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4thWay Reader Asks About An Increasing Number Of Delayed – Refinanced – P2P Loans
A great question from a 4thWay reader gives me a chance to explain about ways P2P lending companies can hide problem debts and how we go about finding them anyway – which 4thWay has always succeeded in doing up to this point.
At the end, I also show you the five P2P lending companies that are possibly the least likely to be hiding any problem debts.
Question from Alan, a 4thWay user
“Your evaluations of P2P property platforms address their monitoring and recovery processes, but, increasingly it seems, repayments of development and bridging loans are dependent on refinancing. [Jump to the gold box, below, if you need a definition of refinancing.]
“This is understandable when a development has been completed or a track record of rental income has been established during the period of the loan, permitting re-lending to conventional lower-cost banking options.
“My impression is that an increasing number are not planned in this way but arise because of delays in construction/planning often associated with increases in costs.
“The “progress” reports often report that refinancing to an alternative lender has commenced but not proceeded at the anticipated timescale or the offer has been withdrawn. A critical aspect of the recovery process is, consequently, the willingness and ability of alternative funders to support late/over-cost projects.
“Would it be a useful subject for your investigations to explore these re-financiers and the prospects of there being sufficient of them to deal with the increasing numbers of projects which cannot repay on their original timescales?”
What is “refinancing”?
Refinancing is when a borrower arranges a new loan to repay an existing loan.
Alan is mostly asking about difficulties in refinancing to another provider to pay off a P2P loan. That's called an “external refinance”.
If the same provider arranges a new loan instead to pay off its existing loan, it's called an “internal refinance”.
Response from 4thWay's Neil Faulkner
That's a great question.
The two most likely means that platforms can use to delay discovery of poor performance are extending loans or refinancing them internally. If no-one is paying attention, they could kick the can of discovery down the road for a long time.
We monitor internal refinancing and extensions, and we have done so since we started in 2014. Ensuring we have the ability to do this is vital for us to be able to use the platforms' data, because otherwise it's not transparent enough. Obviously, an extremely determined party might still be able to make it all up, but it's not easy to do that.
So far, experience has shown that weak platforms avoid our extensive due diligence or pull out at some point to avoid further detailed scrutiny. We cross-reference different approaches, so it's just not easy to hide such deceptive practices from us.
(Although I do expect that at some point in 4thWay's future someone will succeed in deceiving us in a big way; we will not be able to get it right every single time into perpetuity. Good investing includes spreading your money around to account for such a risk.)
With the pandemic and associated downturn, we monitored the rise in late loans, extended loans, loans offered COVID-19 forbearance, and refinances. And we continue to do so.
The increase in all of those things, on average and across most individual providers, was well within safe boundaries for them to continue to offer positive returns to investors who have sensible lending strategies.
2.5 years after the start of the pandemic downturn, we isolated the loans that had been live at any point from the start of the pandemic and over the following 12 months. Those are the loans that are most likely to have been impacted by the downturn.
With most platforms that recently have needed to offer a greater number of extensions and refinances, they involve the loans in this period of time. Many of these are still ongoing as extensions or as refinances.
Isolating just those loans from a risk point of view, the risks are shrinking with each passing month, as more loans are being repaid in full, and the levels are not unexpected or worrying after such a major event as the pandemic lockdowns.
Although the property market falls and recession from late last year will impact some results too, the risks still look very well contained and the pandemic downturn batch of loans, or later loans, will not lead to losses for investors who sensibly hold all their loans until the borrowers repay them, rather than trying to sell early.
(Selling early, in some P2P lending accounts, could mean selling at a discount and in that case the investor is sabotaging themselves by turning a satisfactory batch of loans into a loss-making one. That doesn't reflect the underlying loan quality.)
Incurring an overall loss across a batch of decent lending accounts remains a very, very remote possibility.
Finally getting to your question, Alan
You specifically asked about 4thWay investigating other lending businesses that refinance P2P loans.
Unfortunately, many of these businesses are non-bank lenders, such as family offices, private companies and institutions of varying sizes. There's no realistic way to acquire enough data and information on all of them to assess lending in this way.
4thWay's main focal point instead is on extrapolating current and past results into horrendously stressed, possible future results, assuming a massive recession and huge property crash, and the potential losses that might occur at each individual provider that gives us sufficient data and access.
There are a lot of reasons why a loan might default and not repay in full, so these sorts of stress tests assume that it will sometimes be the unavailability of refinancing to another provider, while often it will be that the loans simply are no longer good enough to refinance.
By being very conservative, assuming the worst scenarios that we can reasonably conceive without maybe nuclear bombs going off, we can then tell lenders whether there strongly appears to be a large margin of safety or not. Currently, there still is.
Lending accounts for those who can't help but worry about refinances, extensions and overdue loans
Loans can fall late, be extended or be internally refinanced, but that is all part-and-parcel of good money lending. As long as it's not getting out of hand.
If these things really bother you a lot, many P2P lending providers offer huge reassurance:
Invest & Fund. This is probably the most remarkable on this list.
It does bridging and development lending, which usually has its fair share of loans going considerably beyond their initial end date.
Yet, while Invest & Fund has completed nearly 200 loans with far more than half already repaid, virtually no loans have gone three months or more past the due date. Just a handful have ever been refinanced, with all of those now repaid.
Invest & Fund has transparently and correctly said this almost perfect record won't continue, but it's still remarkable.
Assetz Exchange sidesteps the issues completely, because it's intended holding period is forever.
Assetz Exchange arranges long-term leases with local authorities that it expects to renew either indefinitely or until lenders collectively decide they want to end it.
Since these rental-property loans are specifically created with a very long-term timeframe, when local authorities renew their leases it will actually shows that these loans are working as intended. It's about a long-term, stable income for lenders.
Current returns are around 5% to 6%, typically rising with inflation.
Lendwise skirts the issue by offering loans to fund post-graduate studies to those with great job prospects
Unlike most P2P lending, Lendwise's loans are non-property loans and they are repaid on a monthly basis.
Previously, Lendwise has told us: “No borrower can have more than one loan at any point in time. There are (limited) cases where we internally refinance existing loans (especially two year programmes where the amount granted is split over two years) and consolidate them into one loan.”
Those claims are backed up with a lot of data provided to us, as usual.
CapitalStackers goes the extra mile on candid detail on its outstanding loans
CapitalStackers does high-rate, junior development and bridging lending and certainly some loans fall behind. (If not many compared to competitors.)
Yet the level of information and data it provides to us in its unparalleled, candid way is second-to-none. It's among the least plausible to be hiding any issues from 4thWay.
HNW Lending tackles this in a completely different way
This is certainly the oddest one for the list, as the type of lending you do here involves lots of loans that fall late or turn bad, followed up by exceptional recovery of that debt, with interest paid over the bad-debt period.
However, HNW Lending voluntarily classes its loans as defaulted or in arrears far in advance of industry standards and also far earlier than the standards imposed by the financial regulator. This is the opposite of burying bad debts.
It then pursues its property-rich borrowers until they finally repay. In this way, it's particularly up front about its overdue, extended or refinanced loans.
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
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*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from Assetz Exchange, CapitalStackers, HNW Lending, Invest & Fund and Lendwise, and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.