Friday, December 21, 2012

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

Continuing the review of loan characteristics as a function of home ownership status of borrower from previous post ...

Interest Rate

The chart below shows the average interest rate of loans issued between 2007 and 2012 YTD as a function of borrower's home ownership status. Due to very small volume of loans issued to borrowers who claimed home ownership as Any or None, those loans are removed from this chart. The average interest rate is an arithmetic equal-weighted average and not loan amount-weighted average.

The average interest rate is slightly higher for borrowers who rent homes compared to their counterparts who carry mortgage on their homes. This pattern has been quite consistent year over year. The reason for the slightly higher average interest rate may be due to lower FICO scores and shorter credit history because borrowers who rent home are likely to be younger and with limited credit history.

Similarly, the average interest rate is slightly lower for borrowers who own homes compared to borrowers who carry mortgage, loans issued in 2009 being the exception. The reason may be due to long credit history and higher FICO scores because borrowers who outright own homes are likely to be older and with decent credit history.

Lending Club Borrower's Home Ownership and Average Interest Rate

To confirm the assumptions, I decided to chart the average credit age at the time of issue of loan with the home ownership status of borrowers as shown below. Sure enough, the average credit age of borrowers who have mortgage on their homes is significantly and consistently greater than their counterparts who rent home. For example, in 2012 YTD, the credit age for borrowers who have mortgage is 15.8 years versus 12.6 years for their counterparts who rent. But there is no such relation between the borrowers who outright own their homes and credit age.

Lending Club Borrower's Home Ownership and Average Credit Age

Next I decided to chart the composition of home ownership status for each FICO score range of borrowers. It's clear that the lower FICO range are dominated by borrowers who rent and higher FICO score range by borrowers who have mortgage. For example, 56.1% of borrowers with FICO score between 660 and 664 rent their homes while only 19.75% of borrowers with FICO score between 800 and 804 rent their homes.

Lending Club Borrower's Home Ownership and FICO Range

Both Credit Age and FICO Range appear to offer a reasonable explanation for average interest rate to be slightly higher for borrowers who are renters. It is also not surprising considering that FICO Range is a key component of calculations used by Lending Club in setting Interest Rate for a loan.

Loan Length

The chart below shows the percentage of 36 months and 60 months loans issued between 2010 and 2012 YTD to borrowers as a function of their home ownership status. Prior to 2010, Lending Club issued loans with 36 months term only thus the data prior to 2010 is excluded from this analysis.

The borrowers who carry mortgage on their home are more likely to request loans with longer terms compared to their counterparts who own outright or rent their homes. In 2012 YTD, 23.60% of borrowers with mortgage received loans of 60 months term. In comparison, only 13.4% of borrowers who rent home received loans of 60 months term. This pattern is very consistent since Lending Club started issuing loans with both 36 and 60 months term.

A likely reason could be the management of debt repayment load. The 60 months loan will have lower monthly payment compared to 36 months loan of the same amount and interest rate. Typically, mortgage holders already have high debt payment burden, i.e. high debt-to-income ratio; thus, they may prefer smaller monthly payments and longer term loans.

Lending Club Borrower's Home Ownership Status and Loan Length

The chart below shows the percentage of borrowers' home ownership status as a function of loan length. This chart shows the same data as the chart above, but shows the composition of borrowers who own, rent, or carry mortgage on their homes for 36 month and 60 month term loans. With this chart, it is much easier to point out that higher number of 36 month term loans are issued to borrowers who rent home and higher number of 60 month term loans are issued to borrowers who have mortgage on their home.

Lending Club Loan Length and Borrower's Home Ownership Status

The chart below shows the borrowers' home ownership status and average monthly loan payment for loans issued between 2010 and 2012 YTD. The average monthly payment for borrowers who have mortgage  is higher than for borrowers who rent their homes. This observation is not surprising considering the average loan amount for borrowers who have mortgage is much higher as observed in the previous post. However, it doesn't help in explaining the propensity of borrowers with mortgages to take out longer term loans at Lending Club.

Lending Club Borrower's Home Ownership and Average Monthly Loan Payment

The chart below shows the borrowers' home ownership status and their average debt-to-income ratio for loans issued between 2010 and 2012 YTD. There is no significant difference in average debt-to-income ratio of borrowers based on their home ownership status.

Lending Club Borrower's Home Ownership Status and Average Debt to Income Ratio

It appears that both monthly loan payment and debt-to-income ratio are not associated with the propensity toward longer term loans by borrowers who have mortgage.

Key Takeaways

  • With the interdependence of Interest Rate with Borrower's FICO range, credit age and home ownership status, most lenders would be fine with only using one of these three parameters or may need to de-emphasize the weightings of all these parameters to not let them overly influence loan selection process.
  • The Loan Length appears to be independent of Borrower's debt-to-income ratio, home ownership status, and monthly loan payment. It would be recommended for lenders consider all these parameters in loan selection process. 


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