Thanks Myles! That is a lot of work. Thanks for sharing.
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Thanks Myles! That is a lot of work. Thanks for sharing.
No. The second default table is already included in the first annual rate of return table. So if Harmoney's estimates are correct, it is still better to invest in the more risky D to F as the returns are in the 14 to 15%. However, Myles' working is based on an even spread of defaults. So the actuals will be a bit different.
One issue often missed in the discussion on defaults is the effect of arrears. A loan may be written off after 10 months. One will then assume that the borrower had been paying for the last 8 to 10 months. But often, they may only paid 2 out of the 10 months or maybe even not at all. So, effectively the loan was in default from the month the borrower stop paying. I assume that Harmoney's stats (and hazard curve) are based on when the loans are written off and not the "effective" default dates.
Harmoney usually write off loans well after 3 months of the last payment.
Say someone had a loan in January and made a payment in February, then another in May, missing March and April. Then no payment until HM write off the loan in September. So from loan to writeoff is 8 or 9 months and that is probably reflected as such on their hazard curve.
However, for our returns calculation, the loan is effectively written off after 2 months (of payments).
Yeah but, the variability of returns (ie risk) goes up as the grade increases. An expected return of 15% on a D grade is better than 15% on a E grade, you need a higher return to compensate for the higher risk. There's a difference between maximising and optimising return. Harmoney's pricing of loans should take this into account but to me feels, admittedly from a position of relative ignorance, under-cooked at the lower and upper ranges.
Yes, look at their Static Loss chart in the market stats. They start writing off after 3 to 5 months. They did state somewhere that it is usually 90 to 120 days after the last payment is received. But my point is if the borrower did not make any payment at all before the loan is written off, it is the same to us as being written off immediately on day one in our calculation of returns.
Yep, I think the way Harmoney show it is appropriate. Static Loss chart - loans aren't a loss, until they are written off. Hazard Curve - when defaults occur i.e. first non-payment.
The way I applied defaults in those previous tables (evenly distributed), would result in a Hazard Curve with a straight line across all 32 months at 3.125%, which, with the higher initial defaults with my method, would, I think, have a similar end result to the supplied Hazard Curve.
After looking at Myles RAR data I am happy now with my 14% and the auto lend grades I have chosen.
It looks like I am on the right track.
Thanks