zcommodore http://www.prospers.org/blogs/zcommodore?tempskin=_atom Random thoughts about Prosper lending b2evolution 2010-04-24T03:35:20Z Gravy loans zcommodore http://www.prospers.org/blogs/zcommodore/2008/10/23/gravy_loans 2008-10-23T14:00:40Z 2008-10-23T14:00:40Z With Prosper so young and with defaults so high, this doesn't happen very often.  However it does happen.

My very first loan is now on the gravy train (I've received more in payments than I originally bid).  Ultimately, the lenders are probably lucky on this one in the grand scheme of things.  Of my original $50 bid, I've received $53.20 in payments (it actually hit the gravy train last month but the payment was late).  If you don't feel like looking at it, it's a E grade loan in a "bad group".  It has been late a number of times and I've received some late fees along with normal interest and principal.  Based on the original payment schedule, the borrower is behind on his payments even though the loan is listed as "current" due to all the late payments.  He still owes me over $20 of my original bid where he should be around $18.42 if he had been paying on time every time.

It's nice to see a few good loans sprinkled in with all the lates and defaults in my account.

Meeting Prosper People zcommodore http://www.prospers.org/blogs/zcommodore/2008/10/17/meeting_prosper_people 2008-10-17T14:04:26Z 2008-10-17T14:04:26Z I've been a member of Prosper for over 2 years now.  Oddly enough, until this week, I had never met anyone who had anything to do with Prosper.  This past weekend, at a meet and greet organized by vsqueen, I finally got that opportunity.

First, I want to send a big thanks to vsqueen for organizing the weekend.  Unfortunately, I was unable to attend any events except the dinner on Sunday, Oct. 12 but I understand there were a number of activities planned for the entire weekend.  Either way, for the short time I was able to attend, it was fun to put some faces to the names.

I can't remember all the names whe attended the event but here are some that I do remember: vsqueen, soupy1 and his wife luana.  The warm and friendly islandmele and her friend Brenda came all the way from Hawaii. Jazzpianist and gogmagog were there also.  A couple of relatively local people showed up as well, zaun and ran-ran.  There were a couple of people who came but aren't participants of Prosper yet, namely Hillary, a friend of islandmele's and zaun's wife who's name I have forgotten.

The topics of discussion mostly centered around Prosper with complaints about borrowers not paying and people's various issues with Prosper's operations peppering the conversations.  Of course, there were some off-topic discussions as well like my discussion with zaun and ran-ran about Creation/Evolution and a few hints of the various political races.  Overall, the time was very enjoyable and I hope to have more opportunities to meet Prosper people in the future.

Finally, just today, I got to meet one other Prosper person, zadrock.  Incidentally, he is the campaign manager for Mike Hargadon who is running for congress in Maryland's 7th congressional district.  Currently, this district is represented by Elijah Cummings, the head of the Congressional Black Caucus.  Ultimately, Mr. Hargadon will most likely not win but either way, it was nice to meet both him and zadrock.

My thoughts on Prosper's quiet period zcommodore http://www.prospers.org/blogs/zcommodore/2008/10/15/my_thoughts_on_prosper_s_quiet_period 2008-10-15T14:28:26Z 2008-10-15T14:28:26Z This quiet period that Prosper announced is a two-edged sword.  Apparently it is necessary as has been seen in the LendingClub situation.

If the quiet period doesn't last too long, it could be a huge boost for Prosper.  Once a secondary market is included, it will add a huge revenue stream for Prosper since they will be able to get fees for each loan transaction, not just loan originations.

In the interim, they have a problem where current lenders will see the effects of their previous bidding decisions.  For lenders who were taking a lot of bad risks, they will probably see the error of their ways and likely never return except to sell their loans.  Unfortunately, a lot of lenders could be in this category so Prosper will have to start over attracting new blood.  Having a more liquid platform for lenders should help with that.

Also, I don't know what "alternative means" Prosper has to fund borrowers but LendingClub didn't do a whole lot of funding while they were "quiet".  I don't anticipate Prosper doing a whole lot either so the total numbers of loans originated aren't going to look too great for awhile.  However, once Prosper's "quiet period" is over, I doubt they will have much trouble attracting borrowers since there is always a market for people who want/need money.

One of my main concerns is whether or not Prosper will be like LendingClub and only allow lenders from certain states.  If Prosper only allows lenders with certain minimum resources like LendingClub is doing, it will adversely affect their popularity.  Admittedly, there's the 80-20 aspect where the 80% of lenders who can't participate due to a lack of resources only affected 20% of their bottom line so ultimately, it probably won't really be a problem.  However, if there is a list of states and it is the same as the one for LendingClub that can/can't lend, that will be a bigger factor to how many people will be able to participate and will hurt their bottom line and their ability to recover from the "quiet period".

