 Notes. I found that the lowest regular payment I've had this month is $0.61, which the fee ended up being 1.64%. So to be conservative, I put the Maintenance Fee (M) at 2% (or 0.02). Some Notes do not have a Maintenance Fee, but to be conservative (and keep things simple) we'll assume there always is one.

Let me know in the comments if there is a problem with this formula or how I am thinking about it.

Now that you've had some time to work through the math, did you get:

G = e^{log_e( (S + P (1 - M) - T (S + P (1 - M) - I - FS)) / I ) / Y} - 1

and

S = (I (G + 1)^Y - T (I - P (1 - M)) - P (1 - M)) / (1 - T - F + TF)

Let me know in the comments if you got something different.

Now the formula needs to be converted to JavaScript to actually be used in the Chrome Extension. Here is the JavaScript I had for S:

Math.pow(Math.E, Math.log( (salesPrice + (1.0 - maintenanceRate) * payments - taxRate * (salesPrice + (1.0 - maintenanceRate) * payments - investment - feeRate * salesPrice) - feeRate * salesPrice) / investment ) / years) - 1

and for G:

(investment * Math.pow(1.0 + annualGain, years) - taxRate * (investment - (1.0 - maintenanceRate) * payments) - (1.0 - maintenanceRate) * payments) / (1.0 - taxRate - feeRate + taxRate*feeRate)

Anyone see any problems with the JavaScript? Again, please leave a comment.

This is what I am looking at adding to the Sell Notes page using the Chrome Extension. It will add an Annualized Return column and calculate the return if it were sold as soon as possible up to the date selected for the expiration.

This is not a photoshopped image, this is a screen grab from version 0.2 of the extension.

Currently version 0.1 is available, and lets you filter the Browse Notes on FolioFN. When version 0.2 is ready, I'll post again with a list of the enhancements I have made, as well as the assumptions that go into it. I still have a few glitches to work out, but I am excited about 0.2.

Now with 0.2 I can completely ditch my old Python script that used Apple Events to scrape the web pages of Safari to see what I was seeing and calculate these things. Version 0.2 of the Chrome Extension will even one-up the script with a neat little feature that will save me so much time in selling Notes (I'll reveal that in the next post when I release it).

So if you'll do me a favor (and yourself if you plan on using or trying my Chrome Extension version 0.2) and look over my math. I'd really like this to be peer reviewed before I release it.

In the mean time, I'm really having fun using this. I spend so much less time on the FolioFN site and will have fewer human errors.

If I haven't mentioned it yet, please leave me some feedback on the math above.

Thanks.

Alright, I'm Ready To Share

2012-03-05T12:39:00.001-06:00

(See Other Posts about Lending Club Extension)

I've been documenting my Lending Club experiece and have been mentioning a script that I use. This script only worked on Mac machines with the Safari browser. I have since started using Google's Chrome browser, and only launched Safari for doing Lending Club business. So to do my Lending Club business in Chrome, I have started writing a Chrome Extension that helps me decide on loans to buy.

This extension is in beta and I make no assurances as to how well it works.

Install Note Browser Filter (click on this link in Google Chrome)

(Note: A slight majority, almost 1/3 of the visitors of this blog are running Chrome, followed by another almost third for FireFox. Also about 2/3 of the visitors are on Windows. I'm hoping this solution works for a majority of the visitors to this site.)

After clicking the install link, there may be a button at the botton of the window asking you to confirm you want to install the extension. Click the "Continue" button and then the "Install" button to install the extension.

This extension will add a button to your toolbar (the red square with the green dollar sign). Clicking this button will reveal extra filters you can apply to the Browse Notes page on FolioFN. You can highlight rows that are out of the acceptable range with whatever color you want. If you specify 000000 as the color, the row will be removed.

For instance, I have it remove duplicate Loans (only the first instance is shown), Loans I already own a Note in, Loans that have Imperfect Status (not Issued or Current), had less than $15 Outstanding Principal or more than $25 Outstanding Principal, Notes that have less the $0.20 of Accrued Interest, Notes that have a Markup of over 10% or Notes that have a Yield to Maturity under 16%.

I also highlight 36 Month Notes in red, Loans that have less than 20 Day Since Payment in orange and Loans with less than 25 Remaining Payments in yellow.

So you sort your Notes the way you always have, and after about 5 seconds it will filter out or highlight the rows for you.

Below is a screen shot of the tool in use. I did not edit this image. Notice it says it is showing Notes 1 - 60, but only 8 Notes are actually showing. Alternating unfiltered rows have green and white backgrounds (to let you know the extension is running, FolioFN uses alternating blue and white backgrounds).

Feel free to leave comments here or email me if you have suggestions or defect reports. I plan on using this on a regular basis, so this is not just something I am throwing out there. I will also be adding features like auto-fill for the Sell Notes page and determining more stats about your performance.

How I Use Lending Club Portfolios

2012-02-16T09:43:00.001-06:00

In my January post Six Months and I'm Reaching A State of Peace, I stated:

I feel like I'm emerging from the Fire Swamp, and now it's time for Prince Humperdinck, I mean Tax season. (Maybe I will name my portfolio Buttercup).

Well, I took that suggestion and segmented my Notes into Princess Bride themed Portfolios.

The Humperdinks are the Late, Default and Charged Off Notes. These are the Notes that you know you don't want around but you probably can't get rid of them. The Rugen Portfolio holds the pre-Grace Period and Grace Period Notes. These are insidious Notes that don't sound all that bad, but can lead to more Humperdinks.

Then we have the Buttercup Portfolio. These are the newly acquired Notes that have no or one payment. They have not proven themselves. Then there is the Wesley Portfolio. These are the Notes that have never had payment problems and have payed me at least twice.

This segmentation helps me avoid looking at Humperdink Notes (Late or Charged Off) while paying attention to the insidious Rugen Notes (Pre-Grace Period or Grace Period). And I can look through my good Notes (Buttercup and Wesley) for Pre-Grace Period Notes by sorting by Payment Due Date and look at the Notes for Collection Logs at the bottom.

