Insight Report: Monthly Performance Overview—February 2020

Preface

• All performance data comes from aggregated information from securitization deals available on

   

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• All performance is presented based on the Collateral Cut-off Date for each reporting period, not the Remittance Reporting Date.

• All performance metrics for each asset type are aggregated from only publicly issued securitizations within that asset type.

• The Issuance Period represents an aggregation of all securitizations with a Closing Date that is within each period.

• Subsequently, the report is compiled as of the issuance period of each asset class, rather than as of the origination period.

• All metrics are weighted averages of all securitizations in each asset type, weighted by the Outstanding Balance of each securitization at each reporting date.

• Similarly, the Issuer-level information available in the appendix is a weighted average of all public securitizations in the corresponding asset type and issuer.

• No Portfolio or Platform-level information has been used to compile any of the performance metrics or derive any of the conclusions in this report.

Additional Notes on Performance Dating

• Data is aggregated by Issuance Periods (half-year), where a half-year is comprised of 6 periods (6 months) of reporting.

• At the time of securitization, all deals are substantially current, with little to no delinquencies in the first reporting period.

• Likewise, there is effectively 0 (zero) CDR for the first 3-4 months of a securitization in the MPL world (and longer for CRT).

• dv01 believes presenting the first 6 months of each Issuance Period shows misleading curves for delinquency and CDR, which are also inconsistent between Issuance Periods depending on intra-period volumes.

• Therefore, in order to more accurately represent performance curves, this report only displays performance starting from month 7 of each Issuance Period. In so doing, dv01 notes specifically that the first point for each issuance period is not the first possible reporting period.

• Additionally, the delinquency and CDR at the first reporting period are not 0 (zero) as one would expect, given that securitizations are issued with without seriously delinquent loans.

• Regarding CRT

  • Given the longer performance history of mortgages, we aggregate by 6-month issuance periods but display data based on yearly issuance.

  • Subsequently, the first 6 months of performance reporting for each Issuance Period only represents performance from securities issued in the first half of the year.

CRT Performance

Prepayment Rates (CPR)

Prepayment rates (CPR) increased again in August as further rate moves continue to drive higher prepayment.

• CPR rates are highest overall for the 2019 issuance period - for which we display limited data due to the dating limitations mentioned in the disclaimer.

  • However, the limited information we do have shows CPR has been above 30%, over 13% (1300bp) higher than the previous peaks reached in CRT securitizations

• The highest CPR increases were concentrated in the 2018 issuance period loans where CPRs have reached 25% from mid single digits and 2017 which went from mid/high single digits to 20.

• Older issuance periods had muted gains, as expected due to lower WAC on more seasoned loans. However, in recent months prepayments have began to increase even in these issuance periods as borrowers lock in lower mortgage rates.

• 2018 and 2017 prepayment rates have now exceeded CRT peak rates of 2015 loans in the rate rally from 2016.

• CPR is a lagging indicator as this indicates loans that likely started in September or October, leaving at least another month or two of strong prepayment behavior as the full rate moves of September through November reverberate through CRT.

  • dv01 believes all issuance periods will continue to remain elevated for several months.

  • The prepayment behavior observed in the last collection period was likely started in September or October, leaving at least another month or two of strong prepayment behavior as the full rate moves of September through November reverberate through CRT.

  • After this period, a small lull is likely due to burnout rates, however the recent move down in interest rates will likely create a further rebound cycle

Delinquency (DQ) and Default (CDR) Overview

Delinquency rates have continued to flatten out for seasoned issuance periods.

• DQs have risen for newer issuance periods, in line with normal seasoning expectations.

• On the flip side of lower CDRs, loans stay delinquent longer in the Actual-Loss deals, hence the DQ rates at any given period are higher in Actual-Loss deals.

• Therefore, higher DQ rates are not a clear indicator of performance between Fixed-Loss and Actual-Loss issuance periods, but rather a function of deal type.
  Default (CDR) rates remain muted, particularly for actual loss deals (issuance period 2015 and later) where CDR rates are sub 0.05%.

• CDRs are significantly lower in 2016 and onward issuance periods because of the shift from Fixed-Loss securitizations to Actual-Loss securitizations.

  • Fixed-Loss sets a “fixed” loss severity for each loan, and specifies a period when the loan recognized as defaulted (and goes into the CDR calculation).

  • Actual-Loss recognizes the actual losses borne on a particular loan, and only recognizes a defaulted loan when all liquidation, foreclosure, deed-in-lieu, or short sale procedures are completed.

  • Therefore, lower CDRs are not a clear indicator of performance between Fixed-Loss and Actual-Loss issuance periods but rather a function of deal type.

All MPL Sector Performance

Prepayment Rates (CPR)

Prime & Super Prime MPL

• Prepayment speeds continue to rise across issuance periods as loans season.

• Prepayment speeds are higher on more seasoned issuance periods due to the lower number of loans outstanding in pre-2017 securitizations.

