Brandon Hansen has captured minor fame for his in-depth analysis of everything from how to beat traffic mathematically to putting gas prices in perspective. Now he takes a look at the LendingMatch algorithm as he decides to diversify his investments with Lending Club. Read the whole article here:
Showing posts with label LendingMatch. Show all posts
Showing posts with label LendingMatch. Show all posts
P2P lending in a credit storm
Techdirt is one of my favorite sites. I subscribe to their daily emails, am a member of their Insight Community and love their news analysis. Mike Masnick in particular provides some great economic analysis of niche topics like the RIAA, DRM, piracy, copyright, laws, and the entertainment industry. Today they tackled peer to peer lending sites in an article called Peer-To-Peer Lending Sites Weather Credit Market Storms and got it all wrong. Here's what Techdirt's Joe Weisenthal had to say. It's short so I'll quote the whole thing:
"Will all of the turmoil in conventional credit markets spur greater interest upstart peer-to-peer lending exchanges? It seems possible, since, in a way, sites like Prosper and Zopa are the antithesis of the highly impersonal, securitized industry that's facing so many problems right now. From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business. Lenders aren't seeing mass defaults, because the standards have been high since the beginning. Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine. Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth."
Let's take a closer look at each of his points.
"From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. "
First, what are the peer to peer lending sites we are talking about? Right now there are only two peer to peer lending sites available to lenders or investors in the U.S. - Prosper and Lending Club. The article mentions Zopa but Zopa has yet to launch in the U.S.
I'm not sure of any way that Prosper has emphasized diversification. In fact, Matt wrote an article last month about this - Most Prosper lenders do not diversify their portfolio. Clearly diversification is one of the keys to successful lending but since the minimum amount that can be committed to an individual loan is $50 most lenders never reach an appropriate level of diversification. 70% of lenders on Prosper have less than 20 loans. If one loan defaults they lose 5% or more of their total investment. (Of course, the amount lost is reduced as the loan matures.)
Lending Club, on the other had, has emphasized diversification since their launch three months ago. The minimum loan amount is $25 instead of $50. They have a program called LendingMatch which is supposed to help borrowers diversify based on their risk preferences. If you use LendingMatch you are required to start lending with $500 and pick your level of risk tolerance on a scale of 1 (less risk) to 5 (more risk). As you move to a 5 the average interest rate on your loans move up and the credit grade of your borrowers goes down.
As far as emphasizing direct relationships, Prosper and Lending Club try. Prosper has a group program that is supposed to bring a community feel to lending. Angry lenders on the Prosper forums don't think it's working. Lending Club uses the Facebook platform to build connections between lenders and borrowers. The potential benefit of the connections is greatly mitigated by the desire and requirement for anonymity for lenders and borrowers as I discussed in this article.
"Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business."
Is this true? There are different ways to define brisk business, of course. On the surface, it appears business is booming. Over $84 million has changed hands on Prosper. Prosper just received $20 million in venture capital and Lending Club got $10 million. Lending Club has hit several quick milestones since their launch in May - $100,000 then $250,000 and they are now at $881,600. Loanio and GlobeFunder are preparing to launch this fall. Zopa is expanding to the U.S. However, a look at loan growth on Prosper shows a different story. This graph, from Eric's Credit Community, shows loan growth is slowing. Lending Stats also has a nice graph showing the same trend.
As for lenders, Prosper does give the ability to diversity to a new asset class. It is different than other investments in significant ways. This could be valuable as lenders try to weather the sub-prime storm. It's unlikely, however, that peer to peer lending sites will fare much better than the sub-prime market at large. Matt, in his article about the effects of a recession on Prosper recommended, "...don't put all of your investment money into any one asset class. You should start with an emergency fund in something like a money market or savings account that can be easily accessed if needed for an emergency. Then any remaining money can be diversified among several different asset classes - stocks, bonds, real estate, foreign markets, and Prosper. The allocation percentages should be based on your risk tolerance and investment timeframe. The longer term (10+ year) money can have a higher percentage in stocks, the mid-term (5-10 year) money can have a higher percentage in Prosper, and the shorter term (<5 year) money should be mostly in cash accounts or bond funds."
