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[DakotahFury]

I'm not sure I agree.  What market level returns are you talking about?  Beating Propser's average?  Bank CD's?  The stock market?

It's going to have to beat the pants off of FDIC insured CDs. In order to make up for the dramatically increased risk, you need much better returns.

Prosper loans need to be compared to other income-centric investments. CDs, High-yield bonds, and perhaps even Utilities Stocks.  Vanguard High-yield bonds fund has returned 8.7% annually over the past 30 years. Fidelity's Utility fund has returned 9.5% since it's inception in 87'.

As I already said, CDs are FDIC-insured, so Prosper investing should provide a much, much higher return. Prosper investing is at least as risky as Junk Bonds and Utilities Funds. While you don't have capital depreciation to worry about, Prosper default rates are much, much higher than even Junk Bonds, which defaut around 2% annually right now (about half the rate of  Prosper AA loans!).

Plus don't forget about PMI's complete lack of liquidity...and the horrible tax implications of Prosper lending returns. Did I mention that those funds I mentioned before have lower investing costs than the 1% fee on Prosper?

We are investing in an unproven market, with questionable leadership, and questionable long-term viability. The entire thing could fall out from underneath us. Many may think it's highly unlikely...but it's possible. We should be receiving returns in line with such risks. We're really, really not. The fact that there has been little of evidence of any institutional-investment interest should speak volumes.

Improved collections is a way of improving returns, as is better verification. That being said, all the examples you bring up are valid. Rates will need to be higher for us to get much better returns.

ETA: And sorry to say...but if those kinds of returns aren't possible...in terms of beating CDs handily and being competitive with junk bonds...maybe this just isn't meant to be. Investment ideas have failed before. This wouldn't be the first.

[czach]

If we all funded those that deserved it instead of swinging for the fences, we'd have a fraction of those complaining because while there are collections issues, etc, they were not created by Prosper, they were created by our own greed and wish to beat the market or other lenders. 

I don't think swinging for the fences is the problem, there's always money to be made in the high risk category. The problem is everyone thinks that a 30% interest rate is great, and it gets bid down to 20%, 18%, which is below the rate where it makes sense.

Translation, people get stoopid on Prosper. I have been running a high risk portfolio for over 2 years now. And I'm still holding an 8% ROI (Based on LS). Unfortunately I can't bid on new stuff because the rates get bid down too low. So I don't lend more money or I take stoopid chances like I did with my latest 4+ month. (an E. Bid on HR's before E's....)

Prosper at it's heart is a tragedy of commons waiting to happen. It's fun to play with, not a place to put real money (as muleshoes and pensioner found). But God, it is a great place to probe the depths of the human soul...
Chris

[AndyAtlanta]

It's going to have to beat the pants off of FDIC insured CDs. In order to make up for the dramatically increased risk, you need much better returns.

This is a real problem.  Even if Prosper cleans up its general business practices, collections, etc., the platform is still a powder keg of risk.  Even though I'm very happy with my 2007 and YTD 2008 returns, I am really bothered by the limited upside with the potential to lose all the principal.  And the tax inefficiencies are a drag.

[mothandrust]

In the end, its our own greed to blame, imo.  All of us had the delusion of grandeur at some point but the reality is that the best way to make a good return is to lend to the smartest, safest people.  So what if that means a 2k loan at 7%, a 10k loan at 11%?

The problem is that that 2K loan to the AA at 7% still won't compensate you for the various risks of recession, inflation, servicing, litigation, etc.  Now that Prosper's ID theft guarantee is all but defunct you're taking the "scam risk" that the borrower is out to scam you from the get-go.  Last I did the analysis it was about 1-2% on AA's.

But if you only lend to 2K AA's borrowing at 15% you'll find yourself outbid on the way down to 7%.  For all the negativity and caution there is here, there is still a lot of newbie greed and stars-in-the-eyes bidding.

[AndyAtlanta]

For all the negativity and caution there is here, there is still a lot of newbie greed and stars-in-the-eyes bidding.

That's one reason why I don't bid on many 30% listings.   To me it's like a craps table:  all the "exciting" bets are in the middle, and those all have the highest house advantage.  I play the pass line and enjoy the drama secondhand 

My slightly boring portfolio -- full of small loans -- seems to percolate along pretty well with an avg interest rate just under 20%.  I always have one or two lates in the process of curing or getting worse.  The good thing from my perspective is that my rate of defaulting borrowers is decreasing.  That is, over time more of my borrowers are paying their loans on time compared to some bad bets I made in 2006 and early 2007.

