WSO CDO Quarterly Update

For those who don't know, I began investing in P2P lending with Lending Club back in November. I built a portfolio of 10 sample loans so we could track the performance here on WSO. Obviously, 10 loans isn't a great representational sample, so it's more for fun than to derive any hard-core statistical data. That said, we just wrapped up the first quarter the loans have been in place, and I'm pleased to report that we're batting 1.000 so far.

I've included the actual screenshots after the jump so you can see the results for yourself, but in a nutshell everyone has made their first three payments as agreed with no late payments or defaults (yet - fingers crossed). The portfolio is paying an annualized 11.87%.


Now, the more detail oriented members of our community might notice that one of the loans is in there twice. This was an oversight of mine when I put the CDO together, and I left it that way for two reasons:

  1. It's a high-interest loan that is performing well and,
  2. I didn't want to be accused of gaming the results by swapping that loan out with one from my other portfolios

For those wondering about the reporting functionality of Lending Club, it's actually quite good and you can drill down into any loan for payment history, to see if the borrower's credit rating has risen or fallen, and a variety of other metrics. Here's what the individual loan screen looks like:

Of the nine different loans in the portfolio, two borrowers' credit scores have risen, two have remained unchanged, and five have fallen (gulp). I don't read much into that in the first three months of a new loan, but if the trend continues next quarter I might make a little more of it. We also have the option of selling individual loans on the secondary market, so that's something to consider as well if we get nervous about a particular borrower.

Overall, I couldn't be happier with the Lending Club experience so far. The people over there are great and are really evangelical about P2P lending, so they're not just phoning it in. I've noticed greater competition for the better loans, so investors are obviously piling into P2P lending in greater numbers. I understand a few hedge funds have also opened portfolios.

If you guys have any questions, fire away.

 
jqbuyside:
How is the collateral (if any) secured? Does Lending Club act as the special servicer? And, if so, do they retain an equity piece?

Unfortunately, it's all unsecured even if the proceeds are used to purchase an asset (car loan, for example). Lending Club services the loans and divides the monthly payments among (often) hundreds of investors. They charge the borrower 1% of the loan amount, and I don't remember how much they charge to service the loan because all reported returns are NET of those fees.

I know I didn't clarify this in the post, but I initially invested $25 each in 10 loans for a total of $250 invested in the WSO CDO.

 

Great to see. I'm doing my senior thesis on P2P lending and am always interested in seeing this market succeed.

Eddie,

I remember in some random thread you posted that you had a significant chunk of money invested in P2P. How do you think this asset class compares with more traditional asset classes?

looking for that pick-me-up to power through an all-nighter?
 
Best Response

For me, it's all about risk tolerance. Part of my personal risk tolerance is dealing with quantifiable risk in the first place. I don't mind taking risk, and more risk than most people, but what I can't abide are the black swans that we've seen in the broader market over the past couple years.

Investors short Goldman or AIG or any of the other TBTF banks and companies got royally fucked when the rules changed mid-game. I enjoyed a nice ROI in the market in 2009, and then I moved into cash and silver (and shorted the ridiculous stock market from time to time with little success). As I've often said on this site, I won't even consider a move back into equities until the Dow is under 7,500 again, and if that never happens so be it.

So I've been researching alternative investment classes since early 2010. P2P lending happens to be one I'm very comfortable with, appears to provide a nice return, and has the added benefit of taking money away from the TBTF banks I so detest.

 

Thanks for sharing your results, Eddie, I hope your success continues. The consumer credit asset class is one of the very few asset classes that has been pretty much off limits for individual investors until p2p lending came along. It is an industry that is growing rapidly because of three big tailwinds right now. 1) People still hate the TBTF banks and are happy to stick it to them. 2) With interest rates still near zero people are more open to new alternatives. 3) The stock market crash of 2008-09 is still very fresh in people's minds and many people like yourself are reluctant to put money to work there.

This is why the industry is seeing year over year growth of over 100%, and until interest rates rise I expect this growth to continue unabated. Peer to peer lending still only accounts for approximately 0.01% of the total consumer credit market. There is room for quite a bit more growth.

 

I am also a lending club member- my oldest notes are about 18 months old now, most are over a year old. My personal performance is 10.97%, with only one note defaulted or charged off. I have had and currently have some notes that are late, but most seem to come back around on the straight and narrow. I have about 130 notes in total, with a few grand invested. I hand pick my notes.

I think Lending club is a great investment vehicle. The only potential downside is when I told a loan officer about my notes, and she did not want to include them as assets. So keep that in mind if you are looking to buy a place and want to invest a significant amount.

I have noticed on the note trading platform that there used to be a lot of inefficiencies there, but it seems a lot of the mispricing has gone away.

 

Wow, how old is this P2P lending? When the financial crisis was in full swing and banks weren't lending I thought of this P2P lending and figured 1.) somebody with more resources than myself has aready thought of it and it already exists, or 2.) there are probably legal constraints. Very cool stuff though!

"One should recognize reality even when one doesn't like it, indeed, especially when one doesn't like it." - Charlie Munger
 
cplpayne:
Wow, how old is this P2P lending? When the financial crisis was in full swing and banks weren't lending I thought of this P2P lending and figured 1.) somebody with more resources than myself has aready thought of it and it already exists, or 2.) there are probably legal constraints. Very cool stuff though!
Prosper has been along for a long while but the interface never attracted me. Lendingclub appears to be more intuitive/functional. I signed up for the trading platform, curious to see how this goes.
 
cplpayne:
Wow, how old is this P2P lending? When the financial crisis was in full swing and banks weren't lending I thought of this P2P lending and figured 1.) somebody with more resources than myself has aready thought of it and it already exists, or 2.) there are probably legal constraints. Very cool stuff though!

Lending club has been around a bit over 3 years now, so their data is just starting to reflect full loan lifecycles. Prosper, another P2P lending site has been around much longer, but Prosper used an auction model to decide the final interest rate, and most people got money way too cheaply for their credit risk- most investors lost money. I heard prosper redesigned their site to make it more like LC's, but LC just seems to be a better company- they are very straightforward with their stats and data, more so than Prosper ever was.

Also, WSO_ninja- your numbers are off- If you are a great credit risk, you are going to get money at around 8%. You can reinvest it to the toxic risk guys at around 17% or so, but there also fees involved as a borrower. It could work out, but I think your risk is going to be quite high. Keep in mind too that Lending club is more of a lending source of last resort, rather than a place to get money at a competitive rate.

 

Interested as well......I might put some money into it after some research.

"One should recognize reality even when one doesn't like it, indeed, especially when one doesn't like it." - Charlie Munger
 

Interesting thought - Say I took out a loan on lending club with impeccable credit, let's say I pay 5.5% interest...I then loan this money out to a diversified portfolio averaging 10%. Profit???

 
WSO_Ninja:
Interesting thought - Say I took out a loan on lending club with impeccable credit, let's say I pay 5.5% interest...I then loan this money out to a diversified portfolio averaging 10%. Profit???

There are many people doing this with p2p lending - they are called Blenders (as in borrowers who lend). Here is a link to story about it: http://www.mydollarplan.com/social-lending-arbitrage/

Also, just a heads up for new people doing research. You should check out Lendstats.com, it is the best place to slice and dice the historical loan database for both Prosper & Lending Club. I like to play around with the loan filters for both companies.

 

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