Techdirt raises some good points. I think we will see new activity in the peer to peer lending markets in this 'credit market storm' from borrowers and lenders. This activity, however, cannot solve many of the underlying problems that are driving this storm. Borrowers who are going to default with a bank are still going to default on peer to peer sites. Lenders who invest in these borrowers are going to lose money and will tend to favor borrowers with better credit. The same borrowers would be eligible for credit from banks.
"Will all of the turmoil in conventional credit markets spur greater interest upstart peer-to-peer lending exchanges? It seems possible, since, in a way, sites like Prosper and Zopa are the antithesis of the highly impersonal, securitized industry that's facing so many problems right now. From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business. Lenders aren't seeing mass defaults, because the standards have been high since the beginning. Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine. Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth."
Let's take a closer look at each of his points.
"From the outset, these P2P lending sites have emphasized diversification, manageable risks and direct relationships between lenders and borrowers. "
First, what are the peer to peer lending sites we are talking about? Right now there are only two peer to peer lending sites available to lenders or investors in the U.S. - Prosper and Lending Club. The article mentions Zopa but Zopa has yet to launch in the U.S.
I'm not sure of any way that Prosper has emphasized diversification. In fact, Matt wrote an article last month about this - Most Prosper lenders do not diversify their portfolio. Clearly diversification is one of the keys to successful lending but since the minimum amount that can be committed to an individual loan is $50 most lenders never reach an appropriate level of diversification. 70% of lenders on Prosper have less than 20 loans. If one loan defaults they lose 5% or more of their total investment. (Of course, the amount lost is reduced as the loan matures.)
Lending Club, on the other had, has emphasized diversification since their launch three months ago. The minimum loan amount is $25 instead of $50. They have a program called LendingMatch which is supposed to help borrowers diversify based on their risk preferences. If you use LendingMatch you are required to start lending with $500 and pick your level of risk tolerance on a scale of 1 (less risk) to 5 (more risk). As you move to a 5 the average interest rate on your loans move up and the credit grade of your borrowers goes down.
As far as emphasizing direct relationships, Prosper and Lending Club try. Prosper has a group program that is supposed to bring a community feel to lending. Angry lenders on the Prosper forums don't think it's working. Lending Club uses the Facebook platform to build connections between lenders and borrowers. The potential benefit of the connections is greatly mitigated by the desire and requirement for anonymity for lenders and borrowers as I discussed in this article.
"Whereas traditional loan brokers are closing their doors left and right, these sites continue to do brisk business."
Is this true? There are different ways to define brisk business, of course. On the surface, it appears business is booming. Over $84 million has changed hands on Prosper. Prosper just received $20 million in venture capital and Lending Club got $10 million. Lending Club has hit several quick milestones since their launch in May - $100,000 then $250,000 and they are now at $881,600. Loanio and GlobeFunder are preparing to launch this fall. Zopa is expanding to the U.S. However, a look at loan growth on Prosper shows a different story. This graph, from Eric's Credit Community, shows loan growth is slowing. Lending Stats also has a nice graph showing the same trend.
From a peak of over $8.5 million in April, loans on Prosper have dropped month by month. From roughly $8.5 million to 7.5 million to 7 million to 6.5 million with each passing month. This is despite a new aggressive referral program which has created more than 5,000 new borrowers and lenders.
Although the drop started in May, it cannot be explained away by competition from Lending Club since Lending Club is still under $1 million in loans. The trend is most likely due to a realization among lenders on Prosper that high risk loans have a high default rate and are not a wise investment. To be fair, the August numbers may still improve. It's the last day of the month right now and loans can take a week or two from the time they close to the time they actually originate. The trend does show, however, that lending on P2P networks may not be as brisk as news reports indicate.
"Lenders aren't seeing mass defaults, because the standards have been high since the beginning."
Unfortunately, standards haven't been high since the beginning. At one time Prosper allowed people with no credit to borrow. This was a disaster and they stopped that experiment. Default rates for high risk borrowers, as Matt pointed out in his article about risk and diversification, are very high. According to his article, 45% of HR borrowers are late or in default and 28% of E borrowers are late or in default. This translates into a negative expected rate of return for borrowers. Prosper now warns lenders of the risk when lending to HR or E borrowers.
