4 ms·

Ok so they are operating at lowest end of the prime range (at least, in your example) - assuming > 660 is prime, 620-660 Alt-A and below 620 as subprime. How do

Ok so they are operating at lowest end of the prime range (at least, in your example) - assuming > 660 is prime, 620-660 Alt-A and below 620 as subprime. How do I reconcile the rate quoted by you with the parent comment that I replied to? (13% is comparable to a standard bank and does not appear much cheaper)

nether 12y ago
https://www.lendingclub.com/public/how-we-set-interest-rates.action https://www.lendingclub.com/public/how-we-set-interest-rates...
7Figures2Commas 12y ago
You're missing the point, which is that in the search for yield, investors are mispricing risk. I would venture a guess that the vast majority of people who own a note tied to the loan of the aforementioned borrower either couldn't tell you what a similar borrower would have paid for the same loan in, say, 2005, or they don't care what a similar borrower would have paid for the same loan historically. They care more about the current interest rate in relation to other yield-producing instruments than they do about the actual risk they're buying and how that risk has historically been priced. One additional thing to note: there are tons of investors (retail and institutional) snapping up junk in this market, but there are also many savvy people in the debt markets who are playing it cool because they know that you make money by pricing risk appropriately, not by buying the instrument with the most appealing yield.
- radmuzom 12y ago
  I agree with your point on mispricing risk - I build credit risk models for a living, though not for US banks and have limited understanding of the US market. On a broader note, even the sub-prime business was highly profitable and attractive to investors till the GFC. Only time will tell if these companies have a sustainable business model.

4 ms·

Ok so they are operating at lowest end of the prime range (at least, in your example) - assuming > 660 is prime, 620-660 Alt-A and below 620 as subprime. How do

by radmuzom 12y ago

nether 12y ago
https://www.lendingclub.com/public/how-we-set-interest-rates.action https://www.lendingclub.com/public/how-we-set-interest-rates...
7Figures2Commas 12y ago
You're missing the point, which is that in the search for yield, investors are mispricing risk. I would venture a guess that the vast majority of people who own a note tied to the loan of the aforementioned borrower either couldn't tell you what a similar borrower would have paid for the same loan in, say, 2005, or they don't care what a similar borrower would have paid for the same loan historically. They care more about the current interest rate in relation to other yield-producing instruments than they do about the actual risk they're buying and how that risk has historically been priced. One additional thing to note: there are tons of investors (retail and institutional) snapping up junk in this market, but there are also many savvy people in the debt markets who are playing it cool because they know that you make money by pricing risk appropriately, not by buying the instrument with the most appealing yield.
- radmuzom 12y ago
  I agree with your point on mispricing risk - I build credit risk models for a living, though not for US banks and have limited understanding of the US market. On a broader note, even the sub-prime business was highly profitable and attractive to investors till the GFC. Only time will tell if these companies have a sustainable business model.