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[christoofar215]

I can't get to the site now at all.

Me neither.   I'm gonna try again in the morning.   It's too late though it has done its damage.

[christoofar215]

Here is the Google Cache version.

http://74.125.93.132/search?q=cache:03QZytD11bAJ:www.thebigmoney.com/articles/money-trail/2010/01/18/you-are-unlikely-prosper+TheBigMoney+Prosper&cd=1&hl=en&ct=clnk&gl=us


I'm going to try to save a copy of this.

[onthefence]

Here is the Google Cache version.

http://74.125.93.132/search?q=cache:03QZytD11bAJ:www.thebigmoney.com/articles/money-trail/2010/01/18/you-are-unlikely-prosper+TheBigMoney+Prosper&cd=1&hl=en&ct=clnk&gl=us

I'm going to try to save a copy of this.

But that is still missing the other two pages.  Anybody have a full copy?  Or the next two pages?

[onthefence]

OK.  Next plan.  Let's formulate a response to Prosper's Open letter and submit it to both Slate.com/thebigmoney.com and Consumerist.com.  Prosper is NOT going to get away with this.

[Xenon481]

You Are Unlikely To Prosper
Person-to-person lending is much riskier than you’ve been told.
By Mark Gimein
Posted Monday, January 18, 2010 - 10:23pm

You are a loan officer at a bank. A potential client comes and sits down across from your desk, asking for a loan. She wants to borrow $10,000 to “consolidate her debts,” and tells you she is willing to pay a startling 23.70 percent interest. Her credit rating is not bad. But then you lean back in your chair and wonder, “Wait a second! Why in heaven's name would someone pay me this kind of money to take a loan to repay her other debts?” You might wonder what the heck the interest rate is on those loans, and how she could possibly be reducing her costs this way. You might even wonder—actually, it would be your job to wonder—if there's something fishy going on here.

That is how things work in the real world. But not so on the Internet, in the world of person-to-person lending, where folks asking to pay those kinds of rates with vague claims about consolidating debt or paying off their credit cards are par for the course. Person-to-person lending--loans made by individual investors who had money to spare to borrowers hoping for better rates than they could get from banks or credit card companies--was supposed to be to loans what eBay was to garage sales. Prosper.com, the pioneer, was one of most hyped internet startups of the last decade.

TIME Magazine chose Prosper.com as its top new website of 2007, and the Wall Street Journal featured it in a high profile story. Prosper television commercials picked out nifty stories like that of a New York cop who lent money to a Chicago fashion designer, and the press followed with quirky human interest stories (like a loan for breast implants). In short order, Prosper was followed by imitators such as Loanio and Lending Club—the latter a Harvard Business Review featured in the Harvard Business Review's picks for “breakthrough ideas for 2009.”

After the press weighed in with the stories about the great new idea in lending, however, hardly anybody except the increasingly unhappy community of Prosper lenders—“Welcome aboard our little trainwreck,” says one poster on Prospers.org, an independent discussion forum for Prosper participants—bothered to keep track of just how well it worked out. The answer is: not well at all. On MSNBC last year, Prosper founder and chief executive Chris Larsen pitched person-to-person lending as the solution to the current credit woes. “Every American,” Larsen said, “can be their own banker. I can back other entrepreneurs, I can back people in my community, and I can make the money on this. I can do well by doing good. I think that's very empowering, and exactly what we need now to fix this crisis.”

To look at the results of Prosper's loan marketplace, though, is to see not a solution to the credit crisis, but a microcosm of it. Loans to unqualified borrowers; reliance on mathematical models that turn out to be a lot less useful than they seemed; failed hopes that high interest rates could make subprime loans profitable; sky high default rates—Prosper has it all. Prosper's Web site advertises returns of 6 percent to 14 percent for lenders. But the reality is that the lenders who loaned $188 million through Prosper have not earned anything like these returns. On the contrary, the majority of them have lost money, as they've watched their loans go bad at shockingly high rates.