Ultimately, I think Prosper will come back and a secondary market will be good for them.  The question will be in the end, whether or not Prosper can become profitable after they restart their operations.  Based on their last 2+ years of operation, I'm not convinced they will be but I'm open to the possibility that they might.

Removing the lipstick from the pig zcommodore http://www.prospers.org/blogs/zcommodore/2008/10/14/removing_the_lipstick_from_the_pig 2008-10-14T21:02:07Z 2008-10-14T21:35:42Z Just today, I received the latest "Market Survey Results" from Prosper.  A cursory read of that letter would make you think Prosper is growing by leaps and bounds, and that the latest economic turmoil was accellerating the growth.  Well, the truth ain't quite so pretty.  Here's the evidence....

Chris Larsen said: "the percentage of borrowers with sterling credit that are listing and getting funded on Prosper remains at record levels"

Well, maybe.... (I don't have information on the number of "sterling credit" listings but I do know what the funded loan percentages are.)


I'm not sure what his definition of "sterling credit" is but for him to say it's at "record levels" is a bit of a misnomer.  The total percentage of borrowers with AA/A credit grades getting loans has been gradually trending down since it's peak in November last year.  Here's a better look:


For whatever reason, the percentage of loans going to the poorest grades of borrowers is trending upwards while the other borrower percentages are going down.  This is not good news for Prosper because with the increase, overall default numbers are going to go up.

I will admit that since November, the top level of borrowers getting loans has been a lot higher than earlier in Prosper history but that was largely due to the lender guidance and also the portfolio plans rather than lender's raw choices.

On to the next one.  Here's a good quote, a whole paragraph: "Another key trend were experiencing is that as consumer borrowing from traditional financing sources is shrinking, Prosper is experiencing solid growth. Year-to-date, the number of loans in terms of units is up 24% over the same time period last year, and up 37% in September 2008 compared to September 2007. At the same time, loan originations year-to-date in terms of dollars have increased 8% over the same period last year, and are up 7% in September 2008 compared to September 2007."

Well, isn't it convenient that September of 2007 was a low point in an otherwise flat loan-origination trend:



Of course, the increase in dollars loaned of 7-8% year over year is nice but given that even at 2007 levels, it is known he admitted they needed to increase volume by 4-500%, a 7-8% increase isn't very helpful.  Also, the fact that the total number of loans has increased 24% only says they're doing more work per dollar earned since the cost of originating a loan most likely stays roughly the same even if the size goes down.

He made a comment about loan sizes: "At a time when every sector in the economy seems to be under pressure and shrinking, the growth Prosper has experienced is very respectable. However, some may wonder why there is a disparity between unit growth and loan dollar volume growth. The answer lies in the average loan amount being funded on Prosper. Year-to-date the average loan amount is $6,047, down 13% or $925 compared to the same period last year. In September 2008 the average loan amount was $5,544, down 23% or $1,631 from September 2007. This indicates that lenders on Prosper are being more cautious by directing their bids toward listings with lower requested loan amounts."

Here's the real trend:


As you can see, the trend in loan sizes has been smaller overall since November of last year.  In other words, Prosper is doing more work for less revenue at an increasing rate over most of the last year.  Obviously, that's not good.  (Yes, I know they increased origination fees and a number of other things over that time period.)

It's always amazing to watch someone pull out a set of numbers and use them for marketing purposes.  I suspect Chris Larsen is using his "select index" for his figures which excludes a lot of activity on Prosper.  Well, as you can see either way, the overall trend is what Prosper is going to make its money on (or not) so just picking out some subset of numbers and marketing them as indicative of Prosper's performance as a whole is just putting lipstick on the pig.

I hope Prosper is keeping track of these real numbers and acting accordingly.  If not, they're going to be very surprised when they discover things aren't quite as rosy as they're trying to promote. Prosper has a lot of work to do if they hope to become profitable. I'd recommend working on improving collections.  If lenders see improved performance on late loans, they might start bidding again.  I don't think the overall economic turmoil is the problem.

Lenders suing Prosper are idiots! zcommodore http://www.prospers.org/blogs/zcommodore/2008/10/03/lenders_suing_prosper_are_idiots 2008-10-03T21:07:26Z 2008-10-03T21:07:26Z Some time ago, it was announced that a group of lenders are considering suing Prosper for a variety of reasons.  I don't remember the details and I don't even know what the status of that potential lawsuit is.  I think they're idiots and here's why:  What they should have done, instead of hiring a lawyer to investigate whatever claims they have against Prosper is to hire a good lobbyist to Congress.

