P2P Cracks Start To Show As LendingClub Write-Offs Double Forecasts

Tyler Durden's picture

Peer-to-peer lending is probably a bad idea.

Securitizing peer-to-peer loans is definitely a bad idea.

Despite these virtually irrefutable truths, the P2P industry is thriving and Wall Street’s securitization machine couldn’t be happier about it. As we reported last May, P2P loan volume was set to surpass $76 billion in 2015 and one driver of the boom is demand from the likes of BlackRock, Morgan Stanley, and Goldman, who have all underwritten securitizations of loans originated on P2P platforms like LendingClub, the number one player in the space.

As we noted last summer, P2P loans create the conditions whereby borrowers can refi high-interest debt via personal loans, transferring credit risk from large financial institutions to private lenders in the process.

It’s not entirely clear what the implications of that shift might ultimately be, especially if the market continues to grow rapidly. “One thing,” we said, “is clear”: Using a relatively low-interest P2P loan to pay off a high-interest credit card is no different in principle than using a new credit card that comes with a teaser rate to pay off an old credit card.

In the end, the borrower will very often max out the old card again and thus end up with twice the original amount of debt.

The same dynamic applies to P2P lending. “So what’s to stop consumers from levering their credit cards back up?” Bloomberg asked last year. “Such behavior could spell bad news for investors in P2P loans if an interest rate hike or an unforeseen shock pressures borrowers," Michael Tarkan, an equities analyst at Compass Point Research said.

“We’ve created a mechanism to refinance a credit card into an unsecured personal loan,” he added. “This may prove to be a superior model, but we just don’t know because it hasn’t been tested yet through a full credit cycle.”

No, we "just don't know", but we may be about to find out because a new presentation from LendingClub indicates that the cracks are starting to show. “LC Advisors, an investment adviser owned by LendingClub that helps people buy loans arranged by the company, said last week in a presentation that some of the debt is ‘underperforming vs. expectations,’” Bloomberg wrote on Friday. “A chart on one of the slides shows that write-off rates for a portion of five-year LendingClub loans were roughly 7 percent to 8 percent, compared with a forecast range of around 4 percent to 6 percent.” Here’s the slide in question:

In other words, the algorithms LendingClub uses to assess credit risk aren't working. Plain and simple. 

“Their business is to take data and use that to underwrite risk,” the aforementioned Michael Tarkan told Bloomberg by phone. “If you’re an investor in the loans on the platform, this creates a concern around that underwriting model.”

It sure does, as does common sense. Matching up individual borrowers and lenders may sound like a good idea in principle, but effectively, you've got a brand new set of companies (the P2Ps) attempting to assess individual borrowers' credit risk on the fly in cyberspace, an absurdly difficult proposition and one that obviously comes with myriad risks especially when those credits are sliced up and sold to investors. 

Securitizations of these loans are just consumer ABS deals. That is, they're no different than securitized credit card receivables or the nightmarish deals that emanate from Springleaf and OneMain

What the slide above shows is that LendingClub is terrible at assessing credit risk. A write-off rate of 7-8% may not sound that bad (well, actually it does, but because P2P is relatively new, we don't really have a benchmark), it's double the low-end internal estimate. That's bad. 

Throw in the fact that LendingClub is raising rates "to prepare for a potential slowdown in the US economy" and the fact that 70% of the jobs created by America's supposedly "robust" labor market are in the food and bev/ retail sector, and you can bet that charge-offs will skyrocket should the US careen into a recession.

Then again, it could be worse for LendingClub investors. The company could be run by Ding Ning.

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TrustbutVerify's picture

But, but, but,...I thought this kind of lending was kewl!  All the hipsters seem to think its kewl...so, how can it not be?  

TeamDepends's picture

#hipsterdouchebagholderslivesmatter

Purpurroter Regen's picture
Purpurroter Regen (not verified) TeamDepends Feb 6, 2016 10:49 PM

Bad idea, you think? Just like it was a bad idea when they turned Jesus into a Jew |o| http://wp.me/p4OZ4v-cw

MSimon's picture

Any person born to a Jewish mother is a Jew. According to Jewish law.

 

In fact Jews accord Jesus Rabbi status. Generally.

MayIMommaDogFace2theBananaPatch's picture

 

In fact Jews accord Jesus Rabbi status. Generally.

Some of them also regard the figure as a false messiah / prophet.

I actually made the same comment as above to an acquaintance once who got seriously indignant and felt compelled to make a big demonstrative spat into the street to emphasize his point.

We didn't talk much after that.

glenlloyd's picture

This sort of lending is just ridiculous, it's unnecessary. People with high rate cards should use the high rate as an incentive to pay it off and keep it paid off.