Seven Months In And Things Are Slowing Down

2012-02-16T09:18:00.004-06:00

(See other Monthly Status Updates)

Seven months have passed and I am now starting to feel the results of the Late Notes that are now Charged Off in my Net Annualized Return. 16.36% is still in the neighborhood of my target 16%. I still have six Late Notes that I am steeply discounting, but it appears that they rarely sell.

I've received enough interest to offset the complete loss of the Charged Off and remaining Late Notes assuming they are all worthless. The total interest I've received amounts to 6% of the money I deposited. Now we are on to start growing again (back to the beginning).

I've sold 2.7 times as many Notes as I currently hold (of course using the proceeds to buy more Notes). My median annualized return on Notes sold is 32%. If you weight the annualized return by days held (the longer held the more weight you give to it's annualized return) my Notes Sold have an average of 58%. This sounds great, but the raw gain, Cash Received (Sale + Payments) vs Cash Paid, is 1.9%. This has probably been impacted most by by selling off of Grace Period and pre-Grace Period Notes at a discount and buying a bunch of pre-Grace Period Notes at a premium before realizing they were pre-Grace Period.

When ranking the risk of my Notes (which I use to determine asking price when selling, 16% - 32%), I weighted most heavily (5 times the weight of the least weighted):

Accounts Now Delinquent
Delinquencies in Last 2 Years
Delinquent Amount
State (Bad: SC, OH, CA and FL Good: WY, ME, with other rated in between)
Inquiries in the Last 6 Months
Months Since Last Delinquency
Status of the Note (Issued, Current, Fully Paid, Grace Period, etc)
Public Records on File
Revolving Line Utilization. I am adding to that

I am now increasing the weight of the Grade of the Note to the same level (was weighted the least, now weighted 5 times higher). I have an uncomfortable number of G Grade Notes. I would rather sell those than hold on to them.

Lending Club has also been making some changes, or rather FolioFN, specifically to the way Browse Notes works. On the positive side they got rid of the confusing checkboxes for Rate and replaced it with a Range. Much better.

On the downside, they now no longer include Issue Notes when viewing Never Late. This makes me sad. I really like Issued Notes, and now they are hard to find. Well, they are hard to find the way I was looking for Notes.

I now choose Notes by looking at everything. I sort first by Yield to Maturity (click once to sort ascending) and then I sort by Remaining Payments (click twice to sort descending). This gives me newly issued Notes with the highest Yield to Maturity. I then look for the Accrued Interest over $0.50, meaning the Note will soon (hopefully) make a payment. This way I get the first payment (which is mostly interest) and hold it just a short period of time before I get that interest. Then if it sells, I get a (mostly) interest only payment, get my Principal back and a premium in a small period of time.

I am not buying exclusively Issued Notes, as there are some great deals in the rest of the Notes. Those I just chose Never Late only and sort by Yield to Maturity. I'm not sure how much of a mix between Issued and Current Notes I'm going to buy. I'll still need to play with that.

Bottom line is that I have taken some lumps (and still waiting for 6 more Notes to be Charged Off) and am still at my minimum target. I look forward to clawing my way back up above 18%.

Six Months and I'm Reaching A State of Peace

2012-01-17T08:28:00.000-06:00

(See other Monthly Status Updates)

So I've gone from flying high to 14 Late Notes (one is now in Default). I was able to sell one of the Late Notes pretty early on. One of the Notes came current (and immediately sold, now that it was not Late and steeply discounted). I don't expect to sell any of the Late Notes I am currently holding before they go into Default. I have steeply discounted them, but it appears that Late Notes just don't sell, especially this Late.

I did have one Note finally go into Default (Charge Off). However, I did get some money from collections ... and then the collection fee ate that recovery up.

I went through and looked at the Notes that were Late and noticed something ... I had three Notes from one Loan that went Late! Three Notes! Not just one or two, Three! I went through my list of Notes and sorted by Loan number. I got pretty good at looking at the last digit to see quickly where I had Notes from the same Loan. I culled out another half dozen from back in the day before I watched for duplicate Notes.

So, lessons learned. First, check the Note before you buy it to make sure they haven't already failed a payment (apparently they still show up as never late). Second, make sure you do not have more than one Note from the same Loan (or Notes worth more than $25). Third, treat Grace Period as the plague. Grace Period sells, but Late does not (only 7% of my Late Notes sold while Late).

As far as returns, Lending Club is still reporting my NAR above 20% (although I am considering those Late Notes as Charged Off already. I've sold more than twice as many Notes as I currently hold, so about every three months I cycle through Notes. Of the Notes I hold, they are worth an average of $24.88. I've held them for almost two months on average. Of the Notes I've sold, I've held them for an average of 19 days (almost three weeks). My median annualized return on Notes sold is 33%, however I like to use a Days Weighted Average (the longer I hold it the more it is weighted) which is 72%.

I feel like I'm emerging from the Fire Swamp, and now it's time for Prince Humperdinck, I mean Tax season. (Maybe I will name my portfolio Buttercup).

Low Risk, High Return Lending Club Strategy (For Some States)

2012-01-12T09:44:00.003-06:00

While I love the great state of Texas, I am disappointed in their regulation of citizens investing in Lending Club. There are many states that prevent their citizens from funding Lending Club Notes, and unfortunately I live in one of them. At the end of this post, I have a summary of a strategy I think will give huge returns for those in states who can fund notes, with really low risk.

Lending Club is offering a No Maintenance Fee for the life of loans over $20,000. The added bonus is that loans of that amount have the highest return, in general.

So for those who live in a state that allow them to fund notes, if you focus on funding notes in the $20,000+ range, not only do you get an average return of 10.29% (as opposed to 7.42% to 9.9% for lower amounts), but you get a 1% boost from not having the maintenance fee.

Now if you funded a $25 share of the loan to minimize risk exposure, the maintenance fee could be as high as 1.7%, because it is 1% of your payment, rounded up. Since $25 shares payments can be as low as $0.60 (possibly lower) that would be $0.01, rounded up to the nearest penny, which is about 1.7%.

To get the best returns with the least risk, fund notes in the Grade E and Grade F range. While these Notes have higher theoretical risk, there are ways to mitigate those risks we'll talk about later. Grade G Notes can go way too low of a return, while not getting much better high range than Grade F (as well as the average return is worse).

