Many of us here are obsessed with defaults. We hate to see defaults and we are always looking for ways to minimize them. But not all defaults are created equal.
When you invest $25 into a new loan you have your entire principal amount at risk initially. But as soon as you start receiving payments you reduce your potential losses. I have some loans from August 2009 where I have received more in payments than my original principal, so even if the loan defaults now I cannot lose money.
But what about the entire Lending Club portfolio? How are defaults impacting principal losses over the duration of a loan? Well reader Bryce Mason wondered the same thing and he produced this attractive chart below.
[Update March 6: Bryce realized a small error in his calculations that has altered the chart slightly. The lines of the chart still end up in the same place but have a slightly different slope that is a little steeper at the beginning].
Bryce has analyzed all completed loans from the very beginning of Lending Club through the first quarter of 2009. He has graphed the amount of principal that was written off over the life of the loans, separating out the information by quarter.
Principal Write Offs Improving
It comes as no surprise that the first three quarters were the worst ones. Lending Club was just getting going and all these borrowers went through the thick of the financial crisis with these loans. And while the improvement hasn’t been consistent, you can see that Lending Club has certainly improved. The latest quarter, Q1 2009, which is not quite complete yet, is easily the best quarter thus far.
Here are some points to keep in mind when looking at this chart:
- These are all 36 month loans.
- Lending Club’s quiet period lasted from April until October 2008 and while they did issue loans during this time the volume was pretty low.
- In October 2008 Lending Club changed their underwriting rules significantly increasing the minimum FICO score from 640 to 660.
What was most interesting to me about this chart is that the lines were more linear than I expected. I would have thought that principal write-off would be higher in the first year and then start to taper off after year 2. But as you can see in Q1-2009 the line has gone steadily up although the good news is that this is by far the best quarter.
I appreciate Bryce sending me this chart and allowing me to publish it here for all the readers to see. Let me know what you think in the comments.