"Of course, the scale is different. You still can't finance a house through one of these sites, but for other needs, they may work just fine."
Very true, P2P lending sites are better suited for other needs such as consolidating credit card loans or funding a start-up.
There is, however, potential for peer to peer mortgage lending. Circle Lending is a peer to peer lending site that facilitates mortgage loans among family and friends. The big difference between Circle Lending and other peer to peer lending sites is that it's not a good option for investors, just family and friends who want to help out someone they actually know. There has been some media attention into the possibility for Prosper to facilitate small mortgages - those under $50,000 where other mortgage lenders can't help. In addition, there is a new start-up which we wrote about, Equity sharing - Prosper for real estate, which uses a P2P lending model for mortgages.
"Between the lack of available credit to consumers and a desire to diversify investments on the part of individuals, this moment in the business cycle offers these sites an excellent chance to really prove their worth."
There is a lot of truth in this statement. Lack of available credit will push borrowers to other places such as peer to peer lending sites. However, their luck might not be much better. Due to recent defaults, lenders on Prosper and other sites are getting wiser. Sub prime borrowers are not getting funded at the same rate they were months ago. Lending Club does not permit borrowers with a score below 640 to request a loan. Except for very small loans (under $5,000), sub prime borrowers are already very nearly shut out of the peer to peer lending market. Despite all this, Prosper still makes a lot of sense for many borrowers with good credit who are looking for an unsecured loan.As for lenders, Prosper does give the ability to diversity to a new asset class. It is different than other investments in significant ways. This could be valuable as lenders try to weather the sub-prime storm. It's unlikely, however, that peer to peer lending sites will fare much better than the sub-prime market at large. Matt, in his article about the effects of a recession on Prosper recommended, "...don't put all of your investment money into any one asset class. You should start with an emergency fund in something like a money market or savings account that can be easily accessed if needed for an emergency. Then any remaining money can be diversified among several different asset classes - stocks, bonds, real estate, foreign markets, and Prosper. The allocation percentages should be based on your risk tolerance and investment timeframe. The longer term (10+ year) money can have a higher percentage in stocks, the mid-term (5-10 year) money can have a higher percentage in Prosper, and the shorter term (<5 year) money should be mostly in cash accounts or bond funds."
Techdirt raises some good points. I think we will see new activity in the peer to peer lending markets in this 'credit market storm' from borrowers and lenders. This activity, however, cannot solve many of the underlying problems that are driving this storm. Borrowers who are going to default with a bank are still going to default on peer to peer sites. Lenders who invest in these borrowers are going to lose money and will tend to favor borrowers with better credit. The same borrowers would be eligible for credit from banks.
Lending Club announces new features
This week we have been paying a lot of attention to Lending Club's video contest. That's not the only thing going on over at Lending Club. I just received an email announcing two "new" features and notice their blog mentions four others. First, the two from email:
LendingMatch™ and borrowing minimums are now $500
You can now use LendingMatch™ to generate portfolio recommendations with as little as $500. It is necessary to lend at least $500 to use LendingMatch™ because the algorithm tries to allocate your investment into at least 20 fractions of loans, for diversification purposes. Since the minimum investment in each loan is $25, you need at least $500 in total. The minimum amount you can lend without using LendingMatch™ remains unchanged at $25. You will also see smaller loans on the site, as we have reduced the minimum loan amount to $500.
Invite your Facebook friends and earn referral bonuses
You can invite 10 Facebook friends per day (in accordance with Facebook's privacy policy) to Lending Club and you'll receive $5 for each person who becomes a member. Let all of your friends know that you have money to lend them!
LendingMatch is Lending Club's answer to the diversification problem. As Matt mentioned in a previous article, most Prosper lenders do not diversify. Mostly, this is because they do not have enough invested. If you are invested in one loan and it defaults you lose all your money. Diversification is very important.
