I think I've figured it out...
Loans don't (typically) start defaulting until at least 2 months into the loan (borrowers can pay the first couple of instalments), with the arrears process then taking 180+ days (6 months), plus a month for the processing gets you to 9 months. However, it does appear that default rates may be on the decline as typically some defaults come through well before the 180 days...
So trying to get some meaningful information on defaults is going to have to be based on at least 9 month old data :( [unless you use arrears info]
The reason I'm interested in this is because it allows you to create stats like the table below for
current loans - the missing detail in being able to determining this is the default rate, so it needs to be 'calculated' based on historic info (or something else), which can be problematic...
Loans |
Principal |
Interest |
Fee |
Default |
Tax |
Income |
MRAR |
1251 |
$121344.46 |
$26996.53 |
($4049.48) |
($3002.13) |
($2834.64) |
$17110.29 |
14.10% |
Grade |
Loans |
Principal |
Interest |
Fee |
Default |
Tax |
Income |
MRAR |
A |
10 |
$373.55 |
$47.46 |
($7.12) |
($18.97) |
($4.98) |
$16.38 |
4.39% |
B |
143 |
$12631.25 |
$2071.81 |
($310.77) |
($134.26) |
($217.54) |
$1409.24 |
11.16% |
C |
493 |
$46936.72 |
$9339.55 |
($1400.93) |
($1238.18) |
($980.65) |
$5719.79 |
12.19% |
D |
436 |
$46098.19 |
$11152.73 |
($1672.91) |
($602.01) |
($1171.04) |
$7706.77 |
16.72% |
E |
167 |
$15235.64 |
$4357.85 |
($653.68) |
($1008.70) |
($457.57) |
$2237.89 |
14.69% |
F |
2 |
$69.11 |
$27.14 |
($4.07) |
($0.00) |
($2.85) |
$20.22 |
29.25% |
The above is calculated on my 'current' loans using 'default rates' from loans older than 10 months, going back a further 12 months to get a weighted average. Ignoring A's and F's due to low numbers (note I'm using a tax rate of 10.5%), it actually looks pretty close to what I'm getting (compared to XIRR calculation on total loans).
I've been looking around to see what others (academics) have done to try to determine default rates - some are using a 'derived' weighting on arrears so it looks at more recent data.
Has anyone else looked into this and come up with any good options?
Note: My B grade loans are weighted on the high side (i.e. mostly B3, B4, B5, so B grade is showing higher than what an average spread would be).