Tuesday, December 18, 2012

Lending Club Borrower's Home Ownership and Loan Characteristics, Part I

In this post, I will review the home ownership status of borrowers and loans issued at Lending Club platform. Lending Club categorizes the home ownership status of borrowers as Rent, Mortgage, Own, None, and Any. While Rent, Mortgage and Own are self-descriptive, I am not so sure what None and Any categories represent and how they differ from each other. For the purpose of analysis, I combined the None and Any categories together.

Over the past year, I have come across multiple loan listings where a borrower indicated home ownership status of Own but had one or more mortgage accounts, loan description or Q&A mentioned having mortgage. I believe some borrowers may be confusing the Mortgage and Own categories.

Loan Volume

The chart below shows the percentage of loans issued in each application year to borrowers with each of the four categories of home ownership status: Any or None, Own, Mortgage, and Rent.

Lending Club Borrower's Home Ownership Status and Loan Volume
The combined category of Any or None accounted for less than 0.002% of loan issued in 2012 YTD and 0.004% in 2011. The highest percentage of loan issued to borrowers with home ownership status of Any or None was 1.90% in 2008. Between 2007 and 2012, only 102 loans were issued to borrowers with home ownership status of Any or None.

Majority of loans are issued to borrowers who declared either renting home (on average 50% from 2007 to 2012) or having mortgage on home (on average 42%). Lenders excluding any one of these two categories in their loan selection criteria are ignoring almost half of the loans available on Lending Club platform.

With the exception of 2012 YTD, the percentage of borrowers who rent home is declining while borrowers who has mortgage on their home is rising. Considering we went through a deep recession, primarily due to Real Estate bubble, the rise in borrowers who have mortgage on their homes is not surprising. The 2012 may be start of reversal in these trends.

Loan Amount Funded

The chart below shows the percentage of total loan amount funded in each application year to borrowers with different home ownership status.

Lending Club Borrower's Home Ownership Status and Total Loan Amount Funded
What is interesting about this chart is that the percentage of loan amount funded for borrowers who rent home is lower than the percentage of loan volume for such borrowers as shown in the previous chart. For example, in 2012 YTD, borrowers who rent home received 47% of total loans but only 42% of total loan amount. The trend is reverse for borrowers who have mortgage on their home. This observation seems to indicate that the borrowers who have mortgage seem to request higher loan amount than the borrowers who rent home. These observations are also confirmed by the chart below that shows the average loan amount funded for borrowers with different home ownership status.

Lending Club Borrower's Home Ownership Status and Average Loan Amount Funded
As the chart shows, in 2012 YTD, borrowers who have mortgage on their home borrowed almost $3,000 (~20%) more than their counterparts who rent home. This observation is perplexing as why a borrower who already have a mortgage (supposedly much larger than any other debt) would request loans for large amount. Only logical explanations I could come up with are that most borrowers don't consider mortgage same as other debt, they are more comfortable carrying additional debt, and they are likely to borrow for large value home improvement projects.

To confirm whether borrowers who have mortgage borrow large amount for home improvement purposes, I filtered the above chart to only include loans where borrower declared the loan purpose to be home improvement. The chart below is its result.

This chart indicates that in 2012 YTD the borrowers who carried mortgage borrowed on average $13,589 for home improvement loan purpose compared to $14,681 borrowed for all loan purposes. This would indicate that hypothesis of higher average loan amount due to home improvement projects is incorrect.

Lending Club Borrower's Home Ownership Status and Average Loan Amount for Home Improvement Loans

Key Takeaways

  • Excluding any one of the home ownership status of mortgage or rent will reduce the loans available for lending by almost 50%.
  • The borrowers who carry mortgage are likely to request larger loan amounts and such loans will not necessarily be for home improvement purpose.

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