As I mentioned back in July, Lending Club "quietly launched a referral program." Now they are making it more public via email to lenders and a blog post.
The other four new features mentioned on their blog post are:
LendingMatch™ and borrowing minimums are now $500
You can now use LendingMatch™ to generate portfolio recommendations with as little as $500. It is necessary to lend at least $500 to use LendingMatch™ because the algorithm tries to allocate your investment into at least 20 fractions of loans, for diversification purposes. Since the minimum investment in each loan is $25, you need at least $500 in total. The minimum amount you can lend without using LendingMatch™ remains unchanged at $25. You will also see smaller loans on the site, as we have reduced the minimum loan amount to $500.
Invite your Facebook friends and earn referral bonuses
You can invite 10 Facebook friends per day (in accordance with Facebook's privacy policy) to Lending Club and you'll receive $5 for each person who becomes a member. Let all of your friends know that you have money to lend them!
LendingMatch is Lending Club's answer to the diversification problem. As Matt mentioned in a previous article, most Prosper lenders do not diversify. Mostly, this is because they do not have enough invested. If you are invested in one loan and it defaults you lose all your money. Diversification is very important.
As I mentioned back in July, Lending Club "quietly launched a referral program." Now they are making it more public via email to lenders and a blog post.
The other four new features mentioned on their blog post are:
- Minimum loan request for borrowers is now $500 instead of $1,000.
- The my account area now contains detailed portfolio analysis and individual loan information.
- Adjustments to the expected monthly payment amount to deal with rounding issues.
- Borrowers from Arizona can now request loans.
Lending Club's Blog educates readers
Lending Club is challenging Prosper to become the leading peer to peer loan marketplace in the United States. They have been online since May 26th - just six weeks. I have not signed up as a lender or borrower yet, but I've been watching their blog pretty close. I've been very impressed with their communication with their community through the blog.
Of course they have the normal things you would expect on a corporate blog such as Lending Club announcements, but they also make a genuine effort to educate users on sound financial principles (mostly the perils of credit card debt). The posts are not overly technical or complicated. Most seem to be written for the average college age person. Someone who might be applying for their first credit card or taking out their first loan. They are clearly attempting to target the Facebook demographic. Here's a quick wrap up of the Lending Club Blog from the last six weeks along with some brief notes from me:
Education
Good Credit Part 1 - The importance of good credit - aimed at college students; housing, job, car
Good Credit Part 2 - FICO Review - what is credit; also see Components that make up a FICO score
Good Credit Part 3 - How to maintain good credit
Investment Mistake 1 - Procrastination
Investment Mistake 2 - Money Ignorance
Financial Independence - develop financial plan, start now
P2P Lending 101: The C's of Credit - character, capacity to pay, capital, collateral
Beware of the credit card access check - don't use the blank checks that credit cards send you without reading all the fine print
Know where your money goes - basic budgeting
Keeping tabs on your credit - one free copy of your credit report per year
Three financial ships - work, investment, charity (receiving, not giving)
Students: Don't be afraid of student loans - difference between 'bad' credit card debt and 'good' student loan debt
Primer on debt reduction - pay of highest interest rate debt first, consolidate debt
What banks don't want you to know - explains the practice of "universal default"; how banks can change your rates if you are late with a payment on another account
Credit Card debt is not simple - minimum payment on a $1,000 credit card debt can be a 22 year commitment
How much profit do credit card issuers generate - $16 for every $100 in outstanding credit balance
Is FICO score a reliable indicator of credit-worthiness - broaches topic of social credit scoring, how someone is more likely to pay their debt on time when they borrow from a community of people they know
Read the fine print - how credit card companies deliberately deceive card holders; the make a pledge "Lending Club does not operate with small print"
Double-cycle billing. Say what? - double cycle billing is used by 1/3 of credit card issuers and significantly increases interest
Grace Period - difference between effective annual rate (ERA) and APR and credit card grace periods
Jargon Watch: Defining DTI - percentage of a consumer’s monthly gross income that goes toward paying debts
Jargon Watch: Defining FICO - stands for Fair Isaac Corporation and is the standard credit scoring system used today; Lending Club's minimum FICO for borrowers is 640
Lending Club Promotion
Why a personal loan from Lending Club makes the most sense - interest rate, fixed payments/term, unsecure loan
Lending Club: an alternative to credit cards
Lending Club News
Close rate: 71% - a sharp increase from the original reports that only 1/3 of loans were closing
LendingMatch: Diversification and Matching - Lending Club's technology that helps lenders build their portfolio with respect to their risk/reward profile and their social connections through Facebook; also read this about LendingMatch
One week on Facebook - the report from their first week (4,000 users signed up in the first week; they are at just over 10,000 now)
Lending Club: How do we make money? How are we different than a bank? - financial comparisons between Lending Club’s operating model and bank’s models are difficult
From all early indications, Lending Club clearly has the best blog among peer to peer loan networks. By providing good, common sense financial advice they will attract an audience that will likely turn into borrowers and lenders.
