Lender ROI on Prosper Select loans declines for sixth straight month ...

[traveler505]

MNH Report #6 has been posted to my blog:

http://blog.traveler505.com/2008/02/lender-roi-on-prosper-select-loans.html

Highlights:

On February 12, Prosper released its People-to-People Lending Marketplace Survey for January 2008, revealing that lender ROI on the loans included in the Prosper Select Index has declined in each of the six months since the Index first appeared. 

For August 2007, the Prosper Select Index was 10.31%.  By January 2008, it had dropped more than two percentage points, to 8.19%.  Here are all of the published monthly Prosper Select Indices:

August 2007 – 10.31%
September 2007 – 9.75%
October 2007 – 9.28%
November 2007 – 9.13%
December 2007 – 8.34%
January 2008 – 8.19%

The decline occurred across all credit grades.  The Prime Select Index declined from 9.41% to 8.75%, Near Prime Select Index slipped from 10.73% to 7.90%, and Sub-Prime Select Index plummeted from 14.95% to 4.93%.

The Prosper Select Index is misleadingly optimistic for at least three reasons.  First, as noted above, it excludes a majority of Prosper loans from its calculations, and, as such, does not reflect the ROI experienced by a majority of Prosper lenders.  Second, it appears that the estimated losses due to default are a moving target, changing retroactively as Prosper acquires additional data and refines its algorithms.  Third, because the observation date is only one month after the end of the loan origination period, many of the loans included in the calculation have not yet had an opportunity to go late or default, leading to overly optimistic performance estimates.

Extending the observation date by 5.5 months resulted in a significant decrease in estimated ROI for each credit grade, with the most pronounced reduction in the lower credit grades. 

Using the extended observation date, and weighting the data by dollar amount of loans for each credit grade, I arrived at a August 2007 Prosper Select Index of 7.03%, more than three percentage points below Prosper’s published figure.  (Weighting by number of loans yielded a slightly higher figure, 7.14%.) 

Again, the February 15 observation date was only 6.5 months after the end of the 12-month loan origination period, and only 5.5 months later than the observation date used by Prosper to create its published ROI of 10.13%.  If the estimated ROI for Prosper Select loans dropped three percentage points during those 5.5 months, one can only wonder what the ROI would be at the end of the three-year term of the notes.

(By the way, I added a couple other blog posts earlier today, but this was the most important.)

[traveler505]

Prosper has lowered the estimated lender ROI range on its home page from "9.49 - 12.81%" to "8.74% - 12.10%".  (The old version was based on selected loans originated between 7/1/06 and 10/30/07 as observed on 11/30/07; the new version uses origination dates of 7/1/06 to 11/30/07 and an observation date of 1/17/08.)

These numbers remain impossible to duplicate using the marketplace performance page, presumably because Prosper has retroactively altered its formulas for estimation of default risk.  The ROI figures which the marketplace performance page generates are much lower.

By the way, the Prosper ad on the P2PNoBank blog aggregator site (operated by the editor of Prosper's blog) still says 9.40% to 13.23%.  (RateLadder hosts the graphic for the ad on his own site; I suspect that Prosper itself regards those numbers as obsolete.)  If one clicks on the link, one lands on a Prosper page which still uses the 9.49% figure which has been removed from the home page.

ETA:  I messaged RateLadder about this, and he switched ad images. 

[arebelspy]

No comments on this in four days.

I don't think anyone is surprised in the least about the contents of this report.

Thanks Trav.

[Fred93]

Not surprised by the contents, but it is good to see it carefully documented.

[ira01]

Not surprised by the contents, but it is good to see it carefully documented.

+1.  Thanks Traveler.

[onthefence]

No surprise at all.  Documentation is always good.  It's also good to here someone else's perspective on this.

[traveler505]

One more indicator of the declining ROI on Prosper.  The previous posts examined trends based on constant bidding criteria.  But even when Prosper optimizes the bidding criteria, the trend is still downward:

Prosper shows two sets of portfolio plans:  one dated January 10, the other February 27.  For each portfolio plan, the estimated ROI declined between those dates.

Conservative:  from  7.56% to 7.03%
Balanced:  from 8.45% to 8.11%
Moderate:  from 10.41% to 8.77%
Aggressive:  from 11.60% to 10.49%

As with Prosper's other ROI estimates, the percentages are based on observation dates (and presumably calculation dates as well) just one month after the end of the loan origination period.  I didn't run the numbers on the portfolio plans, but, for other ROI estimates, a later observation date and/or a later calculation date produces a lower ROI estimate on Prosper's performance page, suggesting that Prosper's methodology is overly optimistic.