Last week Lending Club quietly made the addition of recovery rates to their performance page. The graphic above (click on it for the full size version) shows recovering rates for all their p2p loans that were not current as of the end of August 2010.
What Does Recovery Rate Mean?
First let’s define what they mean by recovery rate. When a loan enters the “In Grace Period” it means the borrower is late on their loan payment. In Grace Period means the loan payment is between 1 and 15 days late. They become officially late if the payment has not been made within 15 days of the due date.
In this chart above, what Lending Club has done is look at all the loans that were not current at the end of August 2010. They took a six month period and worked out how many of these loans were recovered. You can see that 83% of loans that were officially In Grace Period at the end of August had been fully or partially recovered by the end of February 2011.
Now, they do say fully or partially recovered and so you might think that there would be a big difference between the two, but this is not the case. Let’s provide an example to illustrate. Say a borrower has a $20,000 loan with a $500 monthly payment. In August 2010 he falls behind and and enters the Late (15-30 days) category. To be included in the recovery numbers the borrower must have made full payments on all his past due balances. I double checked this with Lending Club.
So to take our example further this borrower must have made at least $2,500 in loan payments (excluding late fees) to have been considered fully or partially recovered. To be included as partially recovered the final loan payment (to bring the account current) must have only had a portion paid. If it was not made at all then it would have been included again in one of the late categories.
Why is Recovery Rate Important?
According to the chart above there is an 83% chance that a loan will be recovered from In Grace Period, a 75% chance that a loan will be recovered from 15-30 days late and (most surprising to me) a 55% chance the loan will be recovered if 31-120 days late. This is good news for those people who have just noticed one of their loans slip into Late status.
Many people assume that if a loan in your portfolio moves into In Grace Period then it is most likely going to default. These stats from Lending Club point out that this is not really true. I know from personal experience that many of my loans have gone into In Grace Period or even 31-120 days late and then they return to current and the borrower continues making monthly payments on time.
Now, I know many investors sell their notes on the trading platform as soon as they enter the In-Grace Period status. This may well be prudent if you can get close to the face value of the note, but if you are taking a 25% hit on the value of these notes then maybe you should reconsider.
My Take on This Change
This is a step in the right direction for Lending Club in that it provides more data for investors. But more needs to be done. Ideally the statistics page at Lending Club should be more interactive and more like the loan filter at Lendstats.com. Lending Club has all the data, but they are not allowing investors to access it easily. In talks with Lending Club management they have indicated their intention to provide a much better statistical analysis page in the future which would be a welcome addition for many investors.
While both Lending Club and Prosper provide their entire loan database for download, neither company provides a robust front end to inquire into that database. While I applaud Lending Club for providing this additional information there is still no way to run filters on their entire database except through a third party site like Lendstats.com.
Lending Club has indicated that they will be updating their recovery rates monthly. It will be interesting to see the trends in these numbers. Right now, I think they are better than most people (I speak for myself at least) expected. But it would be great if they get even better.