This post is based on the findings, which German investor ‘Bandit55555’ posted in his own blog p2p-anlage.de. ‘Bandit55555’ is the investor at Bondora with the highest ROI (at least that I am aware of): He calculates his XIRR ROI to be 35.4%, while Bondora displays 57.5% for his portfolio. He achieves that by very diligently using the public download data supplied by Bondora as a basis for his investing and trading. In fact he even developed his own scoring system based on the data.
The secondary market of p2p lending marketplace Bondora was introduced in March 2013. Right now more than 24,400 loan parts are on sale. Using the data Bondora makes publicly available for download the following charts were created.
Number of loans sold on Bondora’s secondary market. Source p2p-anlage.de, reproduced here with permission. Continue reading →
One advantage of Bondora is that this p2p lending market makes a lot of data available for download to investors. Recently Bondora added data on ‘Secondary market transaction history‘. In this article I will
analyse the data
use some examples to show how volatile the prices of traded loan parts can be
discuss some of the potential reasons for the inefficiency of the market
Sellers can list any current and overdue loan parts for sale as long they are not 60+ days overdue. Loan parts stay listed until they are sold or cancelled by seller for a maximum of 30 days. Loan parts are traded at principal value. Any unpaid accrued interest, overdue interest, overdue principal and unpaid late charges are disregarded for the sales prices and will – provided the borrower pays up anytime after the transaction – cause a windfall profit for the buyer. The seller can impose a discount or markup on the principal. The discount ca go as low as -99% whereas the possible markup was limited to 5% until July 24th, 2014 and increased to a maximum of 40% thereafter.
If a transaction occurs Bondora charges the seller and the buyer a 1.5% transaction fee each.
Using the data download
The download file I used had 159.7K data lines. This includes 66K cancelled listings and 35K failed listings. For the further analysis I used the 59.4K successful transactions.
On first look the market seems efficient: 8.3% of loan parts sold within 15 minutes. 20% sell within the first hour. But I felt the aggregate data might not tell the full story and I started to look how pricing (discount and markups) developed on individual loans.
First example is a 10,000 Euro A900 loan originated to an Estonian borrower on May 2013. This loan defaulted in October 2013 which ended the possibility to trade loan parts. In this short timespan 62 loan parts with a principal value of 1,748 Euro were traded (that’s out of 356 that were listed).
I took the transactions and spread them out over time on the x-axis and graphed the discount rate (blue line, left y-axis).
As you can see the price fluctuates widely from -10% discount to 5% markup, while the basic condition – the loan was overdue since begin of August did not change. I also added the orange line that shows how many days the loan was overdue when the seller listed it (DebtDaysAtStart) and the red line that shows how many days the loan was overdue when the transaction actually took place (DebtDaysAtEnd). At those times where the loan was overdue the distance between the two lines shows how long it took for a listed loan part before it sold (see green mark as example). Continue reading →
Today Isepankur launched the possibility for lenders to sell and buy loan (parts) on a secondary marketplace. Lenders can list the loans they want to sell at the secondary marketplace and set a price which either is equal to the outstanding principal or apply a premium (up to 5%) or a discount to that. The fee Isepankur charges if a transaction closes is 1.5% (each) from seller and buyer.
I talked about the advantages a secondary market offers in p2p lending before. Most major marketplace have added the possibility to sell or buy loans. The latest to introduce this feature was Ratesetter.
In the past weeks Isepankur also introduced borrower groups (A, B and C), which group loan applications by discretionary income. Combined with the credit history classification already used (600-1000) loan applications are now classified by a combination of both (e.g. A800).
Ratesetter yesterday introduced a new sellout function that allows lenders to exit their contracts early.
How does it work? Lenders request the amount they wish to have returned to their Ratesetter Holding Account. Ratesetter works out whether this is possible and calculates the cost of doing so. The Lender confirms their wish to go ahead and then Ratesetter processes all the necessary assignments. The Borrower will remain entirely unaffected by this.
What are the costs involved in exiting early? Ratesetter charges a fee made up of three elements: •   The exiting Lender’s interest is reduced to the level they would have received based on the length of time they have ended up lending for. This is based on the Market Rate and products available on the day they originally lent. So, for example, if the lender had lent into the 5 Year Income market nine months ago and choose to exit now, the lender would only receive the interest the lender would have got from lending in the Monthly Access market for that period of time; if the lender had lent 13 months ago the lender would only receive what the lender would have got from lending in the 1 Year Bond market; if the lender had lent 37 months ago, the lender would only receive what the lender would have got from lending in the 3 Year Income market. With regard to an early exit from the Monthly Access market, the cost is that the lender forgoes all the interest for that month. The purpose of this charge is to ensure there is no incentive to lend for five years if the intention is only to lend for two years; •   A fixed charge for administering the exit which is 0.25% of the oustanding contract amount (currently waived for existing Lenders for a period of one month) •   An “Assignment Fee†to ensure that if the interest rate in the relevant Ratesetter market has gone up the exiting Lender can still exit. This will calculate and deduct from the exiting Lender the amount required to be added to the interest rate to ensure the incoming Lender gets what they expect. In circumstances where interest rates are the same or lower there will be no Assignment Fee.