Of course they have the normal things you would expect on a corporate blog such as Lending Club announcements, but they also make a genuine effort to educate users on sound financial principles (mostly the perils of credit card debt). The posts are not overly technical or complicated. Most seem to be written for the average college age person. Someone who might be applying for their first credit card or taking out their first loan. They are clearly attempting to target the Facebook demographic. Here's a quick wrap up of the Lending Club Blog from the last six weeks along with some brief notes from me:
Education
Good Credit Part 1 - The importance of good credit - aimed at college students; housing, job, car
Good Credit Part 2 - FICO Review - what is credit; also see Components that make up a FICO score
Good Credit Part 3 - How to maintain good credit
Investment Mistake 1 - Procrastination
Investment Mistake 2 - Money Ignorance
Financial Independence - develop financial plan, start now
P2P Lending 101: The C's of Credit - character, capacity to pay, capital, collateral
Beware of the credit card access check - don't use the blank checks that credit cards send you without reading all the fine print
Know where your money goes - basic budgeting
Keeping tabs on your credit - one free copy of your credit report per year
Three financial ships - work, investment, charity (receiving, not giving)
Students: Don't be afraid of student loans - difference between 'bad' credit card debt and 'good' student loan debt
Primer on debt reduction - pay of highest interest rate debt first, consolidate debt
What banks don't want you to know - explains the practice of "universal default"; how banks can change your rates if you are late with a payment on another account
Credit Card debt is not simple - minimum payment on a $1,000 credit card debt can be a 22 year commitment
How much profit do credit card issuers generate - $16 for every $100 in outstanding credit balance
Is FICO score a reliable indicator of credit-worthiness - broaches topic of social credit scoring, how someone is more likely to pay their debt on time when they borrow from a community of people they know
Read the fine print - how credit card companies deliberately deceive card holders; the make a pledge "Lending Club does not operate with small print"
Double-cycle billing. Say what? - double cycle billing is used by 1/3 of credit card issuers and significantly increases interest
Grace Period - difference between effective annual rate (ERA) and APR and credit card grace periods
Jargon Watch: Defining DTI - percentage of a consumer’s monthly gross income that goes toward paying debts
Jargon Watch: Defining FICO - stands for Fair Isaac Corporation and is the standard credit scoring system used today; Lending Club's minimum FICO for borrowers is 640
Lending Club Promotion
Why a personal loan from Lending Club makes the most sense - interest rate, fixed payments/term, unsecure loan
Lending Club: an alternative to credit cards
Lending Club News
Close rate: 71% - a sharp increase from the original reports that only 1/3 of loans were closing
LendingMatch: Diversification and Matching - Lending Club's technology that helps lenders build their portfolio with respect to their risk/reward profile and their social connections through Facebook; also read this about LendingMatch
One week on Facebook - the report from their first week (4,000 users signed up in the first week; they are at just over 10,000 now)
Lending Club: How do we make money? How are we different than a bank? - financial comparisons between Lending Club’s operating model and bank’s models are difficult
From all early indications, Lending Club clearly has the best blog among peer to peer loan networks. By providing good, common sense financial advice they will attract an audience that will likely turn into borrowers and lenders.
Subscribe to:
Posts (Atom)