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Thread: Harmoney

  1. #3661
    yeah, nah
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    Default Default Adjusted Return

    The following table may be of interest to some. It shows my default adjusted return.

    Attachment 9917

    Notes:
    • current interest rates are used - old rates were better/different
    • my selection method/criteria used - so not what someone else would get
    • I don't like A5's, I love F1 and F2 - all are anomalies due to low numbers
    • D's and E's are my money makers!

  2. #3662
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    Quote Originally Posted by myles View Post
    The following table may be of interest to some. It shows my default adjusted return.

    Attachment 9917

    Notes:
    • current interest rates are used - old rates were better/different
    • my selection method/criteria used - so not what someone else would get
    • I don't like A5's, I love F1 and F2 - all are anomalies due to low numbers
    • D's and E's are my money makers!
    Something does not quite make sense / add up

    The invested column is $ or number of notes?
    In $ the total invested column does note make sense
    if number of notes the interest and payments columns don't make sense

  3. #3663
    yeah, nah
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    Quote Originally Posted by humvee View Post
    Something does not quite make sense / add up

    The invested column is $ or number of notes?
    In $ the total invested column does note make sense
    if number of notes the interest and payments columns don't make sense
    All $'s - I should have formatted them that way.

    So under Defaulted Loans:
    Invested: is $ invested in the loans that have defaulted (i.e. purchase of notes)
    Interest: is $ of interest returned from the defaulted loans (prior to defaulting)
    Payments: $ paid by borrower prior to loan defaulting
    Loss: = Invested - (Payments + Interest) $'s [i.e. what I lost from initial purchase of notes)

    Total Invested: is total $'s I have invested in that grade (all loans)

    The rest should be obvious?
    Last edited by myles; 11-09-2018 at 12:13 PM. Reason: clarification

  4. #3664
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    Quote Originally Posted by myles View Post
    All $'s - I should have formatted them that way.

    So under Defaulted Loans:
    Invested: is $ invested in the loans that have defaulted (i.e. purchase of notes)
    Interest: is $ of interest returned from the defaulted loans (prior to defaulting)
    Payments: $ paid by borrower prior to loan defaulting
    Loss: = Invested - (Payments + Interest) $'s [i.e. what I lost from initial purchase of notes)

    Total Invested: is total $'s I have invested in that grade (all loans)

    The rest should be obvious?
    Ok that makes more sense thanks

  5. #3665
    Reincarnated Panthera Snow Leopard's Avatar
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    Quote Originally Posted by myles View Post
    The following table may be of interest to some. It shows my default adjusted return.

    Attachment 9917

    Notes:
    • current interest rates are used - old rates were better/different
    • my selection method/criteria used - so not what someone else would get
    • I don't like A5's, I love F1 and F2 - all are anomalies due to low numbers
    • D's and E's are my money makers!

    I believe you are calculating your losses wrong:

    On the A5 $50 you have lost $43.13 of capital and also lost $1.185 of interest (I assume the IR are annual & we are working over 1 year) for a total loss of $44.315

    Or if you like:
    You put $500 in and get back $510.64

    Your RoR is actually 2.13%
    om mani peme hum

  6. #3666
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    Hi Myles

    Thanks for sharing.

    In addition to Snow Leopard's point, you also did not take into account fees. Assuming your fees is 15%, then following the same A5, you paid 15% on the 10.99% interest received. But you lose the "whole" write off.

    One year calculation (assuming no arrears) and taking the case of the A5.
    You invested a total of $500 and you had one charge off of $50. Your interest received is $450x10.99% + $4.31 (that $50 charge off) = total interest $53.77 for the year. Less 15% fees is $45.70

    Less principal written off $43.13 = net gain after fees of just $2.57. So you end up with just $502.57 at the end of the year or a return of just 0.51% (not the 3.23% in your table).

    Fees affect the higher grades more.
    Last edited by Cool Bear; 11-09-2018 at 02:11 PM.

  7. #3667
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    Quote Originally Posted by Cool Bear View Post
    Hi Myles

    Thanks for sharing.

    In addition to Snow Leopard's point, you also did not take into account fees. Assuming your fees is 15%, then following the same A5, you paid 15% on the 10.99% interest received. But you lose the "whole" write off.

    One year calculation (assuming no arrears) and taking the case of the A5.
    You invested a total of $500 and you had one charge off of $50. Your interest received is $450x10.99% + $4.31 (that $50 charge off) = total interest $53.77 for the year. Less 15% fees is $45.70

    Less principal written off $43.13 = net gain after fees of just $2.57. So you end up with just $502.57 at the end of the year or a return of just 0.51% (not the 3.23% in your table).

    Fees affect the higher grades more.
    And if you cannot deduct the $43.13 principal written off from your taxable interest, then you would have actually lost money on this one! Even worse if fees are also not deducted for tax purposes.

  8. #3668
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    Quote Originally Posted by BJ1 View Post
    Beacon, there is so much of what I have learnt over a lifetime in money that it is hard to impart, either in this forum or by PM. However, I will add that the majority of families need to allocate above 25% of pretax income to accommodation, be that rent or mortgage (majority, not all by any means) and so the theoretical maximum available for other finance costs should be 10%. I hardly ever lend if the repayment to after tax income exceeds 10% as it is quite likely that, no matter what the applicant says about debt consolidation, there will also be a credit card on drip feed in the background.
    Thank you BJ1. Be interesting to watch how the results unfold - your cautious ABCs vs Myles daring CDEs vs Cool Bear Index ( I think he's closest to being an index, out of all who care to consistently share here). Looks like a sunny day all around for Harmoney fans today. Enjoy the sunshine, all!

  9. #3669
    yeah, nah
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    I take the comments above, but the point I'm trying to show is the rate/value of defaults per grade. Defaults are not annual, they are total over the life of all loans - the %Loss is based on total invested value per grade, not current or final value (so loss of potential interest is not included).

    I take Cool Bears point on fees, so I've added that in - it had no effect on the overall trend, but it could have. Tax is at a portfolio level so I'm not including it deliberately.

    I know the last column is meaningless, but I find it to be indicative of the return for the grade.

    Updated with 15% loss due to fees:

    Attachment 9918

    The key thing I take from these values is that the expected, larger default losses for higher grades is not what I'm seeing. So selection criteria can impact expected defaults and averages - significantly.

  10. #3670
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    Myles, I agree with your point on that the higher grades may end up having better returns but the true results comes only when all loans in a cohort have seen out their terms.

    However, my point on the fees is more about your last two columns - fees on interest from the performing (non charged off) loans. The fees on interest from the non-performing (charged off) loans would hardly affect the returns as you rightly point out.

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