As most people who aren't living under a rock know, today Congress decided to pass a huge bill that bails out a bunch of banks that made bad loans for houses and stuff like that.  In addition, there is gobs of other pork that will keep taxpayers paying for this bill for who knows how long.  Obviously, when people make bad loans, the taxpayers will bail you out.

So, these lenders, if they had been smart, should have hired a lobbyist to get Prosper loans included in all this pork.  After all, the biggest reason why so many are going under has nothing to do with the fact that some people just can't/won't pay, and has everything to do with the fact that the economy is going south and so the taxpayers should pay to fix it.  Besides, we're only talking about a few million dollars.  It's not like this would increase the bill that much.  And one side benefit might have been the lenders could have gotten Prosper to help with the lobbyist fees.  Prosper would look good for getting lenders a better return on these bad investments and it would have provided a way for some of these disgruntled lenders to get back on the pro-Prosper bandwagon.  It would have been a win-win situation!

As it is, these Prosper lenders just screwed it up.  Now everyone is mad and Prosper isn't making as many loans as they could have.  Oh well....


Prosper loans dropped 25% in August zcommodore http://www.prospers.org/blogs/zcommodore/2008/08/29/prosper_loans_dropped_25_in_august 2008-08-29T15:00:47Z 2008-08-29T15:01:41Z Today is the last business day in August so all the data is in for the month and it ain't pretty.  Prosper has originated 25% less in loans this month than last, from ~$8 million down to ~$6 million.


I don't know what their recovery plan is but this is not good.  As you can see there has been a peak over the last few months that can be attributed to a significant amount of advertising but something has changed because whatever it was, it hasn't lasted.

Looking at some other statistics, a lot of other things have been going down too.




It's interesting that lenders are focusing more and more on smaller loans as the above graph shows.

Here's a graph I've posted before that shows the total number of loans broken down by credit grade:


Finally, a graph that I find most curious:


Based on this graph, it appears that lenders are funding a lot more HR loans than they used to.  I haven't really looked at the breakdown of what borrowers are requesting but for whatever reason, lenders are funding more and more E/HR loans than they have in quite some time.  AA & B grades have dropped at about the same rate as HRs have risen this past month.  After the super high default rates of these lower grades, I have no idea why so many of them are still funding.  It's not like it was back in their heyday at the end of 2006, still I find it amazing they are still getting loans.

Are borrowers setting the loan origination date? zcommodore http://www.prospers.org/blogs/zcommodore/2008/08/18/are_borrowers_setting_the_loan_originati 2008-08-18T15:34:33Z 2008-08-18T15:34:33Z A couple of weeks ago, Bama and I got into a discussion about whether or not Prosper was pushing through a lot more loans at the end of the month.  I eventually agreed that there was some evidence that this may be the case.  Well, now I have another explanation and that is borrowers may actually be the ones who are setting their origination dates for the end of the month.

First, here's an updated version of my daily loan origination graph after a couple more weeks of data:


As you can see, since the end of the month, the 10-day average has steadily dropped after it peaked right at the end of the month of July.  This steady drop is part of why I agreed with Bama that Prosper was pushing loans through at the end of the month.  Note also that in the first part of the graph, there is a peak roughly once a week at regular intervals but the last few weeks of the graph, peaks vary a lot more.

One fact occurred to me recently and that is Prosper made a change to the loan origination process a few weeks ago.  Here is a quote from their June 24 blog:

As of today, borrowers will be required to return to the Prosper site and sign the promissory notes which evidence their loan, before loan proceeds are disbursed. Until now, borrowers have not had to sign all of the notes themselves because they authorized Prosper to do so on their behalf.

This change caused a bit of discussion among lenders about whether loans prior to June 24 were legal or not.  I'm not going to comment here about that.  The interesting artifact of this change is that now borrowers are the ones who "control" the origination date rather than Prosper.

Traditionally, when looking at the number of loans originating on any given day, the 2nd business day of a given week had the most loans by far compared with the rest of the week.  Recently, though, I noticed that I often would see a different day of the week have more loans than Tuesday.  Here is a graph showing the number of loans originating based on the day of the week:


As you can see, Tuesday is usually the top line until the last few weeks with a couple of notable exceptions.  The first non-Tuesday peak corresponded with April 30th, a Wednesday, when Prosper originated more loans than they have ever originated on any other day in their history.  This peak certainly supports Bama's theory since Prosper was in charge of when loans originated at that time.

The following week there was a "low peak" on a Thursday which I have no explanation for.  Later, in late May, we see a "Wednesday peak" but it followed Memorial Day so it is "typical".  Nothing else is really notable until we get to the middle of July.