Borrowing for consumption is just a really bad idea.

Bendromeda Strain's picture

The Biblicism Institute are a vile lot

NoDebt's picture

P2P is built on direct-to-securitization loans.  They take the skim on the loan Day 1 and pass the losses on to those stupid enough to buy the paper.  That the underwriting is weak should not be shocking but, in fact, expected.  It wouldn't work if it wasn't.

spanish inquisition's picture

The charts were created in marketing and they are working just fine, thank you.

rbg81's picture

I thought this was a good idea for maybe a day and then got over it.  If you need interest yield that badly, there are much safer ways to get it.  

knukles's picture

#notheydon't
#theyshouldbesacrificedonthealtarofthegeorgiaguidestones

greenskeeper carl's picture

I used these guys. My wife quit working to just take care of the kids. Took her credit card debt and mine, neither of which were that big, and rolled it all up into one payment into a 3 year loan, paid it off in less than 2 years. I have a pretty high slave score, around 800, but the credit cards were still around 12% APR, the loan I got from them was less than 5%.If you use them responsibly, they can help you become debt free. But, most people aren't responsible.

 

But, even though I was responsible, a lot of people aren't. I get  emails offering to lend me 35k from them all the time. I also get offers to "invest" in P2P loans from the same people. In theory, I could borrow 35k from this same company at 5% and then "invest" the same money in people borrowing at 10% and make "risk free" 5% gains on my investment. No thanks.

NoDebt's picture

That's great, Carl, but you're not feeding the debt ponzi any more and that doesn't do them any good at all.  We're sitting on the edge of the next recession (within the overall depression) and you're there all debt-free and smug and not doing your part to endlessly expand the debt ponzi.

You dug out of $30K of debt?  Good.  Now go rack up $60K and pay if off.  Then $120K.  Better yet, NEVER pay it off.

Don't feel like it?  Fair enough.  We'll just have the government spend the money for you.  You owe a cool quarter mil already and it grows every minute of every day.  So, in reality, none of us are debt-free.

This only works if we all work together to stay hopelessly, endlessly in debt.

TeamDepends's picture

(it's late and everyone just wants to go home) Okay, how 'bout this: We take this debt, in the form of FRNs, and bury it in a big hole. Then we water it with the blood of banksters so that Jubilee Trees sprout up. Then, unicorns come and feast on the fruits of the Jubilee Trees. After digestation, the unicorns shoot forth from their bungholes Skittles Of Toxic Debt into outer space. The bad space aliens (Anunnaki) find these Skittles irresistable and gag on debt of their own making?

old naughty's picture

oh brother, i finally read something sensible after a good half-hour on the article and the blogs above.

;-p

2big2save's picture

If you are being offered unsecured capital at 5%, I suggest you take it. P2P massively favors the borrower. Exactly who is on the other side is a mystery to me.

TrustbutVerify's picture

Carl,

Great story...boring, but great story.  The larger takeaway story here is about the generation(s) (millennials, or whomever)  that, much more so than previous generations, when they do borrow they don't feel the need to pay it back.  And that in some way that's the way things work.  

Though they have been dealt a horrible hand by the older vampire generations - who refused to face what was necessary for their own generation to do to avoid sucking the future economic lifeblood from their children.  

"Retire early? I'm in!"  

"Unfunded pension with unreasonable promises from the start?  Yessir!  I'm out sooner than others so i can get a little but more than others before it implodes!"  

"Social Security for 50 years?  Damn straight!"  

Too bad the young hipster generations seem to be putting peddle to the metal in the same 'over-the-cliff' direction.  Look how they're voting. I saw one crying behind Bernie Sanders in a video today.  

knukles's picture

So I lend a $100 to my shit ball dead beat brother-in-law.  And my neighbor, the German guy who stays up all night screaming playing the Horst Wessel song, lends $100 bucks to his dead beat army buddy who's in a wheel chair, drooling, drunk all the time and can't even speak English.  So we collateralize a whole piss load of stuff like this.  Notice I say "stuff" so as not to bias you, not lead anybody to think that these're not good loans.  And Moody's and S&P say that if they're diversified enough with enough different dead beat buddies over a big enough geographic area yadda yadda yadda, the stuff's gooder than Mary Todd's homemade apple pie. 
(Would you like that with ice cream and a bit of brains on the side?)
So what could go wrong?

Well, we ain't talkin' collateralizin' the stuff, weighing, bailing and shipping it out, just doing bunches and bunches, gobs and gobs and oodles and oodles of the same old crappy tripe, maybe even like a Ponzi thrown on top to keep the cash flow going.  Y'all gettin' the picture?

