Prosper Marketplace Survey Results April 2008

Prosper has released it's marketplace survey results for April 2008. You can read a copy here or go to Prospers blog and read about it along with comments by Chris Larson (CEO).

Of course they put a positive spin on things and there is some good (but old) news about the arrangement with WebBank and expanding pretty much nation wide. This will certainly expand the number of quality listings at reasonable rates, at least for awhile.

I found the funded loans amount interesting, April 2008 was down $0.2 million from a year ago. Here is a chart from LendingStats that I "borrowed"



There seems to be some tax effect going on, notice the ramp up into April and then the fall off into summer. It will be interesting to see how this plays out over this summer. But the numbers do make me concerned about the viability of Prosper.

But the thing I found really interesting in this PR release was this formula:

Maximum Borrower Rate > Risk Free Rate¹ + 3.25% + (Expected Annual Default * 1.5) + Prosper Servicing Fee.

Which is provided in the "Attractive risk-return tradeoff" definition. This is the first time I've noticed this. It makes sense sort of, the mysterious 3.25% in the middle is interesting. This seems to be what Prosper assumes as the risk premium for unsecured loans to strangers on the internet :)

Homeowners

Are home owners a better bet? I'm not sure anymore and I've been giving listings by home owners more though before bidding recently.

My understanding of how Proser calculates DTI is that they exclude mortgage payments under the theory that rent payments are not included so to be fair neither should mortgage payments. In previous periods this makes a lot of sense, but disconnect between house prices and rent in recent years has created a situation where renters may be the smart (financially responsible) ones and recent homeowners are the folks who are throwing money away.

So I was wondering what the Prosper performance data would indicate. So I looked at loans originated between Jan 1, 2007 and Dec 30, 2007, homeowner vs non-homeowner for several DTI segments.

Play along at home starting with this link.

What I found was interesting. I looked at three segments based on DTI: 30%-35%, 35%-40% and 40%-45%. In each of these the B and C grades for non-homeowners has a better ROI than the homeowners! It is hard to draw any conclusions for AA and A grades because the data for non-homeowners is sparse. And certainly there are lots of other factors to consider.

But I'm having second thoughts about lending to homeowners in states where housing values have become disconnected from reality: Florida, Nevada, etc... And under no circumstances should you lend to a Texas home owner!

Why not 100% verified income and employment status

Why doesn't Prosper verify income and employment status on all loans? My understanding is that today the verification process is hit or miss, some borrowers are verified and others (the majority?) are not. The income range figures into a couple of important calculations and if it is not reliable it will seriously screw up lenders calculations. The first calculation is DTI, how can Prosper publish a DTI and not verify this number with either pay statements or tax documents? The second calculation is a simple eyeballing the loan amount vs. the stated income range. Some lenders might be reluctant to lend $15,000 to someone who makes less than $50,000 a year but might be ok with someone who makes $50k to $75k. But what if a borrower who makes $45k fudges things a bit and states they make $53k? It could make a difference.

Checkout: Prosper.com - the lawsuits begin

Fred93 has a post up:

Prosper.com - the lawsuits begin

Check it out at this link.

http://www.prospers.org/blogs/Fred93

Bad Debt Sale update

There was an update on the official Prosper blog by Doug Fuller today on the most recent bad debt sale attempt.

"In round numbers, the bids that we received were approximately 1/3 the prices bid in December. The price difference between the August and December represented about a 20% reduction."

I'm not sure how to interpret this additional information looking at the previous debt sale page we don't know the loan mix between credit grades / homeowners. It may be that most of the bad loans are junk ( E, NC, HR ) and are now worthless. In my case I have a total of 6 loans that are eligible: 4 E, 1 D and 1 C. Would not surprise me one bit to find out that the E's are worth nothing.
My C & D loans have a combined principle balance of $86.64, neither is a homeowner. I'll take 5 cents on the dollar and throw in the 4 E's for a penny on the dollar. So for a total of $6.08 you can have a "portfolio" of loans that Prosper currently values at nearly $300.00

Bad Debt Sale Hiccup

Well it appears there has been a hiccup in the bad debt sale. This post by Doug Fuller over on the official Prosper blog lays it out, but the simple explanation is that no one wants to pay very much. Take a look at the results from previous bad debt sales:


there seem to be a couple of trends:

1. number of bad loans being sold each time is increasing
2. Rates are decreasing

At the moment there are around 1,100 4+ late loans on the books. Not all of these would qualify for the sale but it is pretty clear that this next sale (whenever it happens) will be the largest yet. A prudent lender would figure on 0% returned from bad loans going forward.