Keep in mind that usually, when Prosper makes a change, the changes don't take effect retroactively.  So, most likely, all loan requests that were submitted prior to the June-24th update did not require the borrowers to "accept" the loan.  So really we wouldn't expect to see much difference in loan origination dates until a week or two later, roughly corresponding with the middle of July.  Since that time, Tuesday is the "peak day" only twice and one of those times only barely so.  This tells me that borrowers may be waiting to "accept" a loan until they decide when they want it to originate rather than Prosper "pushing" through a lot of loans.

I haven't actually communicated with any borrowers about this and I have no idea what Prosper may tell them in their communication.  However, it is an interesting possibility so I thought I'd share.

Competing with banks is stupid zcommodore http://www.prospers.org/blogs/zcommodore/2008/08/07/competing_with_banks_is_stupid 2008-08-07T18:08:55Z 2008-08-07T18:08:55Z Today is my 2-year anniversary since I found Prosper.  My last bid was ~5 months ago.  I may bid again but the likelyhood is dwindling.  In the between time, I've done some thinking about this whole person-to-person lending idea.

When I first found Prosper, one of the big drawing points for me was the interest rates.  Wow!, I thought, I can earn 15+% rates on people who would otherwise be paying 18-30%.  That's a win-win situation if I ever saw one.  So I signed up even though I didn't really have a lot to bid, I figured I could make a few $50 bids and see how it went.

Well, 2 years later, I've made a total of 35 loans, 3 are paid, 14 are current and the remaining 18 are in some stage of lateness including 6 defaults.  The stats-sites show my ROI as negative and they're probably close.  I have received some money from my activities as a GL and through the various referral programs so that helps to offset some of the losses.  Still, overall, it has not been a positive financial experience.  I've definitely learned a few things though.

People who don't have money, can't pay their bills.  Even if they say they want to.

People who don't have good credit history, aren't likely to pay their bills either but they'll tell you anything they can to get you to loan them money anyway.

Overall, Prosper's credit ratings are accurate.  AA borrowers as a whole have a lower default rate than A's and so forth down to HR's and NC's (no longer available).  Some AA borrowers have defaulted, and more will over time but as a group they're doing better than lower credit grades, but not as low of a rate as the old Experian numbers tried to indicate.

Unsecured loans need high rates to offset relatively high loss rates.  Prosper's model bids them down too low to reasonably compensate for the risk and the innefficient tax treatment.

Prosper, due to many issues related to privacy concerns, can't allow lenders to see full credit reports.  This is a huge handicap for lenders.

Lenders on Prosper are amateurs.  Any time you have a bunch of amateurs doing something, you know there will be a learning curve.  In this case, borrowers are making out like bandits and the amateur lenders are losing their shirt.  You can't blame either side individually for this, they're both responsible for their share of the blame.

Prosper may survive but they may have to make some significant changes first.  As things stand now, they're losing a lot of money and aren't going to survive despite their huge lead in this niche market.  Their website technology-wise is second to none but their product leaves somewhat to be desired.  Supposedly this is a growing segment of the marketplace but I don't see banks shaking in their boots from the competition.

Borrowers with good credit can get money cheaper and easier elsewhere.  I've got AA credit and I have a credit card balance that I've rolled from one 0% credit card offer to another more than once.  The people who are coming to Prosper have a reason they are going to a site like this generally--they can't get credit anymore.  There's a reason they can't get credit and that is because they aren't as credit worthy and are less likely to pay their bills.  Some will, but there's no good way to automate the process of finding out who.

In all cases, banks have an advantage loaning money to people.  Banks can make secured loans at relatively high rates and unsecured loans at even higher rates.  There's a reason they make loans at the rates they do--so they can make money even if some borrowers default.  Even then, as we've all seen with the mortgage crisis, they sometimes lose money.  Still, banks have the benefit of having access to the whole credit report, experienced people making lending decisions, the ability to charge higher rates, and much more favorable tax treatment on their earnings.

Some lenders, who wish to take the time, will likely end up with a positive return.  But given the poor tax treatment and the amount of time it takes, they will have to make relatively large bids to make it worth their time.  Unfortunately, larger bids increase their risk exposure which goes against the whole diversification idea that would make their return regress to the mean.  All I can say is "good luck" to anyone who considers this as an "investment".

In the end, the poor lending decisions I've made have been a valuable learning tool.  I'm glad I found Prosper just for the learning experience.  Ultimately, it's been a relatively inexpensive education but there has been a cost.  I've made some new online friends for which I'm thankful.  Shoot, I even started a blog for the first time, something I never really considered before.  For now, I'm stuck here for at least another 2+ years so I'm not going anywhere any time soon.