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Author Topic: before you start posting your important insights to your favorite forum  (Read 8644 times)

112233

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there are two points Kirk Inglis would like to make
http://blog.prosper.com/2009/10/07/prosper-lenders-are-doing-a-great-job-pricing/

btw, which forums did he have in mind?
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cubbiesnextyr

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Re: before you start posting your important insights to your favorite forum
« Reply #1 on: October 07, 2009, 12:50:20 pm »

Quoted for Posterity:

Prosper Lenders Are Doing A Great Job Pricing!

Quote
We are thrilled with the results from Prosper’s first two months of operations since re-launch. Lenders are really capitalizing on Prosper’s best in class rating system and auction pricing model.  Here are some of the highlights:

• The average credit score for loans originated in September was 714.
• The average yield to lenders is nearly 15.9%.
• The average expected loss on the loans originated since inception is 5.9%.
• The expected return to lenders is 10.0%.

I can hear some of you saying these loss rates and returns are estimates of future performance and could be wrong. So how is this good news? Before you start posting your important insights to your favorite forum, there are two points I would like to make:

First, the Prosper Rating System incorporates both national credit bureau scores and the most robust historical performance data in the peer-to-peer industry. In addition, the historical performance that underlies the Prosper Rating System is derived from a poor economic environment. As a result the estimates of loss are biased higher than if the economic environment had been more benign. The variance between actual performance and estimated performance (for better or worse) will be significantly lower than what we saw with the pure score driven rating system.

Second, the chance that actual losses are different than expected losses is the primary risk that lenders should consider when pricing their bids on loans. In my opinion lenders are now pricing in appropriate cushions to compensate for the risk.

For example, since re-launch lenders have priced AA loans to yield 8.5% and E loans to earn 28.0%.


As a result the expected return for AA loans is 7.3% and the expected return for E loans is 13.4%. Losses for E loans are expected to be 14.5%, so even if losses increase by 50%, the return on these loans would still be greater than 6%.  Of course, there is an equal chance the loss rate will be lower than expected by 50%, in which case E loans will return greater than 20%.

Lenders that priced appropriately for risk in the past and diversified appropriately, have historical returns that beat almost any comparable asset class over the past three years.

If lenders demand appropriate rates to compensate for risk and diversify across a broad group of loans, the combination of a rating system based on both national credit bureau data and historical performance and the flexibility to price for risk through an auction is a winning combination.
(underlining his)
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ira01

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Re: before you start posting your important insights to your favorite forum
« Reply #2 on: October 07, 2009, 01:12:00 pm »

What a load of complete horseshit.

Quote
For example, since re-launch lenders have priced AA loans to yield 8.5% and E loans to earn 28.0%.

As a result the expected return for AA loans is 7.3% and the expected return for E loans is 13.4%. Losses for E loans are expected to be 14.5%, so even if losses increase by 50%, the return on these loans would still be greater than 6%.  Of course, there is an equal chance the loss rate will be lower than expected by 50%, in which case E loans will return greater than 20%.

As can be seen HERE, the historical default rate for E loans on Prosper has been almost 50%.  Gee, I wonder what that will do to the ROIs of lenders lending at 28%?

Quote
Lenders that priced appropriately for risk in the past and diversified appropriately, have historical returns that beat almost any comparable asset class over the past three years.

And how many lenders would that be, considering that the mean and the median lender ROI is NEGATIVE? 
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112233

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Re: before you start posting your important insights to your favorite forum
« Reply #3 on: October 07, 2009, 01:18:24 pm »

what's wrong with you people? you should have ignored everything they said and priced in a fudge factor safety cushion.
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Urbi_et_Orbi

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Re: before you start posting your important insights to your favorite forum
« Reply #4 on: October 07, 2009, 01:35:33 pm »

Where else can people post information freely?
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bamalucky

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Re: before you start posting your important insights to your favorite forum
« Reply #5 on: October 07, 2009, 02:02:30 pm »

Lobby ASAP
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Cushie

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Re: before you start posting your important insights to your favorite forum
« Reply #6 on: October 07, 2009, 02:23:13 pm »

Lobby ASAP

2nd.