To continue to maximize your return, you can fund 60 month Notes (versus 36 month Notes). Lending Club gives a higher risk value to 60 month Notes, which translates into higher interest rates, 2.05% to 4.5% higher (see interest rate factors). True, the longer term Notes have more risk, but again there is a way to mitigate that risk.

So now we get to the risk mitigation, the FolioFN trading platform. This is where those who are in states that can fund Notes can help (and benefit from) those in states that do not allow us to fund Notes.

There seem to be two major camps of loan buyers. Michael at Nickel Steamroller focuses on highest Discount. This approach looks for the steepest Discounts or lowest Markup on Notes as opposed to highest Yield to Maturity. This approach appears to get you the most for your money.

The second approach is looking for the highest Yield to Maturity. This approach assumes that if the Note is held until it matures, and it does not default, you'll get the highest return. Of course, with Grade E and Grade F notes at 60 months, that seems like a bit of a stretch.

Yield to Maturity seems to be a very popular method of choosing Notes (hence the Nickel Steamroller post warning against it). It is the approach I use to maximize my return. I've heard many people wonder why people would buy a newly funded $25 Note for $26.50. The three reasons I can think of are (a) they are looking for the Note to be held to term and not default, (b) they are looking to sell the Note to an (a) at a slightly higher premium or (c) a combination of (a) and (b).

I am a (c). I buy mainly Grade F Notes with a smattering of Grade E and Grade G (yes, I know G is a lot riskier with lower return). I tend to also buy some mature Grade C and Grade D on occasion when I have under $20 available to buy Notes. I also buy mostly 60 month Notes. Both the Grade and the term of the Notes I buy is not really a conscious decision, but a byproduct of buying the highest Yield to Maturity Notes.

Strategy

So to maximize potential return, here is my recommendation for those who can Fund Notes:

Buying Criteria

$20,000+ Loans
$25 Notes
Grade F Notes (22%+ Interest)
60 Month Term

Selling

Upon Funding, sell the Note at a 5% Markup. You'll get an immediate 5%, assuming it takes a month from the time you pledge the money for Funding to the time you get the money back from the sale. Annualized that would be more than 50% return. This cuts your risk because no Note will ever default because you sell them before their first payment.

For example, say you Fund 4 Grade F 22% 60 month $20,000 Loan Notes, spending $100 (4 x $25). You offer each Note at $26.25 (of the current top 60 Yield to Maturity Notes, 6 of the 14 $25 Notes are offered at over $26.25). Your funds (after FolioFN takes their 1%) are at $103.92. If that took 30 days, and then you reinvested the $100 in the same way, after 7 months you'd have $127.44. Then you start funding 5 Notes with the same criteria. In 5 more months, you'd have $152.09. For the year, you'd have over 50% return.

Caveats

This strategy is based on current market conditions. If too many people flood the market with high Yield to Maturity Notes, you'll have to reduce your Markup to get your Notes sold. I in no way guarantee that this strategy will work as described as the market place can change dramatically based on a number of conditions.

This is a win-win for those in states that can Fund Notes and those in states that cannot. It gives us in non-Funding states a nice stream of Notes to buy. It gives a nice low risk, high return for those in states that can Fund.

Why Lending Club is a Scam (Hint: It's not)

2012-01-05T09:18:00.003-06:00

First they ignore you, then they laugh at you, then they fight you, then you win.

Mohandas Gandhi

My parents visited us for Christmas. I owe a lot to my parents. From my father I learned the importance of temperance and striving for a spiritual life. From my mother I learned frugality and efficiency. With my father I often discuss politics and philosophy. With my mother I often discuss finances and investing. This particular visit, I mentioned that I was investing in Peer to Peer lending. The first thing she said was, "It's a pyramid. Get your money out while you can." This took me aback, but after thinking about it, I wasn't surprised. One of the common phrases I heard growing up was "never be the first on your block."

This leads me to Peter Renton's No Google, Lending Club is Not a Scam post (sociallending.net). It got me to thinking. Why would someone search for "Is X a scam?" While pondering this idea, I read Seth Godin's How much are you going to tip? post (sethgodin.typepad.com). This example he gave struck me:

There are two couples at the table, the waiter has brought separate checks and the credit card holder turns to the other credit card holder and tries to find out how to coordinate the tip.

Why?

I mean, if they were out just the two of them, would they ask what people at the other table were going to tip?

I've heard it said that all you need to have an opinion is a mouth. I guess the internet-age equivalent is, to have an opinion all you need is internet access. Searching (or is it googling) is an art. Using it for research on anything can be misleading at times, but especially for new and disruptive ideas. There is the idea of the S-Curve (see Wikipedia Diffusion of Innovations).

The S-Curve is a visual representation of the Gandhi quote at the beginning of this post. A very small number of people in society adopt a new idea. At first no one pays attention to it. Then it starts growing from just the innovators to the early adopters. This is where people laugh at you, as Gandhi said.

Next as the early majority starts joining in, those who see it disrupting status quo start whisper campaigns against it, as well as those with ill intentions see an opportunity to make a quick buck. Somewhere between early adopters and early majority, the government usually steps in with regulations. They want to make it "safe" for everybody. If it can survive the whisper campaigns, the malintent opportunists and the regulations, then we get the late majority and finally the laggards. My parents advice to "never be the first on your block" places you firmly in the late majority to laggard stage.

There is nothing inherently bad about being a late majority or laggard. And most people are not 100% in any of these categories (I believe my parents were the first on their block to have Magic Jack phone service). Some people are laggards just because they were born too late (I am a TV and telephone laggard). Most people tend towards late majority and laggard as they age (things just change too quickly).

With investing, while there is risk in being an innovator or an early adopter, it is matched with a large reward. If you are investing before the early majority hits, you can benefit from the surge. For those who are constantly investing as innovators or early adopters, you understand that there is risk and you expect to lose sometimes.

There is only one way to learn, through experience. There is only one way to get experience, through mistakes. However, there are two types of mistakes, your own or someone else's. If you rely solely on your own mistakes, it will be a tiring, expensive and demoralizing experience. You will find the most success in using a balance of the two. Try to learn all you can and at the same time, take some action. Expect to make mistakes.