[Xenon481]

In the end, its our own greed to blame, imo.  All of us had the delusion of grandeur at some point but the reality is that the best way to make a good return is to lend to the smartest, safest people.  So what if that means a 2k loan at 7%, a 10k loan at 11%?

The problem is that that 2K loan to the AA at 7% still won't compensate you for the various risks of recession, inflation, servicing, litigation, etc.  Now that Prosper's ID theft guarantee is all but defunct you're taking the "scam risk" that the borrower is out to scam you from the get-go.  Last I did the analysis it was about 1-2% on AA's.

But if you only lend to 2K AA's borrowing at 15% you'll find yourself outbid on the way down to 7%.  For all the negativity and caution there is here, there is still a lot of newbie greed and stars-in-the-eyes bidding.

You forgot to mention the effect of Idle Time on your money.

[mothandrust]

For all the negativity and caution there is here, there is still a lot of newbie greed and stars-in-the-eyes bidding.

That's one reason why I don't bid on many 30% listings.   To me it's like a craps table:  all the "exciting" bets are in the middle, and those all have the highest house advantage.  I play the pass line and enjoy the drama secondhand 

My slightly boring portfolio -- full of small loans -- seems to percolate along pretty well with an avg interest rate just under 20%.  I always have one or two lates in the process of curing or getting worse.  The good thing from my perspective is that my rate of defaulting borrowers is decreasing.  That is, over time more of my borrowers are paying their loans on time compared to some bad bets I made in 2006 and early 2007.

The stars-in-the-eyes bidding extends even to those small amount 19% loans in your portfolio and all the other loans on Prosper as well, I believe.

If the median 365+ day avg loan age lender is seeing returns of 3% or so, then this means that everyone has overpaid by about 1200 basis points for their loans.  Then we'd see a bell curve peaking around 15% and we'd be rationally compensated for the risks.

Looking at your portfolio or mine or Billy Bob's is only relevant if you believe that there is some inefficiency in the marketplace that can be exploited for profit. 

If there are such efficiencies then we should see more than just a few outlying lenders (not just ones out lying about their performance)--you're not the first one to think that smaller loans are safer loans--and if that were the way to beat the market then we'd see a pocket of lenders making 15%+ as this superior strategy paid off.

Because of this overvaluation, a skillful lender might be able to get double or triple that 3% median return--and still not hit the 15% threshhold (12.82% is currently the best anyone's got: avg age>365, 20+ loans, 2K+ invested).

But add 1200bp to everyone's results and that top lender can hold a clinic on how he made 24.82% on Prosper, and even the guy who's down 12% now would be getting his money back.  The 3 lenders that are down 40% would still feel a painful 28% loss, but we expect there to be losers as well as winners in a risky investment. 

[idf]

But add 1200bp to everyone's results and that top lender can hold a clinic on how he made 24.82% on Prosper, and even the guy who's down 12% now would be getting his money back.  The 3 lenders that are down 40% would still feel a painful 28% loss, but we expect there to be losers as well as winners in a risky investment. 

If this were true, we'd be in the diminishing returns category.  Place a premium on 12% on every loan and see how many more defaults we'd get because the only people using the service would be fools, those about to declare BK, scammers, ID theft, etc...  anyone with economic sense would go elsewhere for the home improvement loan and we'd be left with a handful of CC conolidators that often get rid of the CC debt and then decide they just gotta have that Sony LCD TV.

In a way, I am taking myself out of lending because yes, there is a limit to the upside and the same downside as a stock.  I do agree with the comment above though, it is facinating to watch the human condition at work.  Its also intriguing to compare our abilities to sniff out better loans than the next guy.

[mothandrust]

The diversified homogenous loans that is Prosper's product are not worth what people are bidding on them. 

The Cassandras here are saying the loans are no good (some say at any price) but there are enough fools in the market who are still bidding down the rates.  How many Prospeculators have to crash and burn before a solid AA puts up a $3000 listing at 18% which will fetch no bids?

[ira01]

How many Prospeculators have to crash and burn before a solid AA puts up a $3000 listing at 18% which will fetch no bids?

Actually, a solid AA with a $3K listing at 18% probably should get no bids.  See http://www.prospers.org/blogs/ira01/2008/08/09/loans_with_very_high_rates_for_their_cre