Can the lender choose which individual contracts I sell? No, the contracts will be automatically selected, starting with the most recent contracts.
Where does the incoming Lender come from? From the same market as the exiting Lender.
Are there any circumstance when the lender would be unable to exit early? It is Ratesetter’s intention that the lender will be able to exit all contracts at any time. However, it may not always be possible to do so: •   If there are insufficient funds in the relevant market. This will be determined by a “buffer†of available funds (of which the amount in each market will be periodically reviewed) designed to keep the smooth running of the Ratesetter markets. •   If an individual contract is less than £10, the current minimum reinvesment size.
Offering a secondary market (regardless in which form) is becoming a basic functionality that lenders expect as a core feature from a p2p lending service. The 3 major British services Zopa, Ratesetter, Fundingcircle as well as American Lending Club and Prosper now offer the ability to sell loans. In other countries regulation makes the setup of a secondary market difficult.
Yes-secure, a British p2p lending marketplace launched in June 2010, will very soon add a secondary market called Secondary Loan Slice Market.
According to information the company provided P2P-Banking.com, the secondary market will have the following features:
Advantages for Loan slice buyers:
• Loans offered at premium and discount: Lenders are able to buy loan slices from other lenders at a premium or discount to the principal remaining amount. Lenders can invest in quality loan slices which they missed out on earlier.
• Ability to view repayment history: Potential buyers for the loan slices can view detailed information about the borrower repayment history, enabling them to make informed low-risk decisions based on track record of reliable repayments.
• Earn interest from day one: As the existing loans slices can be transferred within a few minutes, they can start earning interest with immediate effect.
• Build a balanced investment portfolio: Lenders can quickly build themselves an active and balanced portfolio by picking and choosing through different markets, rates and terms; this automatically leads to risk-diversification through loan portfolio management.
The advantages for Loan slice sellers:
• Encourages liquidity: Investors can easily generate cash as and when they require by selling their loans slices to other registered members of YES-secure.
• Flexibility: Investors can easily manage their investment portfolio, buying and selling chosen loan slices and fine-tuning their lending portfolio to suit their risk profile.
• Loans sold at premium or discount: Lenders can set a price for their loan slices at rates within +/-10% of the remaining principal amounts of their loans.
It is interesting to see that Yes Secure does not face the regulatory challenges Zopa cites (see: Zopa Rapid Return Secondary Market) or has overcome them.
One of the disadvantages for lenders in many p2p lending markets is that money lent cannot be withdrawn early during loan terms.
Zopa UK now introduces a secondary market called ‘Rapid Returns’, which allows lenders to cash out on all or selected market loans early. To do this a lender simply selects all or specific markets to ‘sell’ his loans.
For each of these loans, the system looks for other lenders offering to the same market at the same or a lower interest rate. Where a match can be found, each loan is then permanently transferred to the lowest bidding lender in that market. The winning lender will then earn the interest rate that the previous lender was getting on that loan, even if they offered at a lower rate. The lender receives the total outstanding capital on the loan from the offered funds of the winning lender.
Zopa deducts a 1% admin fee from the transferred capital.
There are some limitations: Loans made through ‘Zopa Listings’ are not eligible. Also excluded are loans where the borrower ever has missed a repayment. Some more restrictions apply.
And of course there needs to be a matching lender offer with a rate low enough.
Asked why lenders can not bid on loans on offer – thereby buying at a discount or premium – a Zopa employee explains: “What you describe here is a true secondary market which …, we are not regulated to provide. I hope all will become clear when the full functionality is available in the next couple of weeks.
Our overarching rule when developing Rapid Return has been that it should allow lenders who want to exit some of their cash to do that. It is not designed to tinker with a loan book – in particular we wanted to avoid a scenario in which an experienced lender could cash out of some loans at the expense of an inexperienced lender. As a final note on the ‘never missed a repayment rule’ – we started development with this rule as ‘not currently in arrears and hasn’t missed a repayment in the least three months’ but when we looked at the proportion of the total loan book for each, there’s a negligible difference. It’s therefore much clearer and fairer to go with the former.”
Currently Rapid Returns is only collecting offers on the buying lender’s side, letting lenders amend their bid offers to include Rapid Return loans. The feature will actually go live in a couple of weeks. Then selling lenders can mark their loan books for sale.
I expect that the Rapid Returns feature will further boost Zopa’s growth in the British market. Congratulations.
