Announcement: New Portfolio Added

Odivelas As a commercial credit analyst by trade, my credit and investing philosophy is to control risk first and then maximize the return I can get for the risk that I am willing to take. Many of you know by now that I quantify this goal by trying to earn 1% per month which annualizes to 12%.

Stockach One of the most common questions I'm asked is that if my Credit analysis techniques are so good, why not use them to filter out bad loans and seek out the highest return possible?  Since I take pride in sharing my Credit techniques, I am adding a new portfolio to my Monthly Reports.

http://siftstar.com/2004/09/ When many of you replied to my post on What Type of P2P Lending Investor You Are, many of you said you are high yield seekers or Type 2. If that describes you, then this new portfolio is for you.

Enter The High Rate Portfolio

stráž gay seznamka My standard Credit based portfolio will still be monitored on both Prosper and Lending Club but now I have started a new portfolio on Lending Club only, the High Rate Portfolio. My goal for this portfolio is 1.25% per month which annualizes to 15%. It was funded on Feb 2 and now I'm in the process of buying loans.  My filters for this are pretty simple and I'm only using Lending Club and starting with $1000.  My filters include:

Homeownership

This is one of my standard filters on my scorecard where homeowners get a higher grade than renters. That will continue here.

12 Months Since Last Delinquency

Delinquencies happen. I see all kinds of little collections, especially Medical, on personal credit reports and then ding the pay history overall as well as the score. My view is that if the last delinquency was more than a year ago, then some of these issues may have been worked out or it may have been an isolated event.

Two Years Employment At Current Job

This is pretty self explanatory as a sign of stability as well as the fact that if they are not the newest employee in, they probably are not the first employee out when layoffs occur.

Max 1 Credit Inquiry

Credit inquiries (if they are a hard inquiry) hurt credit scores so this is an additional risk control factor while I seek the higher yields available among the D and lower rated loans. I'm also fully aware I may have to open this one up to more inquiries to get more loans to choose from. We'll see how it goes.

Conclusion

The high yield seekers amongst us retail investors now have a place where you can compare directly apples to apples with what I am doing and my own Credit analysis techniques. The High Rate Portfolio is set up as a test to see how well these techniques can prevent defaults even among the higher rated loans where higher default rates are expected. I will be reporting this as a separate line item each month starting in March.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

4 thoughts on “Announcement: New Portfolio Added”

  1. Hi Stu,

    Any reason why you prefer homeowners over renters? Speculation? I threw this variable out since its a user provided value. Just like you mentioned in your previous post, you don’t want to throw out the baby with the bath water. Doing some quick checks on 2014 LC history, you would be excluding 40% of all loans (assuming homeownership is owning or having a mortgage).

    During the creation of my credit model, I took a good look an employment history and the defaults were spread across years, even after I applied my model. Threw out that variable too.

    One good thing that I found was the limiting the number of inquiries to 2 across all FICO bands did decrease the number of defaults.

    Reply
    • Historically, homeowners have better credit and in the current state of the economy where its tougher to get a mortgage, if they are still homeowners now then they were able to weather the storm of the recession. This is why I prefer them. Once in a while I do take a renter. It’s also easier for a renter to disappear the first time something goes wrong in their loan.

      Great questions.

      Reply
  2. Totally understandable. Do you use the basic credit variables that LC provides to create your scorecard or do you use the extended set in the downloadable csv?

    Reply

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