Online loans defy fears of mass delinquency

Market loans – unsecured personal loans created online on platforms such as Lending Club, Sofi, Best Egg and Upstart – have challenged skeptics of the Covid-19 pandemic, with defaults increasing only moderately then even as unemployment has skyrocketed.

According to a recent report by data provider dv01, bad loans in the market – those that have fallen behind in payments or accepted withholding payments – account for 9.7% of the total, up from around 6% before the start. of the crisis. This is down from a peak of 16% in April, and the rate of depreciation continued to decline during the first weeks of August. About two-thirds of bad loans are withheld.

That compares with total forborne or past due credit card loans over 5% in June, and mortgages over 7%, according to credit agency TransUnion. But proportionally, the depreciation rates for market loans have increased less than those for cards and mortgages, both of which were well below 2% before the start of the pandemic.

The performance of loan-backed securities in the market “has defied expectations, to be fair,” said Jennifer Thomas, analyst at asset manager Loomis Sayles.

“The securitizations are going on and the secondary trading has been quite active.” She noted that on new securities, the price is only a few basis points from what it was in 2019. In a recent transaction, the most senior debt tranche was valued at just 80 points of base relative to Treasury bills of equivalent duration, and the lowest rated tranche. tranche listed at 270 basis points above Treasury bills.

The dv01 data is based on 1.7 million loans with a cumulative value of over $ 19 billion, representing the vast majority of the market lending universe.

“We were struck by the improvements [in impairment rates] recently across all parts of the market universe – high income, low income, high FICO [credit] score, low FICO, ”said Vadim Verkhoglyad, chief analyst at dv01. “What this tells us is that they really value their loans online, even if they are not from a bank.”

The credit agency Experian recently released a report on the credit hierarchy which found that, among unsecured debt, consumers gave the highest priority to personal loans, ahead of student loans and credit card loans. Personal loans typically charge double-digit interest rates, higher than student loans, but lower than the high rate for teens charged by a typical credit card.

Scott Sanborn, CEO of Lending Club, told the FT that the majority of the company’s borrowers were repeat customers, so they wanted to make sure they had a good relationship with the lender. He said that “everyone has been skeptical [of marketplace loans]. You can make any pattern you want, but at some point people want to see what your loans are doing during a recession. ”

Renaud Laplanche, managing director of the lender and issuer of Upgrade cards, told the FT that “delinquency rates are falling in all areas”. He added that “about 10 percent of our clients signed up for a hardship program in March or April and 85 percent of them. . . are already out of this program.

Lenders of all types face the prospect of a dragging pandemic and the expiration of government benefits. The stock market seems skeptical about whether the low delinquency rates on market loans can continue. Lending Club shares, although they have risen in recent months, are still less than half of their pre-crisis level.

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