So back to the idea of a scam. There are two types of "scams." One is when the other intentions of the other party of to take as much of your money as possible without giving you equivalent value. The second, and more pervasive in internet "scam" searches, is when the other party has full intentions of giving you the stated value, but the person puts the blame of their lack of education behind the word scam.

So is Lending Club a scam? You'll probably find more and more in internet searches as Lending Club grows, and for them, they feel they were scammed. For those who educate themselves, learning from their mistakes and those of others, you'll know if it is a scam, or you will get some valuable experience.

(In my opinion, Lending Club is not a scam. I believe that they have full intentions of helping their customers receive as much benefit as they can from their investment. Oh, and for my mother, it is regulated by the Securities and Exchange Commission.)

For help in finding Notes in FolioFN or selling Notes before they mature, see posts about Lending Club Extension.

A Revelation On My Grace Period Epidemic

2011-12-23T08:00:00.000-06:00

So for those just joining us, my Lending Club experiment was going well since August, in fact, very well. So well, that I shifted all my fun investment money over to Lending Club and have regular deposits. Then in November I started getting Late Notes. I figured it would happen sooner or later. Then I started getting a lot of Late Notes. I also noticed that Late Notes don't sell very well. So I started discounting Grace Period Notes. If it doesn't go into Grace Period, it won't be late.

I noticed that I had a lot of Grace Period Notes. Since I wasn't even keeping track of Grace Period before, I just figured it was that way all along and was common. I attributed the Late Note epidemic to the season (and possibly the economy). Now that I am discounting a lot of Grace Period Notes, I feel it is affecting my return. However, I think I could have avoided most of this mess if I just understood what Never Late meant.

The way I look for Notes is to use all Percentages and select Never Late and Now Current (disable the other Now Late checkboxes). Then I sort by Yield To Maturity. My assumption was that every Note in the list had always paid on time (never in Grace Period).

Today I was using my Cash to buy up Notes when I noticed a steeply discounted Note with the highest Yield To Maturity. When I investigated, I found the following:

In the Browse Notes list it showed it was Current. However, they were still trying to process the payment. It was steeply discounted because someone was watching their portfolio closer than just the status reported by Lending Club. I would consider this Grace Period, but at least now I know.

So now I will screen each Note before purchase (clicking on the Current or Issued link) to see if it really is Never Late. I expect that would cut down on my Grace Period epidemic.

Five Months and The Good Times Roll (For Those Who Ran Off With My Money)

2011-12-19T09:56:00.002-06:00

(See other Monthly Status Updates)

So after five months I've had a great run, followed by an avalanche of Late notes. I think I've had a total of 13 notes that have gone Late. One of them I've been able to sell off.

Every one of the Notes that have gone Late have made payments, but none of them have made payments to me. They were never late and were current when I bought the Notes (assuming that is what those checkboxes mean when Browsing Notes).

When they give my return, they obviously don't take into account that the Late notes are as good as gone. The chart above shows that of the Notes that go past 31 days, you have basically a 50/50 chance of getting any money back (they don't specify how many were fully recovered versus partially recovered, and how much that partially is). The site reports my return as over 21%. They no longer show your percentile. When they did show it, I had dropped solidly into the 99% (before I was waffling between being in the top 99% and 100%). My own internal reporting needs to change. I've been calculating my account value as the sum of what I paid for all my notes. What I need to use is the lesser of what I paid or what I am asking. I believe that will more closely represent my account value.

Of course, it may be more representative to consider Late Notes to be $0. I don't know what the conversion rate from Grace Period to Late is, but from 16-30 Days Late to 30-120 Days Late has been 100% for me. I've been able to stem the tide of Late Notes by being more aggressive at selling Grace Period Notes. I've still had a few slip into Late status.

I've been selling Grace Period Notes at 80% of P+I (rounded down to the nearest dollar), and dropping the price by $0.10/day. Some of these Grace Period Notes have received payment and then sold at this discount. At first I was disappointed, but then I realized I didn't want the notes where the borrower was willing to go into Grace Period.

Late 16-30 Days I sell at 75% of P+I (rounded down to the nearest dollar), and dropping the price by $0.10/day. Late 31-120 Days I sell at 50% of P+I (rounded down to the nearest dollar), and dropping the price by $0.10/day. Not that discounting Late Notes seems to work. I have only sold one Late Note, and none have returned from the grave. I may consider being more aggressive at selling Grace Period Notes just to prevent Lates, since they seem to be the land of no return.

Most of my Notes (almost 2/3) are still F Grade. If I read the numbers correctly, 76% of the F Grade Notes are still Active (Current or Late). Of the Active F Grade Notes, 95% of them are Current. 25% of my Late Notes are F Grade while the compose 63% of all my notes. It appears that F Grade Notes are a pretty sweat spot.

E Grade Notes have roughly the same Current, Late and Default rates. They are also about 25% of my Late Notes. However, they only comprise 6% of my portfolio. So apparently I've been really unlucky with E Grade Notes.

Half of my Late Notes are G Grade. Given that about 1/3 of my portfolio is G Grade and that the stats for G Grade notes is a bit worse (91% of Active Notes are Current as opposed to 95% for E and F) that is not surprising. About 8-9% of E and F Grade Notes are in Default. For G Grade Notes, it's 14%.

You would think that due to the very small place that E Grade Notes hold in my portfolio (and that they are statistically equivalent to F Grade Notes) that they would not hold such a prominent spot in my Late Notes.

It is also interesting to see what Lending Club is doing to attempt to reclaim my money from the Late Notes. Below is a chart of the latest action Lending Club has taken on the Late Notes.

