Harmoney

[leesal]

I don't agree with your calculation - as per my previous comment - early repayments are earning interest not included in your determination of 12% - defaults have already been factored in for all loans (these were actuals for the full period, re-investment included).

I've calculated my actual return for just those E5 loans as 16.99% (pre tax), 19.98% without fees.

Some of the original loans are still current and earning 38.25% interest [rates over the period include: 38.25, 26.95, 28.69]

This was why I approached the comparison from the actual loss side, much easier to calculate than trying to calculate the actual gain, which has to be done on an individual loan basis...and why it is pointless generalising the final value...

[Calculated by weighting individual returns and annualising both returns and default losses.]

Hi Myles. The intriguing thing about your data, is your loss on the lower grades being significantly less. If you select well, you can exploit thoses pockets, at the lower grades.

What we have to consider, given the age of our portfolios (both being immature), is how each individual cohort will run. By continually repurchasing, you will be witnessing the performance of a mixture of cohorts with a younger average loan age - higher interest relative as a portion of monthly repayments, less loans reaching 120-180 days in arrears etc.

HM annual average default is misleading. Rather I prefer to look at cohort default across the full term. Taking HM forecasted stats for Grade "E", their default forecasts are approx 4.5% per annum, or 22.5% across a 5 year term. To validate this, taking the 2014 E grade performance off the "historical annual default rate tool " https://www.harmoney.co.nz/investors/default-rates - shows that the cumulative default of E grade at 22.7% (and running to a similar place on 2015 and 2016 cohorts). Critically the definition of cumulative default is based on the number of loans originally funded, not the loans outstanding.
How is the cumulative default rate calculated?

The cumulative default rate is calculated by dividing the total number of defaults by the total number of loans funded. For example in 2015, for grade C3, 447 loans were funded and 17 loans defaulted to the end of 2017 creating a cumulative default rate of 3.8%.
How that reads to me, is early repayment is not factored in. If HM were to publish annual default based on time in lent, the number would be significantly different. ie If 22% of your E grade loans are going to default, and 78% remain good - how are your stats going to look if 40% of the good ones repay early in the first 12 months!

To run some really crude numbers, here is a mocked up example on 5 year on E5. I've used heuristics to make the stats less complicated (no hazard curve, timing of cash at start of period).

Attachment 9931

Ultimately I'm not in disagreement with the part of your analysis that compares relative defaults between the grades. If you can select DEF grades which will default at the same rate as BC's - then fantastic. And those lucky enough to get in at 38.25%, kudos and am jealous. But rather trying to throw questions for those who may otherwise assume that 20% gross returns are readily achievable at todays rates.