And only my decent upbringing keeps me from telling Mr. Inglis what he can do with his blog post.
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112233

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Re: before you start posting your important insights to your favorite forum
« Reply #7 on: October 07, 2009, 02:44:31 pm »

3rd
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pioneer11

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Re: before you start posting your important insights to your favorite forum
« Reply #8 on: October 07, 2009, 03:41:42 pm »

Quote
Of course, there is an equal chance the loss rate will be lower than expected by 50%
Horseshit!
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regeneration

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Re: before you start posting your important insights to your favorite forum
« Reply #9 on: October 07, 2009, 11:47:29 pm »


Quote
Of course, there is an equal chance the loss rate will be lower than expected by 50%


There is an equal chance that I will let Prosper touch another dime of my money.  Either I will or I won't, 50/50.   :ninja:
« Last Edit: October 07, 2009, 11:49:26 pm by regeneration »
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Fred93

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Re: before you start posting your important insights to your favorite forum
« Reply #10 on: October 08, 2009, 12:02:39 am »

As can be seen HERE, the historical default rate for E loans on Prosper has been almost 50%.  Gee, I wonder what that will do to the ROIs of lenders lending at 28%?

Prosper changed the rating system.  They used to give us "credit grades" AA, A, B,... HR.  Now they give us "Prosper Rating" AA, A, B, ... HR.  

An "E" in the old system (which is what is plotted by rateladder) is not an "E" in the new system.  The old credit grade E meant a credit score in the range of 560-599.  

In the new Prosper, folks with a credit score in that range aren't allowed to borrow at all.  Every borrower now has to be >640.

By using the same scale, ie AA, A, ... HR for both systems they made this all confusing, but those are the facts.

ira01

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Re: before you start posting your important insights to your favorite forum
« Reply #11 on: October 08, 2009, 01:06:20 am »

By using the same scale, ie AA, A, ... HR for both systems they made this all confusing,

No doubt that was on purpose -- over time, the new loans will bring up the stats on the old loans of the same letter classification. 

The bottom line is that this isn't the first time Prosper purported to use its historical data to determine future default rates, and it was an abject failure last time.  I doubt this time will be a whole lot different.
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Fred93

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Re: before you start posting your important insights to your favorite forum
« Reply #12 on: October 08, 2009, 01:49:08 am »

over time, the new loans will bring up the stats on the old loans of the same letter classification. 

On prosper's stats web page they have a button that selects which you want.  If you select the prosper ratings they show the AA, A ... and if you select "credit score" they show the credit score ranges that match the old credit grade letters.

Quote
The bottom line is that this isn't the first time Prosper purported to use its historical data to determine future default rates, and it was an abject failure last time.  I doubt this time will be a whole lot different.

Well the first time the historical data was Experian's historical data rather than prosper's historical data, but you are precisely correct.  What comes to mind is ... Fool me once shame on you.  Fool me twice shame on me.  I think they mean well, and have done their homework much better this time, but they don't have a lot of credibility, given their prior results.

ira01

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Re: before you start posting your important insights to your favorite forum
« Reply #13 on: October 08, 2009, 02:09:56 am »

Quote
The bottom line is that this isn't the first time Prosper purported to use its historical data to determine future default rates, and it was an abject failure last time.  I doubt this time will be a whole lot different.

Well the first time the historical data was Experian's historical data rather than prosper's historical data, but you are precisely correct.  What comes to mind is ... Fool me once shame on you.  Fool me twice shame on me.  I think they mean well, and have done their homework much better this time, but they don't have a lot of credibility, given their prior results.

No, I think there was another attempt in between.  IIRC, Prosper purported to use its own historical data to calculate expected default rates -- perhaps as part of its bidding guidance?  And average lender performance suggests that this wasn't a whole lot more accurate than the Experian data.
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bamalucky

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Re: before you start posting your important insights to your favorite forum
« Reply #14 on: October 08, 2009, 08:32:42 am »

I begged them to cut off HR's in the petri dish in Sept 2006.

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