Now, let me take it a step further.  Know that guy who stiffed you on E-Bay that not even E-Bay could set straight?  The one who kept the stuff you sent him, in which you never got paid and he sent you back an empty box?

Now, keep thinkin' good thoughts and there you got P2P.  I about wanted to beat (physically beat, I'm tellin' ya') some dork trying to tell me about how great this shit was one day. 
Sorta like the dimwit who tried to tell me that ... oh never mind.

Go for it.
There is absolutely NOTHING like experience.  Yes, try some and lose some of your own money and you'll believe me.
Another dumb idea for dumb people.

Oh and the other Great Thing About It is in lesser developed countries in particular, some people commit to paying serious vig rates, too.
Great for the game, it is.  Margins close to central banking.  Unless you ain't running the books and takin' your taste.

Yen Cross's picture

 I can't stop laughing. Knuks just wrote a CDScredit default swap agreement.

Blano's picture

Yeah, that was awesome.

I've said it before and I'll say it again....Knuks is one of my all-time favorite posters.

HedgeAccordingly's picture

Lending Club has been senting out out unsolicited offers in the mail like hot cakes the past year or so... 

http://hedgeaccordingly.com/2016/02/the-stench-of-socialism-in-the-usa.html

Scooby Dooby Doo's picture

Scooby will gladly pay you Tuesday for some kibbles today.

Father Thyme's picture
Father Thyme (not verified) Feb 6, 2016 10:29 PM

Charge-off of the light brigade!

Irving Phelps's picture

Unsecured PTP, which is really STS (stranger to stranger) is simply greed to grope for a return on ones money....how fucking stupid and desperate are we getting people !

Squid Viscous's picture

the whole thing smells jewish to me... usury combined with fraud, lying, and the anonymity of the interwebs

 

what could possibly go wrong?

MSimon's picture

So just how should people who loan money get paid?

 

Risk with no reward? There will be no loans.

 

You don't like interest on loans? Find some one who will loan you interest free. Maybe your brother-in-law.

Scooby Dooby Doo's picture

Those shady Muslim men are always singing their praises that Islam does not allow interest, all loans are free of interest.

Scooby says BAH! How can you trust interest free loans??! Even Tylers hates ZIRP!! He hates it!!!!!!!! as not American and Trump will stop this NOW!!

SCOOBY DOO!

Mauricio6401's picture

It worked for me. Thanks Lendingclub. Out of debt.  ;)

roddy6667's picture

Lending Club makes the loan shark you meet in the alley behind the dumpster look honorable.

The people who make the vig in the middle of all this don't care about write-offs. They have already taken their cut.

jailbirdjackson's picture

Lending Club margins seem to be very tight. I work in the industry, personal lending. The industry is expanding big in Chicago with lots of startups. I think it's more profitable in the subprime and near-prime segment. 

http://www.prnewswire.com/news-releases/enova-closes-107-million-securit...

Zombies On Toast's picture

If I remember this correctly in the movie "The Big Short" they said that if 8% of the mortgages in a MBS bond went bad then the bond blew up and the CDS on the bond would pay off. Is that how it works? How is this different?

Zombies On Toast's picture

If I remember this correctly in the movie "The Big Short" they said that if 8% of the mortgages in a MBS bond went bad then the bond blew up and the CDS on the bond would pay off. Is that how it works? How is this different?

Chris88's picture

LC is a joke.  They were trading (at start of 2015) at something like 900% of tangible book, with multiples on earnings like that of a tech company when they operate a business model that has no barriers to entry and is essentially garbage.  That falling knife was one great short, such a piece of crap.  

Satan's picture

"Stealing from Paul to pay Peter"...

You aren't Peter.

The Alarmist's picture

Lending Club ... is that like Hair Club for Men, or is that like the Super Adventure Club depicted on South Park?

I get rude remarks when I tell my colleagues we don't want to be in P2P, we want instead to be in payday lenders, like Wonga, with 1,200% APR that better reflects the risks you are taking on in this space.

glenlloyd's picture

Well if you're going to operate in the secondary loan market space with the type of risks there it ought to be 1200%.

Just sayin...

dogismycopilot's picture

Neither a lender nor a borrower be.

TheDanimal's picture

So I see they offer car loans on Lending Club.  I would assume those are actually secured, but does anyone have any information to the contrary?  I would sure love to arbitrage the shit out of this to get a free car.  I mean I'd at least try to make a payment or two, I'm not that much of a cold-hearted asshole.

Bryan Roland's picture

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