Much like the loans made by banks during the mortgage boom, Prosper's loans have gone into default at rates much worse than predicted by historical credit data.  In November, 2007, Larsen told the Associated Press that Prosper's default rate “hovered at around 2.7%.” That, however, included many new loans that simply hadn't had time to go bad. Larsen refers to this obliquely in the AP story, noting that as more loans matured the rate would rise, but there's no hint of just how steep that rise would be. Prosper's data now shows that now shows that close to 36% of the loans made before Nov. 27, 2007—the date of the AP story—have ended in default, roughly thirteen times what a casual reader would have thought from Larsen's comments. That is close, coincidentally, to the total 39% (or roughly two in five) default for the Prosper loans that have reached the end of their three year term. (You can go here to see the data for yourself, just try plugging in the ending dates).

For those lenders who hoped, as subprime banks did, to counter high default rates with very high interest rates, the numbers have been even more depressing. Prosper, to its credit, provides data to outsiders that lets potential lenders and other Web sites analyze Prosper's loans in detail. The best Prosper analysis site is Eric's Credit Community, run by a Michigan programmer named Eric Petroelje. Thanks to Petroelje's site, it's easy to cut up the data, to find, say, how many of the loans with interest rates of 18 percent and up have gone into default before the three-year payment period is up. The answer: 54 percent. So more than half of these high-rate borrowers failed to fully repay their debt.

Which brings us to bottom line: After you take the defaults into account, investors have lost money on most of their Prosper lending. Prosper does provide all this data to potential lenders, but you'll have to look hard to find it on the Prosper.com Web site. Prosper grades loans based on borrower's credit scores and other factors with a rating system that rates the risk from AA (at the top) through E and a final category of “HR” (for “high risk”). A visitor who gives the “marketplace performance” charts on Prosper.com a quick once over sees the encouraging information that the loans in the AA to E categories, at least, have been profitable.

But there's a sleight of hand that only those who are familiar with the history of Prosper's borrower ratings and sift through the data carefully are likely to notice. Prosper reopened its marketplace to new loans last July after a long hiatus to comply with new regulatory requirements, and in the meantime changed the rating criteria, making the requirements for each category much more stringent. Most older Prosper loans—including some that had top ratings under Prosper's old AA to HR criteria—have now been reclassified as “HR” loans or are listed in an “N/A” column that includes loans that would no longer meet Prosper's criteria or (for some of the older loans) are missing some of the information that's used in Prosper's new rating algorithm.

Those two columns make up $136 million of the $188 million in loans that Prosper lenders have funded since the loan marketplace started. Close to $38 million of that $136 million in loans has already been charged off as bad debt. Overall, Prosper admits that investors in these categories, which Prosper's chief financial officer characterizes in bank-speak as “under-priced,” will wind up losing money.

In other words, only by cutting out more than two-thirds of its loans, does Prosper manage to eke out the positive results for AA to E rated loans that prospective lenders see on Prosper.com. Or you can look at it another way and ask how many investors have actually gotten returns in the 6 percent or 14 percent range that would-be lender see blazed across the Prosper.com front page? Thanks again to Eric's Credit Community, we have a pretty good idea: Of investors with a portfolio of loans that are an average of at least two years old, folks who have lost money outnumber those who've earned 6 percent annual return by more than six to one.

Prosper's Web site now prominently displays what look like very attractive returns for loans made since the marketplace reopened in July, with estimated returns of 7.86% to 12.87% on loans to the more creditworthy borrowers. But these are based on estimated default rates and repayment rates, about which Prosper has time and again been wrong. This time, Larsen says, Prosper has it right. In the past, according to Larsen, Prosper had to rely on credit-score data that turned out, for banks as well as for Prosper, to vastly understate the losses in what turned out to be the worst credit crisis in 70 years. Prosper's new algorithms, promises Larsen, will actually reflect how loans perform. “It's only three years in that we could do the rating system based on actual data from the marketplace.”

Recall, however, that in November 2007—already close to two years into Prosper's life—Larsen was talking about Prosper's 2.7 percent default rates. Maybe a new crop of lenders will believe that this time things will be better. Prosper's more seasoned lenders, though, don't seem to be biting. “Prosper will change the lipstick on the pig, but that's just about it,” writes one disenchanted lender on the Prospers.org message board. Prosper's loan volume is a fraction of what it was at its height in 2007 and 2008. Eric Petroelje says that the traffic on his site is down from 500 or 600 visitors a day to just 100 or 150.