Months Old	Payments Made	Latest Action
3	2	Sent email to borrower
4	7	PAYMENT Failed
5	2	Borrower contacted Lending Club
5	3	Sent email to borrower (three notes for this loan)
8	4	Borrower located (skip trace)
8	5	Borrower provided Bankruptcy counsel information
9	6	Borrower filed for Chapter 7 Bankruptcy
9	6	Collections Agency attempted to contact borrower
12	8	Drafting lawsuit
19	16	PAYMENT Failed (previously: Borrower provided Bankruptcy counsel information)

So now after my big Late Note hit, I'm making some changes. First, Grace Period Notes seem to sell. I think I need to discount them slightly more than I have been. I'll be discounting them to 75% of value instead of 80%. Late Notes don't seem to sell at all (especially 31-120 Days Late). I'm also adjusting my Risk Factor for Note Grade. I used to just convert the letter to a number and the trailing number to the fraction (ie A1 = 1.1, F4 = 6.4). Now I will be squaring that (ie A1 = 1.1^2 = 1.21, F4 = 6.4^2 = 40.96). This should cause my tool to more steeply discount G Grade Notes, as they will be rated 36% more risky instead of 17% more risky. This may also weight my portfolio more towards E Grade Notes. Given the lower return and about equal risk to F Grade Notes, I'm not sure how I feel about that (not to mention my propensity to have Late E Notes).

Also, of note may be the states my Late Notes are from: SC, AZ (2 Notes), NY, VA (3 Notes, same loan), CA, OH (2 Notes), OR, MN. I was already weighting the risk of Notes based on state, thanks to Nickel Steamroller. Currently I weight riskier than average the following states (riskiest to less risky): CA, FL, NE, IN, MS, TN, IA, ID, MT, UT. I also weight the following states less risky than average (least risky first): WY, ME, OK, LA, CT, KY, NC, WV, KS, AL. I am adding "riskier than average) to my Late Notes' states (although I already had CA as the riskiest, I considered the others as average risk). Since SC and OH have two Late Notes each, I made them as risky as CA and FL. The other states I put their risk about equivalent to TN or IA.

And yes, I have three Notes from the same Loan and the Loan went into Default. I have identified some holes in my detection of Notes from Loans I already own. This is the risk I was trying to avoid. I think I've worked out a way to avoid the hole that got me three notes from the same loan and I think I discount Notes which I have multiple from the same loan.

If I assume that all my Late Notes are worthless, I think I'm basically back to my original investment, so 0% return. So now that I've learned a lot of lessons, I'm starting from the beginning again, and hopefully will come back with a vengeance!

'Tis The Season, I Hope

2011-12-05T08:23:00.001-06:00

The first three months were great: August, September and October. Since then, I've had 12 loans go late. One was sold, the remaining 11 I still have (not by choice).

My thoughts right now are that as soon as a note goes into Grace Period, it's time to start discounting it. I was just giving a mild discount (Principal + Interest rounded down to the nearest dollar). This led to three more notes going late. I am now going to 80% below P + I for any notes that goes into Grace Period. This is based on the recovery rate from the chart below.

I still discount 16 - 30 day late notes 75% and 31 - 120 day late notes 50%. Grace Period, Late 16 - 30 and Late 31 - 120 I drop in price $0.10/day ($0.60/week). It may be that I've been once bitten, twice shy, but I'll find a happy medium as I experiment with discounting.

I'm hoping that it is the end-of-year season that is causing the larger number of Grace Period and Late notes, or at least due to fluctuations in the economy.

What I'd really like to see is someone blogging about their experience in taking discounted E, F and G Grace Period or Late notes and making some nice returns from those. If everyone followed the advice I post, no one would be there to pick up the notes I don't want anymore.

How do I choose loans?

2011-11-21T12:36:00.001-06:00

I just received an email from Peter Renton, of SocialLending.net fame, asking me a few questions about my use of FolioFN. I figured I would answer them in a blog post.

How do you choose the loans?

I first started choosing notes to buy based in several criteria. I would scrutinize the notes, read over the application, really make sure I was buying a solid note. However, that was when I was going to hold every note until completion.

I always believe that if something is not dear to you (no note is really dear to me) it has a price that it can be sold for. For instance, on Zillow.com, I have a Make Me Move price. I'm not in the market to sell my house, but if someone were to offer that much, I'd be willing to move. The same thing with my notes. My personal rule is that every note should be up for sale, even if no one will bite. The reason is simple, if someone does bite, they take the risk away from me and give me my return.

As I saw how easy and fast you can sell notes, I decided to change my strategy to be in the business of buying just about any note, but sell my favorites at a premium and the less desirables for minimum returns.

So, for the technical aspects of buying notes:

1. Use FolioFN Note Browser to filter only notes that were Never Late and are Now Current.

2. Then click on the Yield to Maturity column twice (sorts by Yield with the highest first).

3. This is when my hand written tool comes in. I have a custom Python script that runs while I'm on Lending Club's site (and FolioFN) that scrapes the web pages I am viewing and puts together account information and displays more meaning information. For instance, it will show me notes that I currently own another note from the same loan (or a purchase is pending), or notes that are larger than a $25 slice of the loan.

When I'm down to too little cash to buy a new, high yield note (generally less than $20), I then sort by asking price and look for the best Yield to Maturity for the money I have left. This can be a bit tedious if I have more than $15, as there aren't many positive yield notes in the under $5, but for each dollar added, it appears the number of notes grows exponentially, so you have to wade through more pages to find the best return.

How do you find the interface?

I find the FolioFN interface lacking. This is sad because the state I live in does not allow me to fund loans directly, which means much of the nice data and interface from Lending Club does very little for me. Here is my wish list for FolioFN's note browser:

Download all notes for sale in a format that a spreadsheet can import (making many of the following unnecessary)
Filter out notes from loans for which you already own a note (or a purchase is pending)
Filter out notes by asking price (ie notes asking $12 or less)

Selling notes on FolioFN is about as good as it can be, although the two step process of selecting which notes to put up for sale is a bit annoying. I like the one-button that sets all to principal + interest and then the button repeated so you can do that for just an individual note.

I do wish the sale window was more than one week. I'd love to have my notes for sale for a month, maybe two. The problem you would run into is what to do when you get a payment. Reduce the asking price by the payment amount? Reduce it by the principal only? I'd like both those options.

While I would like these tools built into the FolioFN website, not having them gives me a slight edge. With my custom tool, I get at a lot of these features (however, not the long term sales) via my custom Python script.

