High tech or low tech, if you’re a lender, you have to lend to creditworthy borrowers. From Tyler Durden at zerohedge.com:
Online lenders were supposed to revolutionize the consumer loan industry. Instead, they are rapidly becoming yet another “the next subprime.”
We first started writing about the P2P sector in early 2015 with cautionary pieces like and “Presenting The $77 Billion P2P Bubble” and “What Bubble? Wall Street To Turn P2P Loans Into CDOs.” Things accelerated in February of this year when we first noted that substantial cracks were starting to show in the world of P2P lending, and more specifically, with LendingClub’s inability to assess credit risk of its borrowers that were causing the company to experience higher write-off rates than forecast.
Below is a chart that was used in a LendingClub presentation showing just how far off the company was in predicting write-off rates – the bread and butter of its business. It was evident then that their algorithms weren’t “working very well.”
At the time we said that 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. In other words, we said, the algorithms LendingClub uses to assess credit risk aren’t working. Plain and simple.
Three months later, in May of 2016, our skepticism was proven right when the stock of LendingClub – at the time the largest online consumer lender – imploded when the CEO resigned following an internal loan review.
Since then, despite a foreboding sense of deterioration behind the scenes, there were few material development to suggest that the cracks in the surface of the online lending industry were getting bigger.
Until today, that is, when we learned that – as expected – there has been a spike in online loan defaults by US consumers, sending a shockwave through the online lending industry: a group of online loans that were packaged into bonds is going bad faster than lenders and bond underwriters had expected even after the recent volatility in the P2P market, in what Bloomberg dubbed was “the latest sign that some startups that aimed to revolutionize the banking industry underestimated the risk they were taking.”
In a page taken right out of the CDO book of 2007, delinquencies and defaults on at least four different sets of bonds have reached the “triggers” points. Breaching those levels would force lenders or underwriters to start paying down the bonds early, redirecting cash from other uses such as lending and organic growth. According to Bloomberg, one company, Avant Inc. and its underwriters, will have to begin to repay three of its asset-backed notes, which have all breached trigger levels.
Two of Avant’s securities breached triggers this month for the first time, the person said, asking for anonymity because the data is not public. Another bond, tied to the subprime lender CircleBack Lending Inc., may also soon breach those levels, according to Morgan Stanley analysts. When the four offerings were originally sold last year, they totaled more than $500 million in size. Around $2.8 billion of bonds backed by online consumer loans were sold in 2015, according to research firm PeerIQ.
To continue reading: Surge In Online Loan Defaults Sends Shockwaves Through The Industry