Meanwhile, since the Prosper marketplace, Prosper has again been trying to drum up business, and again the press has is along for the ride: the MSNBC appearance in which Larsen chatted up how “empowering” peer-to-peer lending can be, a Washington Post piece about Prosper.com being a source of credit for folks faced with tightening credit card standards, promising (incorrectly) rates as low as four percent. The difference is that now, unlike at Prosper's launch, there is plentiful data about just how bad the performance of Prosper.com loans has been. Much of this information has been carefully cataloged by bloggers who follow Prosper, yet little of it finds its way into major media stories.

In this way, too, the story of Prosper.com is reminiscent of the larger story of the credit crisis. Calculating the returns on loans and digging through statistics about default rates and pre-payments can be tedious work. It is the kind of work that reporters rarely want to do, and all the information that was hidden in the data only comes into public view after the money is long gone. In an interview last week, Chris Larsen argued that given all the changes in Prosper's lending criteria, a story that looks at how Prosper's loans and lenders have fared in the past, is “oddly late.” On this, unfortunately, Larsen is completely right. It's clearly a story that would better have been done long ago. But it's still better to do it now than to wait for yet more loans to go bad, yet more money to be lost, and yet another cohort of lenders to be sucked in by the latest failed idea in finance.

[Fred93]

Thebigmoney.com web site was down for awhile tonite, but it is back up now.

[Xenon481]

I left a comment on the blog.

Your comment is awaiting moderation.

Xenon481 | January 20th, 2010 at 2:33 am

Can you please comment as to whether this graph contains data for loans that are greater than 120 days past due? The labels on your graph indicate that such data is not included. Any delinquency graph that does not contain that information is useless and errant.

[Xenon481]

Here is the full text of Prosper's blog in case it gets deleted or edited like so many of their blog posts in the past.

An Open Letter to The Big Money: Retract Your Story

01/19/10 posted by Prosper Blog   

Today, The Big Money, an outlet we and many others respect, published a disappointingly inaccurate story about Prosper and the peer-to-peer lending industry.  It’s unfortunate that the author’s data analysis and perspective relied almost entirely on a hodgepodge of anonymous sources.  If higher reporting standards had been upheld, the reality that Prosper has shown great promise and performed well on a relative basis over the last three-years would have been self evident.

We’ve requested that the editors at The Big Money retract Mark Gimein’s erroneous perspective on Prosper and the peer-to-peer lending industry.  We look forward to their response.  In the meantime, we’d like to set the record straight.

Mr. Gimein discusses Prosper’s loans in the context of only cumulative unit default rates rather than in terms of the average annual returns lenders have earned.  For example, Mr. Gimein states that 39% of loans that have had a chance to come to maturity (originated prior to 12/31/2006) have defaulted.  What he doesn’t say is that the annual yield on these loans was 16% and the annual loss experienced by lenders was actually 20%, resulting in an annual average return of negative 4%.  Although this return is negative, put in the context of the largest recession in generations, and the performance of other asset classes during the same time period, this paints a very different and more accurate picture of how lenders have fared on Prosper.

Mr. Gimein continues to use his flawed methodology to state that 54% of loans with an interest rate of 18% or greater have defaulted, leaving the impression that lenders on these loans have lost over half of the funds that they lent, and that losses ran roughly three times the interest rate on loans.  Again Mr. Gimein is equivocating annual interest earned with cumulative default rates over a three year period.  Lenders on these loans lost 10% on an annual basis, and while not positive, it’s a far cry from the 54% loss that Mr. Giemein flawed analysis leads the reader to believe.

After quoting these cumulative loss results out of context, Mr. Gimein’s bottom line is “After you take defaults into account, investors have lost money on most of their Prosper lending.”  Mr. Gimein makes this statement without providing any actual returns data, again leaving the false impression that lenders have lost 39% to 54% on their Prosper lending.  The truth is that the median return across all Prosper lenders was negative 3.2%.  In addition, 39% of lenders have made money on their Prosper investment.  While we would have preferred all of our lenders to have made a profit, a low single digit loss for Prosper lenders in the context of the worst recession since the Great Depression shows great promise for peer-to-peer lending as an alternative asset class for investors.  Even a broad index like the S&P 500 saw an annualized loss of 6% in the past three years.  Most individual investors have experienced performance substantially worse than this in their investment portfolios and 401k accounts.  Something Mr. Gimein fails to discuss.