Fourth Month and Seven Deadbeats

2011-11-16T08:01:00.001-06:00

(See other Monthly Status Updates)

Well, I knew this day would come. I have had seven notes that have gone past the Grace Period into the Late Period. Lending Club states that those within the Grace Period, I have an 83% chance of getting some money back from. Those that are Late 16 to 30 days, 75% chance of getting some money back. Late 31-120 days yields 55% chance. Note that this does not state that you will get all your money back, but get some back.

I'm changing my pricing strategy a little. Any notes in the Grace Period, I am now selling for Principal + Interest. This means I could lose up to 7 days of interest if it sells on the seventh day from when I put it up, but given that there is a 17% chance I could lose the entire note, it's little to give up. Then when a note goes Late, I start decreasing it's sales price by $0.10/day.

Of the 7 notes that have gone into Late, I've sold one so far. This is my first chance to get real data (although not enough for statistical significance) as to who defaults. Of the six notes I still own that are Late here is the info (notice that I bought all of these notes right before they stopped making payments):

Months Old	Payments Made	Latest Action
4	2	Voicemail left
7	4	Collections Agency attempted to contact
7	5	Borrower provided Bankruptcy counsel information
8	6	Borrower filed for Chapter 7 Bankruptcy
11	8	Drafting lawsuit
18	16	Sent email to borrower

We'll see how this plays out as far as collections. However, I'm still optimistic. My account is currently worth 5.1% more than the money I put in. On notes I sell, I get a median return of 38.5%. On average I sell notes after holding them for two weeks. The notes in my portfolio I've held for an average of 40 days. So it looks like my strategy holds on to some notes and cycles through others.

I've been bouncing around between 99% and 100% for my investor percentile. We'll see how that pans out over the next several months as we see what happens with these Late notes. Currently, I'm guessing I'm really in the 99.5% and the rounding gets me to 99% or 100% depending on the day.

The main thing I've been focusing on is keeping my time to a minimum on handling my account. My routine is to spend about 5 to 10 minutes a day each morning buying and selling notes.

Lending Club reports that I have a return of 21.22% (average is 9.64%). I think my Late notes will affect this, but I'm hoping my Grace Period and Late note selling strategy will minimum the impact on my return.

I'm still a small investor. I am over the 100+ Note range but not quite to the 400+ Note range. Of the 100+ Note investors, if I can stay in the top 6.5% of investors, I will still have a 15%+ return. My target is 16% per year, so 21.22% gives me some wiggle room.

So I think the changes to my strategy will be to:

#1 Do not buy notes that are in Grace Period
#2 Sell notes that reach Grace Period at value
#3 Discount Late notes by $0.10/day

This is where it gets really fun, how to mitigate risk and still make a good return. When I said I've been lucky so far, this is where we see what the real possibilities of Lending Club are.

Third Month and Going Strong

2011-10-13T11:27:00.003-05:00

(See other Monthly Status Updates)

Three months down and my luck is holding. Lending Club reports that I am getting over 20% (my target minimum is 16%). This appears to put me in the top 1/2%. I say that because I've been fluctuating between top 99% percentile and 100% percentile. I think they are rounding it. I can't seem to find how many investors there are on lending club, so I'm not sure if I'm in the top 5 or top 50.

I'm still trying to figure out where the problem is with about 1/3 of the notes I sell being sold for less than 16%. Of the notes that sell for less than 16%, they all sell for 1.7% to -100% (annualized). I'm hoping it's my tool. I now review my sales to make sure that I at least ask for the principal and interest.

I may also have my first default here soon (16-30 days late).

My strategy hasn't changed. Buying: I prefer to hold notes that have just been issued or are within the first year (the earlier the better). I only buy $25 fractions. I try not to buy notes from loans from which I already have a note. I want loans that are Now Current and Never Late. Then I look for the highest Yield to Maturity. Selling: I offer all my notes for sale. I set the sales price such that with taxes, fees, payments and purchase price taken into account I would get 16% to 32% annualized return if the note sold in 7 days.

I have a formula that determines the risk of a note using 30 different criteria (which my tool grabs from the original loan information and the note information pages):

Accounts Now Delinquent	Amount Requested	Credit Score Change
Credit Score High	Credit Score Low	Debt To Income
Delinquencies (Last 2 yrs)	Delinquent Amount	Expected Final Payment
Fraction	Grade	Gross Income
Home Ownership	Inquiries in the Last 6 Months	Interest Rate
Issue Date	Last Payment Date	Late Fees Received
Length of Employment	Length	Monthly Payment
Months Since Last Delinquency	Next Payment Date	Open Credit Lines
Public Records On File	Purpose	Revolving Credit Balance
Revolving Line Utilization	Status	Total Credit Lines

The more favorable these criteria are, the closer to 32% (I want to hold the note longer). This way I lower the price on riskier notes to have them (hopefully) sell before there are problems while less risky notes are held to collect payments until they start getting in the risky category.

As you can see I mainly have F and G notes (highest Yield to Maturity) as well as mainly 5 year notes.

This mix seems to jive with Lending Club's reported Return by Credit Grade. Grade F notes get the best return generally, with Grade G being slightly behind. Grade E notes are even further behind, which may be why I only have a handful of them.

While I have over 100 notes, Lending Club doesn't know about all of them. In the "Your Investment Numbers" chart above, it reports I only have 99 notes. The rest of my notes are being held in Foliofn. It takes a business day (sometimes more) for trades to settle. So at any point I may have a half dozen to several dozen notes bought or sold and pending settlement. It is a little confusing at times having notes and cash in the Lending Club account and pending sales or purchases in Foliofn.

So apparently my strategy can, at least in the short term, put me in the top 1.35% of all those with 100+ notes. On this chart they state that it takes a minimum of $2,500 to get to 100 notes. While that is not technically true (you could buy 100 notes near the end of their term for $5 to $15 each), you probably won't get the best returns buying those notes. Remember that the early payments are mainly interest, while the last payments are mainly principal. The value in a note for sale is the principal plus the next interest payment. However, the longer term value is the principal plus all future interest.

After three months I'm still having beginners luck. I'm still getting more than twice the average return. Still no defaults (although I have about a 25% chance that one of my notes will default). Still working it.

