HNW Lending’s Powerful Risk-Reducing Features
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Just for a bit of quick background on HNW Lending*, it does short-term property loans and development loans, as well as asset-backed loans (see info box), to individual borrowers who are rich in assets and property.
It pays around 6% to 10% interest.
There have still been no losses to lenders in tens of millions of of pounds of loans, despite several loans going bad.
Its senior loans have earned a 5/5 PLUS Rating from 4thWay based on international banking-style stress tests of all its historical loans.
So, HNW Lending offers several very substantial defences against losses, and I want to talk to you about a couple of new ones, but I will also go over two old ones first.
Security is the main defence
The main defence against losses at HNW Lending has always been to agree to very small loans compared to the valuation of the borrower's security.
Typically, a £40,000-£45,000 loan has been backed by property or other assets owned by the borrower (the security) that has been valued by HNW Lending or an independent expert at around £100,000. This means the average loan-to-value (LTV) is around 40%-45%, which is incredibly low, i.e. incredibly good. 60%-65% is more typical of a cautious lender doing loans of this type.
Remember this is an average. Some individual loans will be larger loans compared to the valuation of the security, but the maximum is usually 70%.
While HNW Lending usually gets an up-to-date, independent valuation, it doesn't always. In order to ensure a quick deal for the borrower, HNW Lending can be a little loose in how it values some kinds of loans, usually when it believes the security is clearly far more valuable than it needs to be and when the high-net worth borrower has a whole fleet of cars or other assets that could also be taken in security, if need be.
It's the pragmatic approach, whereby the very sizeable security taken appears to easily compensate for this. If it bothers you, you are able to look through all the valuation documentation yourself and choose loans that have been recently independently valued.
When a P2P lending site focuses almost exclusively on the security, as HNW Lending does, these sorts of loans can “go bad” much more readily than other loans, meaning the borrower falls late or very late. That doesn't mean lenders will lose money, only that the danger of that happening can now occur.
Recovering bad debts on asset and short-term property loans can take months or even years some times, and not all lenders are prepared for that to happen. You can generally expect to recover all or most of your loans, along with extra interest along the way. But patience is required.
Another old defence – HNW Lending pays the “first loss”
HNW Lending's directors also lend between £2,000 and £50,000 in most of its loans, and they take the first loss on those loans.
This means if a loan goes bad and cannot be recovered in full, HNW Lending's directors will lose money first. That shows commitment.
Only if even more money is lost, over and above the first loss, do ordinary lenders lose an equal share between them. In this event, individual lenders will make a smaller loss than if HNW Lending did not take first loss.
Looking at data supplied by HNW Lending, I see that, with its senior loans, HNW Lending typically looks to take the first loss on loans that have a higher than average (worse) LTV.
So the average LTV might be more like 50%, but the first loss averages at about 10%, lowering the risk to individual lenders back down to around 40%. So it works out about even.
New defence 1: auto-lend
HNW Lending introduced an optional auto-lend feature, which has two main purposes.
Firstly, your money is lent, and re-lent, automatically, saving you the bother of choosing loans and ensuring that you don't make the amateur mistake of putting all your money into one loan.
Secondly, and most importantly for this article, your money is spread across a minimum of 15 loans (provided that number are available) and a maximum of 10% of your pot in HNW Lending is lent in a single loan.
Spreading your money across lots of loans is an important step for lenders in P2P lending and IFISAs. 15 development and asset-backed loans with low LTVs is probably not quite sufficient by itself, but combined with spreading more money across lots of other P2P lending platforms that also diversify your money, and you can make yourself a low-risk combined portfolio of loans.
If you want to auto-lend over £250,000, you need to talk to HNW Lending to arrange this.
All loans in the auto-lend programme have a first-loss from the directors.
New defence 1: auto-lend's “reserve fund”
Auto-lend loans hold back some interest in order to pay any missed interest payments and to reduce the impact of any losses if a borrower is unable to repay the entire loan.
HNW Lending does not guarantee how large this pot will be. We're told that it is typically 1% of the auto-lend loans. That might seem small, but in a pooled pot of money it is substantial and could noticeably take the edge off any losses in a disaster, or even pay for a few huge individual loan losses all by itself.
For example, say there are £15 million in loans outstanding. That means there could be over £600,000 in a pot to cover losses. The average loan has been a little over £200,000 and the largest loan has been £2 million. So if lenders lose 10% on any loans, the reserve fund would pay for the losses on three £2 million loans or 30 £200,000 loans.
Interestingly, we're told that lenders don't really get a lower interest rate with auto-lend, because HNW Lending funds the pot from the cut that it takes from the borrowers for itself. This makes it unusual, because reserve funds usually lower risks but also directly lower rewards, because they are usually funded from what would be the lender's share of interest.
Note that I'm loosely calling it a “reserve fund”, but HNW Lending has not done so and it probably doesn't deserve such a name, which sounds rather legally binding while there is actually still little small print to back it up.
HNW Lending is still undecided in which direction it is going to take this feature. In particular, it doesn't know if it will hold back this interest permanently to grow a larger reserve pot. I suspect it won't do so, because the interest comes out of its own share, which it will want to collect on, in the end.
Where are the finishing touches?
The one fly in the ointment to me here, with these new defences, is that I have noticed that HNW Lending does not mention its first loss, auto-lend or its auto-lend “reserve fund” in its terms and conditions.
This fits the pattern at HNW Lending of being loose in some secondary areas of its business model. It would be much nicer and reassuring if these items were laid out in a legal contract between HNW Lending and individual lenders for all its website visitors to see.
HNW Lending also mentions “provisioning” in its terms and conditions in a way that appears to indicate that all loans, regardless of whether they are in auto-lend or not, are protected by some form of “reserve fund”. (Again, to use the phrase loosely.) I wonder whether it previously offered that feature to all lenders, decided to restrict it to auto-lend lenders, and then failed to update its small print.
That's another little question to ask them next time one of us at 4thWay gets in touch with them. If HNW Lending would get just a bit tighter on its legal print and provide a little more information up front on fiddly aspects like those mentioned towards the end of this article, it could really be an absolutely astounding proposition.
As it stands, it still offers many exceptionally good loans for lenders to choose from, which I think is the main thing.
This article was co-written by Jane Rey.
Read more about HNW Lending: Which P2P Lending Site Offers Very Personal Service?
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The 4thWay® PLUS Ratings are calculations that were developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the risks and rewards of losing money in scenarios up to a serious recession and a major property crash, and they assume you spread your money across lots of loans and rated P2P lending accounts or IFISAs. The rating is calculated using objective criteria that can be measured and improved on over time, although no rating system is perfect. Read more about the 4thWay® PLUS Ratings.
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