As long as these loans (I've got 6 now that are 4+ late) are sold before the end of the year I'll be able to write off the remaining principle. I find it annoying to have to go look at each of these loans whenever I want to calculate my ROI to subtract the loan value from Prospers figures. Why can't the lending overview screen show us the loan value and principle for each category of late loans? (yes it would look bad)

There is a bigger issue though that has folks over at prospers.org worked up. By delaying the bad debt sale the performance numbers on Prosper look better than they actually would be if the bad loans were sold off. One might argue that we don't know what they are worth until actually sold but Prosper has 8 separate opinions at this point (the bids from the bad debt buyers) and apparently the recent bids make the previous debt sales look generous. Time for Prosper to "mark to market" the bad loans and come clean about what returns actual lenders are able to achieve.

4+ month late loan count today (5/3) according to LS: 1,177

Weirdness in principle received

Just in case someone else runs into this situation I noted in my previous post, I have an explanation for the decrease in principle paid that I observed. First a couple of screen shots.

End of March 2008:


End of April 2008:




Note that principle received in March was $853.42 and in April was
$847.45 so $5.97 disappeared somehow!

That answer was provided by yankeefan over at prospers.org

The "principle received" figure only includes active loans. One of the ways a loan can go from "active" to "not-active" is a payoff (good), another way is default (bad), a third way would be repurchased, perhaps there are others.

But the point here is that when you have a good loan that pays off, the principle received value will drop! This is true of early payoffs and eventually loans that make the final scheduled payment. Now contrast that with the typical defaulting loan, a borrower made a few payments (mostly interest) and then stopped paying and the loan defaults. Principle received will go down some small amount.

Weird, wonky stuff!

April 2008 XIRR is at 6.36%

LS shows 8.62% and Eric's shows 9.33% (both of these have gone up in the last few days, on Sunday LS was 8.40% and Eric's was 8.89%).

There seems to be some screwup on the Lending screen payments received figures. Take a look at my screen shot from last month and compare the figures.

I had a lot of payoffs this month, added $200 and that plus income funded 12 new loans! To push my loan count up to 107.

Looking forward to debt sale when I'll get pennies back on those 6 4+ month lates.

What about that Secondary Market

We are rapidly approaching the six month anniversary of the S-1 filling by PMI and there doesn't seem to be any new information available. Now I can see how this could be far down on the SEC's to do list but it would be nice to know how things stand. Is there any activity or has the PMI folder been lost in a pile on the desk of the person in charge of wacko ideas.

Looking for gaps in the new Portfolio Plan slices

In case you haven't noticed yet, Prosper updated the Portfolio Plan slices as part of last nights upgrade. But a new feature described on the official Prosper blog indicates that the updates are not automatic so you won't be caught by surprise by the changes (good change).

One interesting change is the max DTI is now 40% or less for all slices except for slice #4 of the moderate portfolio which stays at 70% ( And a very odd slice, anyone want to bet on how long that lasts ?)

There were other slight modifications, a new slice thrown into balanced, tightened or added criteria, and almost all slices had the min bid lowered. 5.9% if you are a clean AA and ask for less than $10,000.

So where are the opportunities? It used to be one could underbid the PP slices but Prosper seems to have closed that gap up.

In the AA credit grade it looks like one could underbid the Balanced PP slice 1. This slice bids on clean AA 0-0-0 with 0-1 inquiries and loan amount of $15,000 or more. Maybe stick to the listings with zero inquires and bid 11.49%

Same thing for A credit grade, moderate slice 2 bids 16.15% on 0-0-0 with 0-1 inquires.

The B slices are interesting in that Prosper has added a max revolving credit criteria for two of them, balanced slice 5 and moderate slice 3. Perhaps accept slightly more than the $25,000 limit and lower the number of inquiries. There also seems to be a good amount of overlap in the B grade slices.

The C slices don't seem very interesting unless you are a borrower, 10.45% even with 2 current delinquencies as long as DTI is at 40% or below and inquiries is at zero. $7,499.99 is yours for the asking!

As for the D slice (actually the same criteria in both moderate and aggresive) I won't be bidding but it looks like one might underbid and do ok.

I skipped over the auto-fund only slices (three of them, one each in AA, A and B). Looks like a good deal for an A borrower that has some skid marks on the credit. If your DTI is 40% or below and you only want $4,999.99 or less it is yours for 13.10%. Moderate slice 1 doesn't specify an criteria for current or past DQ's, public records or inquires!

Overall I think the portfolio plans are getting better.