As the WSJ reports, a five year old fund managed by LendingClub that invests in the company’s online consumer loans and which is the largest in-house portfolio run by LendingClub unit LC Advisors LLC and has regularly returned about 0.5% a month or more, just hit a brick wall: it is now expected to report its first-ever negative month, after 63 consecutive months of positive returns. As Peter Rudegeair adds, "the unusual result shows how a confluence of negative trends is hitting performance for the unsecured personal loans held in LendingClub’s Broad Based Consumer Credit (Q) Fund. Performance for the roughly $800-million fund in June “is likely to be negative,” LendingClub CEO Scott Sanborn wrote in a letter to investors Tuesday."
What caused this unprecedented shift? The very same factors we warned about first over a year ago: "the fund has been under pressure as defaults have risen and LendingClub has taken steps to manage them. In March,the fund returned only 0.05%, following a 0.13% gain in December."
The CEO added in the letter to investors Tuesday that the June returns have been weighed down by a series of increases on borrower interest rates designed to entice new investments. Although the higher rates will ultimately lead to higher yields for fund investors, under accounting rules LC Advisors must mark down the value of existing loans the fund holds that carry lower coupons."
Now this seems normal, the existing loans are marked to the new rate, Lending Tree takes a loss on its older loans. This is called discovering real rates after the loans were made, this is what banks do, discover, and they discover good and bad news.
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