Mr. Gimein also fails to mention that historically there has been a significant amount of social lending through Prosper’s marketplace.  Social loans are deliberately underpriced relative to their stated risk by lenders in order to benefit borrowers with unique or challenging circumstances.  Although we do not have a way to isolate the impact of these loans on performance, there is no doubt that they have had a downward impact on some lender returns.

Mr. Gimein also seems to find fault with the steps Prosper has taken to improve the lending process and provide lenders with additional information to improve their lending decisions.  Prosper has instituted a minimum credit score requirement of 640 to request a loan from Prosper’s lenders as well as a bid floor. Prosper also introduced a new rating system in July 2009 that incorporates the historical performance of over 29,000 Prosper loans into the rating of new borrowers looking for loans.  Although the new rating system uses the same letter grades to rank order risk, the meaning of the letters has changed significantly. This has resulted in a change in the composition of Prosper’s listings, which allows lenders to more accurately assess risk and set prices for prospective borrowers.  This change in rating methodology is well documented on Prosper’s site and lenders can easily compare the impact of Prosper’s new rating system on loans originated under the older system.

The early results from the new rating system are excellent.  Prosper is estimating returns for lenders above 10% for loans originated since our July re-launch and the early data supports these expectations.  Below is a graph comparing the delinquency performance of loans originated by year with the loans originated in the third quarter of 2009.  As you can see, the proportion of loans that are 31 to 120 days past due for the loans originated under the new rating system are dramatically lower.

Prosper was launched to the public in February of 2006 and was about 18 months old when the credit crisis turned our economy upside down.  The crisis that followed saw a dramatic increase in defaults for all classes of consumer loans.  Large banks with years of lending experience saw a dramatic increase in consumer defaults and posted significant losses.  Prosper was clearly not immune from the economic environment, but looked at in the proper context, peer-to-peer lending has weathered the storm relatively well and as a result is well positioned for a bright future.  At a time when financial markets are in upheaval and consumers are facing a dwindling set of credit alternatives, Peer-to-Peer lending deserves better than a flawed, out of context evaluation from a seasoned journalist, and a respected Web site, that should hold themselves to a higher standard.

[Xenon481]

Another comment awaiting moderation on the blog. Inspired by a point made by Chris.

Your comment is awaiting moderation.

Xenon481 | January 20th, 2010 at 2:46 am

If Prosper is blaming the poor performance on the recession and credit crisis starting in late 2007, then why does the graph’s 2006 and 2007 lines approximately match eachother?

[ira01]

Prosper's blog entry is the biggest load of malarcky I've ever seen.  Some of you have already pointed out some of the many problems.  here are a few more:

It’s unfortunate that the author’s data analysis and perspective relied almost entirely on a hodgepodge of anonymous sources.  

Huh?  Prosper, better than anyone, knows exactly who the so-called anonymous sources are.  For example, Prosper knows Fred93's real name, address, phone number, social security number, checking account number, etc.  Similarly, is Prosper really claiming that Eric's is an "anonymous source" considering that it takes Prosper's OWN data and makes it available to the public and has done so for almost as long as Prosper has been around?

Although this return is negative, put in the context of the largest recession in generations, and the performance of other asset classes during the same time period, this paints a very different and more accurate picture of how lenders have fared on Prosper.
* * *
[A] low single digit loss for Prosper lenders in the context of the worst recession since the Great Depression shows great promise for peer-to-peer lending as an alternative asset class for investors.  Even a broad index like the S&P 500 saw an annualized loss of 6% in the past three years.  Most individual investors have experienced performance substantially worse than this in their investment portfolios and 401k accounts.