I'm No Longer On Top

2011-09-29T09:18:00.003-05:00

I knew it had to happen. I am no longer the top dog on Lending Club as far as Net Annualized Returns. I dropped from 21.54% to 20.56% and dropped from the top 100% to the top 99%. I imagine that all this time I wasn't really the #1 investor, but the 99.5% top investor.

I've now fully invested all the money I've transferred in. I did it slowly, so as to not affect prices too much. I noticed that I did raise the low end for the notes I was investing in.

If you browse the notes for sale, and look at All Rates and only Never Late and All Current (no past due notes) and then sort by Yield to Maturity (high to low), of the top 60 notes listed, I either own a note from that loan or it is more than a $25 share of the loan (except for 2 notes).

For a while there, if you looked at 15.5% and higher notes (again Never Late and All Current only) and then sorted by Markup/Discount (sorted low to high) of the top 60 I would own about 80% of them. After three days of only buying notes to replace sold notes and now I only own three of the top 60 discounted notes (15.5% and higher Never Late and All Current).

So now I have been humbled. It probably wasn't as big a drop as it seems (I wish they'd show an extra decimal place on the percentile). I'm still near the top. The average return is about 9.5%

The notes that I currently hold I've held about 7.3 days average. Given that I bought the bulk of them in the last two weeks due to my increased investment, that makes sense. I've paid an average of $24.63, or in other words I generally buy $25 fractions early in their lifetime. This gives me the most interest for my investment (at the end payments are mostly principal, at the beginning they are mostly interest).

I mostly hold F grade notes (53%), followed by G grade (38%). The D and E grade notes are usually the notes I buy when I have a little money left (less than $20). The best deals there seem to be in the D and E grades.

Right now I've got 2.4% more in my account than I put in. Since the bulk of that money was put in in the last two weeks, that would be more than a 50% return per year, if I can keep it up.

I've sold around half as many notes as I currently hold. I've held them for an average of 11.7 days before I sell them. The median Annualized Return on notes I've sold is 59.1%.

Looking over the notes I've sold, about 25% of them have been less than 16% Annualized Return, and most of those have been between -14% to -99%. Some of these have been typos. Some have been an error in my sell calculation (I think). However, given that the other 75% get 17.5% or higher Annualized Return and over 40% of my sales have been at over 100% Annualized Return, I'm still doing pretty well even considering the little glitches and mistakes.

It's interesting that even though I am now over the $1,000 mark (also over the 100 Note mark) that I am still compared to investors with less than $1,000. I think they only take into account notes you've actually funded (which is illegal for me to do in my state).

Now that I've crossed the first milestone (100+ notes) we have some statistics on people who hold that many notes. Almost 83% of those with 100+ notes make between 6% and 18%. It looks like around 10% make 3% to 6%. This leaves 7% to be divided among the -5% through 3% and the 18%+. It looks like more of that 7% is in the -5% through 3% range. So let's say 3% of those with 100+ notes make 18% or more.

You'll note on the image here that they state that 100 Notes can be purchased with a minimum investment of $2,500. Of course, if you are using the secondary market (Foliofn) you can get 100 Notes for less than that. However, the less you spend on the 100 Notes, the less your return will be. Remember that early in the life of a Note, you get more interest per payment. The smaller the note (the more payments have been made on it), the less interest you'll get in the payments, and hence a lower return also.

Update: I figured out how to get some more information on the 18%+ bracket for 100+ notes. So of those with 100+ notes, I'm in the top 1.31%. The average investment is $19,094 (I'm not quite there yet) and the average number of Notes is 274, or an average of $69.69 per Note.

It was interesting to see the average Note value for 100+ Note holders by return. If you are getting between 0% and 3% return and you have 100+ Notes, chances are you hold $250 Fractions (smallest fraction is $25). That means you are banking a lot on a few loans.

Even if you have a lot of Notes, they may still be from the same loan (my tool filters out Notes from loans I already hold).

It looks like most of the 9%+ return crowd go for higher notes. I can understand, as without some tool to manage your notes, it can be a pain to handle a bunch of notes. If you double or triple the size notes you hold, you cut in half or third the number of notes you have to deal with.

Still beginners luck. Still no defaults. Still playing the game. Until next time …

Second Month Of Lending Club

2011-09-16T10:27:00.004-05:00

(See other Monthly Status Updates)

So it's been two months and things are still looking pretty good. I've had a 4.5% growth in the funds I deposited. 58 Days ago I bought my first notes. I've been adding a little money to my account over the last two months, but if I had put it all in at the beginning, that would be an annualized rate of 32%. Since my minimum target is 16% per year, I think double is a good rate.

I've moved from a Google spreadsheet to a custom tool I developed that grabs the data directly from Lending Club's website. This way I am not limited by the amount of data I am willing to copy into a spreadsheet, it cuts down on the time I spend entering data (none) and I have more flexibility with what I do with the data. I now can spend less than 10 minutes a day to sell dozens of notes and buy at least a half dozen notes.

In a previous post I stated that I was going to change my strategy to cut down on the number of trades I do. This was mainly to cut down on the time. Every note that I bought I would enter a limited set of data into a spreadsheet. For each not I sold, I would add some more data about the sale. All this manual entry was time consuming. Now with my new tool, I can trade more frequently with less time being taken to enter data. Buying notes still takes a bit of time to find the right notes to buy. I wish Foliofn had better filters (like "only show notes with Yield to Maturity greater than X").

So I am still Top of the Class. My Net Annualized Rate dropped to 21.79% (or 22.01%, depending on where I look). The lowest it has been was 21.68%. Lending Club reports that for "Investors Like [Me]" 100% have a NAR less then me. Less than 4% of all Lending Club investors get over 18%. "Investors Like [Me]" dropped to 5.56% NAR and overall average remains at 9.64%.

I'm still not convinced this is more than beginners luck. I am, however, transferring a larger chunk of funds into my account.

Currently I am holding about 1/3 of the notes I've ever held. Or, in other words, I've sold twice as many notes as I currently hold. The notes I sell I hold for an average of about two weeks. The average return is really high because I've sold some notes for a premium (I really wanted to hold them) the day after I got them. When you annualize that, it gets pretty crazy. However, my median annualized return from selling notes is 43.7%. The notes I am currently holding I've held for an average of about two weeks. The purchase price of the notes I am holding now average $18.27.