Near Prime MPL

• Prepayment speeds have decelerated slightly in all post 2016 issuance periods in the past few months, though they remain elevated relative to 2016 issuance speeds.

• Prepayment speeds for 2017 and 2018 issuance periods are clearly higher than pre-2017 issuance periods.

All MPL Sector Performance

Delinquency (DQ) Rates

Super Prime MPL

• The rate of Delinquency (DQ) increase) has continued to flatten out for seasoned issuance periods prior to 2017-H2.

• There has been an increase in delinquencies in 2017-H2 in the past few months after a period of flattening, similar to trends observed in other MPL sectors.

  • Overall levels are still in line with historical trends.

  • 2017-H2, 2018 and 2019 delinquency trends are covered in more detail in the “Additional Note on Delinquency and CDR” section.

Prime MPL

• DQs and CDRs have come down significantly from the first issuance period, 2016-H2 with exception to 2017-H2.

• The slope of the delinquency curve has been flat for a few periods in 2018 issuance periods, a positive trend for near-term CDRs. There is not enough data periods to definitively call a trend but dv01 will continue to monitor for further performance clarity. This trend was first observed last month so the continuation is a positive development.

• Overall level of delinquencies in 2018 issuance have been substantially lower than pre-2018 issuance periods.

  • Delinquencies are still rising but the trend suggests they will peak below prior issuance periods.

  • This is covered further in the “Additional Note on Delinquency and CDR” section.

• The slope of the delinquency curves have been consistent for post 2016 issuance periods.

Near Prime MPL

• There has been a flattening of delinquency levels in the last few months for both 2018 and 2019-H1 issuance periods. Overall levels of delinquency are at or below prior issuance periods. This bodes well for near-term CDR trends and is a very positive development. This trend was first noticed in the prior report and continued this period, dv01 will continue to monitor for continuation of the trend.

• There has been a continued increase in DQ rates over the past few months in the 2017 issuance periods.

• The pickup suggests that we have not yet hit a peak of CDRs for the 2017 and 2018-H1 issuance periods, despite the flat shape of the CDR curve.

• There has been a flattening of delinquency levels in the last remittance period for the 2018-H2 and 2019-H1 - the most recent performance periods. Both have occurred at levels substantially below prior issuance periods. Dv01 will continue to monitor this behavior for trend-spotting.

• Overall delinquency levels are within prior period performance trends, though dv01 will continue to monitor the increases.

  • The collateral has factored down more substantially than pre-2017 issuance, indicating the higher DQs and CDRs are occurring on a smaller portion of the original balance.

All MPL Sector Performance

Default (CDR) Rates

Super Prime MPL

• CDRs have remained flat to decelerating for over a year in 2016 and 2017-H1 issuance periods.

• Overall CDR levels have increased post 2016 issuance, a topic covered further in the “Additional Note on Delinquency and CDR” section.

Prime MPL

• DQ rates and CDRs have come down significantly from the first issuance period, 2016-H2.

• CDRs have increased for 2017-H2 and 2018-H1 issuance periods in recent months. Dv01 will continue to monitor changes in delinquency rates noted for the issuance periods for the relationship to CDR in the coming months

• 2018-H1 CDRs have eclipsed post 2016 peaks, but based on the observed flattening of delinquencies dv01 expects a moderation of this trend.

Near Prime MPL

• The flattening of delinquencies noted above in 2018 and 2019 issuance periods bodes well for near-term expected CDR trends, and we should expect to see this behavior in coming months.

• Thus far, 2017 issuance CDR have peaked below pre-2017 issues.

  • Due to the higher recent DQ rate mentioned earlier, dv01 expects CDRs to increase in the near-term.

  • Nevertheless, current CDRs on 2017-H2 and 2018 issuance periods are still several percent lower than peaks seen in pre-2017 issuance periods.

• 2018-H1 CDRs have begun to rise as a result of the higher DQ rates noted above, but are largely still in line with 2017 trends.

All MPL Sector Performance

Additional Notes on Delinquency and CDR in Prime and Super Prime MPL

• In Super Prime MPL, 2017 & 2018 DQ rates and CDRs are reaching higher levels than 2015 and 2016.

• In Prime MPL, as mentioned earlier, DQ rates and CDRs have been lower than prior issuance.

  • There is a difference with the slope of the 2019 issuance period versus prior periods.

• These trends are explained by the increasing weighted average coupon (WAC) of loans being securitized.

  • Super Prime MPL:

    • WACs have gone from around 8.5% in 2015 and 2016-H1 to around 9.8% for 2017 issuance, to 10.6% in 2018-H2 and 11.4% in 2019-H1.

  • Prime MPL

    • 2016-H2 WACs were significantly elevated at 21%, which explains the significantly higher CDR and delinquency trends for that issuance period.

