Underwriting Update – Our P2P loans and default rates
P2P loans – late payers and defaults
We do at present have a number of P2P loans on our platform that are in late paying or in default status. Due to the nature of the market we operate in, there will always be a percentage of these loans that go to late paying status, which is partly why we can offer such high returns. A recent external audit of our loan book did clarify that our default rates are within the parameters of the industry we operate in. At present we define a loan as being in late payment status for 90 days after it has passed its due repayment date and then it is classified as being non-performing or in default. This is a 50% shorter time period than the FCA uses for classifying non-performing loans – they define a loan that is secured against property as being in default when it has not been repaid after 180 days. As funds are secured against bricks and mortar, P2P loans secured against property are deemed as having a greater chance of recovering all investor capital if a borrower fails to repay a loan.
It is important to note that whilst a number of loans go beyond their initial term, there is often a good reason for this, and the loan will often redeem within a matter of days or weeks. As the exit strategy for loans is usually a refinance or sale of a property, it is understandable for a refinance to take longer than expected, or for a property sale to do the same. In most instances, this late payment will lead to investors receiving a high rate of interest (the default rate) for the period the loan is late paying. We have also had investors observe that our updates sometimes don’t go into enough details, or aren’t updated often enough, or the recovery process is taking too long and we don’t provide timeframes for repayment. For legal reasons when a loan moves into the recovery process, we are limited with the information we can give out especially if it is to do with the borrower’s circumstances. We try to be purely factual in the information we provide to investors, but sometimes there is little information we are permitted to give out in case it impacts on the recovery process.
We also endeavour to provide frequent updates on late paying loans but there can be periods of time when there is little new to report. The recovery process we are legally required to follow for both commercial and residential loans can be arduous, and each case is different. With residential loans, if we reach the stage where we need to apply to the courts to repossess the property, we do legally need to show that we have given the borrower ample opportunity to repay the loan. Rushing this procedure would cause the courts to look less favourably on us if we did reach the stage of a court hearing.
A number of delays are also caused by the courts themselves. When applying for a possession hearing for a residential property, it can be weeks before we are given a date as this depends on how busy the court in question is. When we are given a possession date, that is the date we can apply for a bailiff and once again, depending on busy the bailiffs are, there can also be delays before a bailiff is assigned and can attend the property. Delays can also be caused by the courts making mistakes with paperwork filed.
Conversely, loans do sometimes redeem early – one of our first Scottish loans recently redeemed 10 months early.
P2P Loans – our criteria
We are, as our peer to peer lending book grows refining our criteria and procedures for how we choose the loans we offer. When deciding whether to accept a loan we look at a number of factors – the LTV, the type of property and ease of disposal if we have to repossess it, market trends in the area the property is located and prices comparable properties have sold for and the speed they have sold at. We also look at the borrower to see if they pass our acceptable borrower criteria. We look at their credit file focussing in particular on any defaults they have had and looking for patterns in their previous borrowing and whether repayments have been made on time. If the loan is in a company name, we investigate the borrower’s history as a director. If they are planning a refinance, we ask if they have commenced one, and look at how likely they are to achieve a refinance.
Once a loan has been made, we do communicate with the borrower during the course of a loan to see how their exit strategy is progressing. We cannot however force a borrower to communicate with us or provide proof of any exit strategy they are pursuing. We frequently write criteria into our loans, such as if the exit is the sale of the security, the borrower needs to drop the price if the property has not sold within a certain period of time. We are also constantly monitoring for market changes throughout the country – the slowdown in the London property market, for example, has led us to be very cautious about the property we lend against in London. It is far easier to dispose of sub £1 million properties in London than higher valued, so the majority of London opportunities that are presented to us are rejected. The LTV criteria we use for the few London properties we do accept is far lower than for other loans we make.
There has recently been an article in the Financial Times concerning one of our competitors, Lendy, and issues with default rates in particular with regards to developments. Whilst we cannot comment with regards to Lendy’s loan book, we would like to offer some clarification with regards to our own developments. The development loans we currently offer on our platform are in-house loans made to our development company House Crowd Developments, so we are in full control of these sites and the release of funds to them as the development progresses. We do not lend funds to third-party developers at present. All investor funds are secured with a legal charge against the land and the building work as it progresses in the form of debentures.
We do stress that the timeframes for our developers are estimates only, and yes, they do sometimes run over. Development timeframes can be affected by unforeseen circumstances such as delays to the provision of utilities, planning permission issues and delays in the conveyancing process when we sell the units. It isn’t unusual for a sale to fall through due to a mortgage offer being withdrawn or a buyer’s circumstances changing, which in turn can lead to delays in the return of investor capital and interest. Our monthly development updates are designed to keep investors informed with progress with regards to the development build and any issues it has encountered which could lead to delays in repayment and also, as the development reaches its later stages, with progress with regards to reservations and unit sales.