I still haven't had a default. I focus on buying high interest rate notes in their first year with either the highest Yield to Maturity or the lowest Markup (roughly equivalent). I want the notes to be $25 fractions of the overall loan. Then I sell the note for somewhere between 16% and 32% annualized (assuming it sells in 7 days). Since I don't hold notes for more than two weeks on average, that means no note really even has a chance of defaulting. That and I choose notes in the first year, which is the least likely time to default on a note (in my opinion).

I've found that there is a limited number of low Markup (or high Yield to Maturity) $25 fraction notes for sale. There are several in the range of $250 fraction, but the minimal ones tend to have a higher markup. The opportunity is there to take the lowest Markup $25 fraction notes and mark them up higher. If I can continually buy all the lowest Markup $25 fraction notes, and make sure the lowest ones are the ones I am reselling, then it increases the demand for my notes. At least that's the theory.

Tax Rate

2011-08-20T09:01:00.004-05:00

As I was writing about how I determine the sales price of my notes, I realized that I had the tax rate at 15%. Why 15%? That is that value i was using for my stock spreadsheet. Short term gains are basically regular income. To be on the safe side, I should probably use 25%.

Of the notes I've sold, one had a -6% APY (because of tax). I think this one was a typo when entering the sales price.

The rest were over 16%. Many much over 16%.

So I made a mistake with the tax rate calculation, but because of my margins of safety, I'm still getting more than 16% APY overall.

Strategy Change After One Month

2011-08-20T08:54:00.001-05:00

I think I've mentioned that I require a minimum of 16% APY on my investments. So after the first month I'm getting 24% to 46% return, why would I change? My other priority, time.

I'd like to spend less than 30 minutes a week with account maintenance. I was selling more than three notes a week, which didn't take much time to turn around and buy a new note, but I'd like to spend less time churning notes.

Ideally I'd sell one, maybe two, notes a week. That way I don't feel like I've got a lot of money "sitting on the couch" waiting until I refresh to sell orders.

So to compensate, each week I increase my target APY for my sale price calculation. Currently it's at 18% instead of 16%. Remember that is the minimum annualized gain if the note sells seven days after I put the sell order in, so the gain will be higher.

Basically I feel I am pricing my notes too low so they are selling too fast. I need to create less demand for them by increasing the price, which will allow me to spend less time managing my account. It also has the side benefit of higher return per sale.

So now my strategy is this:

1. Buy high return, high risk notes within the first year of being issued.
2. The riskiest of my notes get offered for sales for whatever rate (currently 18% APY) sells less than 10% of my notes per week.
3. As money accumulates in my account (payments, interest, sales proceeds) look to buy notes. For small amounts I'm not so picky about the risk/interest rate.

My Initial Lending Club Strategy

2011-08-19T20:41:00.002-05:00

I look for a minimum of 16% return per year. So my strategy with Lending Club was initially to fund a bunch of F rated notes (default/return rates: A 1%/6%, B 3%/8%, C 5%/10%, D 6%/11%, E 6%/13%, F 8%/14%, G 11%/15%). I looked at the data and decided I could get 16% holding those notes. I was glad there was a way to cash out, trading notes, but wasn't interested in trading frequently.

Then I found out I lived in a state that does not allow funding of notes. So I stated to look at buying notes. My strategy became to look for notes that are not, and have never been, behind, with the lowest premium, and the highest return. Pickings can be slim if you are picky.

And speaking if picky, I do look at the notes to see what is behind them. I look for people paying off, or consolidating credit cards or other debt. Lending Club stats show these to be low default loans. I also look for home owners, although info let in renters some times. I'll buy notes other than consolidation, but I really shy away from "start a business" and purchases.

When looking to buy a note, I filter out anything that is less than 17% and sort by premium. You can buy notes worth hundreds, or even thousands, but I'm looking for anything up to just over $25. Initially it was to diversify my default risk, but it has come to be key to my trading strategy.

I try to make sure all of my money is in a note at all times. Your money can't work for you if it's sitting on the couch.

I'm also a big fan of a Zillow.com concept, Make-Me-Move. The idea is that you are not emotionally tied to your house (or in this case note) and would sell it, for the right price. So my spreadsheet calculates at what price I could sell each note for in a week and get a 16% return per year rate, taking into account selling fees (1%), taxes (15%) and payments received so far. This is then my Make-Me-Sell price, the idea being I could get a guaranteed 16%+ return without worrying about default.

My theory is that defaults generally don't happen at two times, the beginning of a loan and the end. At the beginning they have full intention of paying every month for three or five years. But then after a while, life happens. If they survive life hapenning, they get to the exciting time of "It's almost payed off!" the most dangerous years in a loan are the middle ones (or one in the case of a three year note).

So if I can buy new notes or notes about to finish out, I'll lower my risk of default. Hence why I set all my notes to a Make-Me-Sell price.

My spreadsheet also has a risk calculation. It is based on several factors, but determines how risky I think the loan is. The riskier notes I set their Make-Me-Sell price for 16% APY. The notes I'd like to keep, I still have a price, but it could be up to 80% APY. In other words, I don't want to be a day trader, but if you really want it, you're going to pay a high premium.

You may be asking why I set a 16%-80% return if sold at the end of the week. Why not month (which is what I do for stocks)? I'm not fond of the small window, I'd much rather a month. Foliofn only allows sell orders to remain in effect for seven days. This is ok when you have 15 notes, but not 800 (or for that matter 80). I think I will sort my spreadsheet by risk factor when the number gets unwieldy, and only offer my 15, or 30 most riskiest loans for sale.

This cycling through of my worst loans helps me ward off the most likely defaulters (assuming my risk calculations have any real world worth) and lock them in at 16%+ APY. The + comes in because the calculation of price assumes it is sold in seven days. However, when they sell it is usually not on the last day. Time value of money makes the actual APY more than 16%. Of course the longer I hold a note, the less those seven days makes a difference.

That is the basics of my initial strategy. Within a month of actually acting on this strategy, I saw some things that needed to change. So next up, how I'm changing up my strategy for month two.