Broadway Dan, thanks for posting.
Since Bert is so respected, I thought I would post what I thought was critical in what he said about Upstart, just to close down this delinquency worry. I am a paid subscriber and am pulling from his emails to subscribers, but in this case I don’t think he would mind because I am not identifying a stock pick he is not also recommending to his free audience. (He might have also posted this on seekingAlpha for free, I haven’t looked)
Here is what he says, bold is mine:
I won’t try to fully analyze the issue of default rate, except to note that it really shouldn’t be taken out of context. There are some who misunderstand how AI technology can and is used to analyze credit. AI is not meant to eliminate defaults or loan delinquencies. It is supposed to be used to maximize risk adjusted spreads.
Of course we had some great people on the board who have given us the numbers to show that this is in fact what is happening.
What’s also interesting is this again, bold is mine and I have no problem reproducing this because it’s reproduced from the KBRA report:
“ UPSPT 2022-ST1 has a smaller percentage of Grade D and E loans to UPSPT 2021-ST10, which have a higher cohort-level base case default assumption than the higher grades. Upstart Pass-Through Trust, Series 2022-ST1 11 January 21, 2022 Changes to the CND Trigger The graph below illustrates the difference between the current cumulative net default trigger level against the previous pass-through’s trigger level. The difference between a specific period for UPSPT 2022-ST1 could be as much as 0.70% higher than UPSPT 2021-ST10.
So what this shows is that the newest packet of Upstart loans is swimming a bit up the FICO chain now. I imagine we will see the content of these packages changing based on the loans they are writing and that delinquencies will fluctuate accordingly. So, as Bert says, it’s super important for us not to analyze delinquency rates out of context.
I know that there were a lot of discussions a while back on Upstart’s altruistic focus. At the time I said something to the equivalent of, let’s face it, their primary goal is to make money, and we love them for it. I see them executing flawlessly thus far on their plan, and that is to manage the risk and rewards to maximize yields (factoring in default rates) for the institutional investors and for the banks.