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. 


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.

Monday, December 10, 2012

Lending Club Borrower's Credit Age and Loan Defaults

In this post, I continue the analysis of borrower's earliest credit line and relationship with loan status. As Lending Club doesn't publish the age of borrower, in this analysis I use the year of earliest credit line, termed credit age, as proxy for borrower's age. I am particularly interested in finding out whether:
  • The finding from past consumer finance research of older borrowers being higher credit risk holds true for peer-to-peer lending platforms, and
  • The borrowers with recent earliest credit line are higher credit risk, as asserted by White Coat Investor in his blog post Peer to Peer Lending Club Update.
Personally, I believe that Lending Club borrowers with earliest credit line several decades old likely to be much higher credit risk. Such borrowers in need for loan with high interest rate are likely to be not very savvy in managing their finances.

Earliest Credit Line and Loan Status

The chart below shows the loan status as a function of the year of earliest credit line. The loans issued to borrowers who started their credit in early 70's or earlier seem to have higher charged off, defaults and late payments. With 40+ years of credit history, these borrowers are likely to be in their late 50's and early 60's.

It may appear from the chart that loans issued to young borrowers who started their credit history in 2007 and later seem to have lower charged off and later payments. Considering that the fully paid loans are also lower for such borrowers, I believe most of these loans were recently issued. Even though I didn't find any explicit statement, I believe Lending Club doesn't issue loans to borrowers who have less than three years of credit history.


The chart below shows the charged off and default loan status as a function of the year of earliest credit line by loan application year 2008 through 2010. The loans issued to borrowers that started their credit history in 1970's or earlier appear to have consistently higher charged off and default status. There is no such pattern for borrowers with recently established credit history.


Credit Age and Loan Status

The chart below shows the loan status as a function of credit age. The pattern of loans issued to borrowers with longest credit history (40+ years) with higher charged off and default loan status, observed in first chart appears to hold. Also, loans issued to borrowers with credit history less than four year old appears to have higher charged off and default loan status.


The chart below shows the charged off and default status as a function of credit for application year 2008 through 2010. While borrowers with long credit history continue to show higher tendency to have loans charged off and defaults, there is no such consistent pattern for borrowers with short credit history.


Key Takeaways

  • The borrowers with long credit history (40+ years) tend to have more loans charged off or defaulted. Risk averse lenders may benefit by avoiding older borrowers.
  • There is no consistent patterns of charged off and defaults with younger borrowers. Lenders may consider taking a cautious approach toward borrowers who have less than four years of credit history.

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Wednesday, December 05, 2012

Lending Club Loan Borrower's Earliest Credit Line and Loan Volume

After returning from vacation, I have started to analyze Lending Club historical loan data again and have improved PeerCube further. I am pleased to see PeerCube user base growing another 20% in my absence. Peter was kind enough to set up a section for PeerCube on Lend Academy forum. I'd like to encourage you to use the forum to suggest enhancements, request new features, and report any issues on PeerCube.

In a few posts, I will analyze a correlation between borrower's earliest credit line and credit risk. The past consumer finance research indicates that age of the borrower is significantly related to credit risk. As Lending Club doesn't publish the age of the borrowers, I have been using Earliest Credit Line as a proxy for age in my loan selection at Lending Club.

I am particularly interested in finding out whether the year of earliest credit line moves with loan application year as that would indicate a particular age group of borrowers more likely to use peer to peer lending for their credit needs.  My impression is that most people start their credit in late teens and typically get into credit problems in late 20's or early 30's if they don't manage money properly. I expect that most borrowers on Lending Club to have their earliest credit line opened 10 to 15 years ago.

The chart below shows the loan volume as a function of the year of earliest credit line. The surprising pattern is that the borrowers with first credit line established in year 2000 appears to have most loans issued, year after year. The breadth of years when first credit line was established for which most loans were issued seem to be narrowing with application year.


I wanted to see whether the distribution of loans by borrowers' earliest credit line is changing year over year. The chart below shows the distribution of loans by borrowers' earliest credit line for each application year. The percentage distribution for each application year appears to track closely. While the previous chart indicates that borrowers who established credit line in 2000 have the biggest share of loans, this chart indicates that the percentage of loans issued to borrowers with earliest credit line established in 2000 is rising with each application year and shifted from 1999 and 1996 in earlier application years.


I also calculated the Credit Age in years, the number of days between the earliest credit line date and application date. The chart below shows the loan volume as a function of credit age. The chart is not that different from the first one above. Even though no additional insights I gained from this chart, I expect the credit age to be handy when I analyze loan defaults.


In the next post, I will analyze loan defaults with respect to earliest credit line and credit age.