    • Post-2016, WAC decreased to 15% and 15.5% respectively in 2017, and ~14.25% in 2018, which explains the lower delinquency and CDR for 2018 issuance.

    • Since 2018, WAC has rebounded back to 15%, which explains the difference in slope of the 2019 issuance period.

• GWAC trends are inconsistent in Near Prime MPL due to the introduction of a separate Rate Administration Fee independent of loan WAC.

Issuance Report

Lending Club Quarterly Issuance Overview

LendingClub formally reported their 3nd quarter 2019 issuance information.

• Total issuance was $2.34 Billion, an increase of 13.6% Y/Y and 7.8% Q/Q.

• For the second straight quarter, they have 0 (zero) issuance in E, F and G grades.

• Gross Wac was 12.74% - driven by higher percentage of issuance in high-grade loans.

  • Weighted Average WACs for the top 2 grades was 9.69%, up 7bp Q/Q.

  • On a Y/Y basis, Average WACs for the top 2 grades are up 62bps, and are at all-time highs.

All MPL Sector Performance

Securitization Issuance Overview

• Total securitization volume (certificate and traditional bond issuance combined) was $2.99 BB, down 23% Q/Q and up 13% Y/Y.

  • The 4th Quarter has historically been a period of slower issuance during the year due to slower year end activities and significant number of holidays. Q/Q issuance has declined from Q3 to Q4 in 3 of the past 4 years.

  • dv01 does not view the decline as cause for major concern.

• The issuance of certificates has continued to accelerate (such as CLUBC, PPTT, and other certificates issued directly by marketplace originators) exceeded $1.5 BB for the second straight quarter in the 4th quarter of 2019.

  • $1.64 BB of pass-through certificates were issued, an increase of 3% Q/Q, 128% Y/Y and up from $65mm in Q4 of 2017, the first quarter certificate issuance.

• Traditional bond issuance was $1.4BB, down 30% Y/Y and 41% Q/Q, largely due to the significant shift to Certificate issuance.

  • SoFi did not have a traditional securitization in Q4 2019 for the first time since 2016 and Avant did not issue a securitization (but they have gone quarters without issuance before).

  • Excluding SoFi, traditional bond issuance was up 1% Y/Y.

• LendingClub is the largest certificate issuer, accounting for 66% of total certificate issuance.

  • LendingClub was the first to issue certificates, but other issuers have followed suit.

• Total securitization volume hit record highs for Upstart.

  • Most other issuers had declining volumes, in line with the normal 4th quarter trend discussed above.

• Overall, securitizations, particularly of issuer certificates, continues to play a significant, and growing part of the Marketplace universe.

Appendix

Near Prime & Super Prime Securitization Performance, Aggregated by Issuer

Prime MPL by Securitization Performance, Aggregated by Issuer

CRT by Securitization Performance, Aggregated by Issuer

Disclaimer

• This publication is intended as a general overview and discussion. It does not constitute an offer to sell or a solicitation of an offer to buy any security.

• dv01 does not make an effort to differentiate or opine on specific issuers or issuer performance trends within a specific sector.

• dv01 also does not seek to influence future performance or opine on the investment returns of any particular investment strategy.

• Investors should consider this publication as only a single factor in making their investment decision.

• Past performance is not a guarantee of future performance.

• All opinions, projections, and estimates constitute the judgment of the author as of the date of publication and are subject to change without notice.

• No material, non-public information was used to derive the findings and analysis of this report.

• dv01 has established policies and procedures to maintain the confidentiality of certain nonpublic information received in the course of its business operations.

• The only platform-level information present in this report was in the insights into Lending Club’s quarterly origination information, which only references the publicly disclosed platform information that LendingClub makes available. A summary of the referenced information can be found here: https://www.lendingclub.com/info/demand-and-credit-profile.action

• All performance data comes from aggregate information from securitization deals available on.

• All performance is presented based on the Collateral Cut-off Date, not the Remittance Reporting Date.

• Issuer-level information available in the appendix was similarly aggregated from securitization deals in which the issuer’s loans comprise the underlying collateral.

• This publication has been prepared independently of any issuer of securities mentioned herein. In no instance is this report being published in connection with any proposed offering of securities or as an agent of any issuer of any securities.

• dv01 does not have any authority whatsoever to make any representation or warranty on behalf of an issuer.

• dv01 does and seeks to do business with companies covered in this research reports. As a result, investors should be aware that the dv01 may have a conflict of interest that could affect the objectivity of this report. However, readers should also note that dv01 has in place organizational and administrative arrangements to manage potential conflicts of interest of this nature.

• No part of the author’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in this report.

• While dv01 has obtained information from sources it believes to be reliable, dv01 undertakes no duty of due diligence or independent verification of any information it receives.

• dv01 does not accept any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this information including out of actions taken or not taken on this basis of this publication.

• dv01 assumes no obligation to make any updates following publication in any form or format.

Report Credits: Vadim Verkhoglyad, CFA, Senior Product Specialist