zcommodore

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.

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.

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.

Bama thinks Prosper is "churning loans".  He seldom lets facts get in the way of a good conspiracy theory, but lets look and see if there's any merit to his assertions.

Here's a graph showing the actual number of loans Prosper approved each business day and a 10-day trailing average to help smooth things out.

As you can see, there's a little uptick at the end of the month.  I haven't been watching the number of listings on Prosper too much but it is a bit curious.  However, if you look at the end of all the previous months in the graph, there's not any strong evidence of an uptick at the end of any of the other months. Fortunately, I have data for each business day for the last 13 months.

I took all 13 months and averaged each calendar day so that I could create a graph with the average number of loans created each day for an entire month.  If Prosper is "churning loans" at the end of the month, we should see an uptick in the number of loans near the end of the month where they approve more loans than the rest of the month.  So, here's what I found:

Well, I suppose there is a slight upward trend as the month progresses but it doesn't seem exceedingly large. At the beginning of the month, there appears to be ~49 loans approved per day up to the end of the month where there seems to be ~56 loans approved per day.  Most of the month appears to be fairly flat though, right around 50.  Note that the "5-day Avg" line is an average of each average plus the two days before and after, wrapping around from beginning to end.

So, why is there an increase near the end?  Prosper may actually be "churning" loans to some extent so that is possible.  Honestly, I can't really think of any other good reason for the increase either.  Still, a 6-10 loans-per-day increase doesn't really strike me as strong evidence of significant "churning" either.

One thing I do know and that is the 2nd business day of any given week has a significant increase in the number of loans approved.  I attribute that to the fact that all funded loans that end between late Friday evening until some time Monday afternoon can potentially originate on the following Tuesday.  For this reason, I like to track loans by the week rather than by the day since this smoothes out the data much better.

Based on this graph, it's unclear exactly which direction Prosper's loans are going in the near term.  If anything, it looks like Prosper has peaked and is going down.  However, I do remember Prosper had a big advertising push a couple of months ago that corresponded to the spike in loans, in addition to going (almost) nationwide with a common interest rate.  Those two things contributed significantly to the spike I believe.  The question is whether or not Prosper is planning any more advertising.  Ultimately, Prosper can't "churn" loans if they don't have at least a few willing borrowers and lenders unless they're creating fake loans and/or bids.  Now *that* would be the ultimate conspiracy theory.

Yes, it happens once in awhile.  A borrower comes to Prosper and asks for the maximum at a high rate and actually pays it off.

This morning, I had one borrower do just that.  About a year and a half ago, in IRC, Bama told me he wouldn't pay for another 6 months, that he would default.  I didn't save the log so I can't prove it but, suffice it to say, he was wrong.  At any rate, since pensioner had over $18K of that loan, I'm sure he's happy with the results.

I did a bit of checking on ericscc.com and found that between Prosper's launch and the end of February 2007, 24 borrowers were successful in getting $25K loans at rates 25% or higher.  Of those, 10 are current, 5 are paid and 9 are 1-month late or worse.  Obviously, with rates even 25% or higher, if 37.5% default, you're not going to make any money.  And, incidentally, I was on one of those defaulted loans as well.  In that case, the borrower declared bankruptcy and it was recently finalized.

Oh, and one other thing, the borrower I had who paid in full got a new loan for nearly $22K at 35% about a month ago.  I have no idea how he's going to make any money paying those kinds of rates but he seems to think it's possible.  I wasn't aware he was seeking a loan until just the other day when I saw his previous one was paying off.  All I can say is, "good luck" to his new lenders.