This repeats a fallacy I have repeatedly pointed out.  Yes, the S&P tanked badly in 2008.  And yes, Prosper lenders' losses in 2008 were no doubt dwarfed by their stock losses.  But guess what?  The defaulted Prosper loans are worthless FOREVER.  But those stocks regained most of their losses in 2009.  If stock investors hold on to their shares, at some point (most likely this year) the losses will all be erased and stock investors will have profits.  But no matter how long we hold on to our defaulted loans, they will NEVER bounce back -- they will ALWAYS be WORTHLESS.

The early results from the new rating system are excellent.  Prosper is estimating returns for lenders above 10% for loans originated since our July re-launch and the early data supports these expectations.

Uh huh.  Just like Prosper estimated similar returns for lenders using its much vaunted Experian default rates?  Sure, this time it will be different.    Uh huh.

Below is a graph comparing the delinquency performance of loans originated by year with the loans originated in the third quarter of 2009.  As you can see, the proportion of loans that are 31 to 120 days past due for the loans originated under the new rating system are dramatically lower.[/quote]

Let me see if I have this straight -- Prosper is comparing the percentage of bad loans originated in earlier years with the percentage of such loans from 3Q09???  Those loans are a mere 3.5-6.5 months old, so they have only had 3-6 payments even due yet.  And to be at least 31 dpd, they would have had to miss the second through fifth payments!  No duh that this subset of extremely young loans isn't doing badly yet.

Prosper was launched to the public in February of 2006 and was about 18 months old when the credit crisis turned our economy upside down.

So why is it that Fred93's charts showed even back then that Prosper loans were headed for a 40% default rate?

[Urbi_et_Orbi]

The people at Prosper are so thrilled they have the "great recession" to hide behind as a way to mask their incompetence, now that they're running out of mirrors and the smoke is beginning to clear.

[ira01]

I seem to recall that Prosper posted a lame-ass "rebuttal" to the Motley Fool article on its blog too.  And that one wasn't nearly as bad for Prosper as this article.  Prosper has to really be shitting its figurative pants.  

[Urbi_et_Orbi]

Here is the full text of Prosper's blog in case it gets deleted or edited like so many of their blog posts in the past.

An Open Letter to The Big Money: Retract Your Story

01/19/10 posted by Prosper Blog   

Today, The Big Money, an outlet we and many others respect, published a disappointingly inaccurate story about Prosper and the peer-to-peer lending industry.  It’s unfortunate that the author’s data analysis and perspective relied almost entirely on a hodgepodge of anonymous sources.  If higher reporting standards had been upheld, the reality that Prosper has shown great promise and performed well on a relative basis over the last three-years would have been self evident.

We’ve requested that the editors at The Big Money retract Mark Gimein’s erroneous perspective on Prosper and the peer-to-peer lending industry.  We look forward to their response.  In the meantime, we’d like to set the record straight.

Mr. Gimein discusses Prosper’s loans in the context of only cumulative unit default rates rather than in terms of the average annual returns lenders have earned.  For example, Mr. Gimein states that 39% of loans that have had a chance to come to maturity (originated prior to 12/31/2006) have defaulted.  What he doesn’t say is that the annual yield on these loans was 16% and the annual loss experienced by lenders was actually 20%, resulting in an annual average return of negative 4%.  Although this return is negative, put in the context of the largest recession in generations, and the performance of other asset classes during the same time period, this paints a very different and more accurate picture of how lenders have fared on Prosper.

Mr. Gimein continues to use his flawed methodology to state that 54% of loans with an interest rate of 18% or greater have defaulted, leaving the impression that lenders on these loans have lost over half of the funds that they lent, and that losses ran roughly three times the interest rate on loans.  Again Mr. Gimein is equivocating annual interest earned with cumulative default rates over a three year period.  Lenders on these loans lost 10% on an annual basis, and while not positive, it’s a far cry from the 54% loss that Mr. Giemein flawed analysis leads the reader to believe.

After quoting these cumulative loss results out of context, Mr. Gimein’s bottom line is “After you take defaults into account, investors have lost money on most of their Prosper lending.”  Mr. Gimein makes this statement without providing any actual returns data, again leaving the false impression that lenders have lost 39% to 54% on their Prosper lending.  The truth is that the median return across all Prosper lenders was negative 3.2%.  In addition, 39% of lenders have made money on their Prosper investment.  While we would have preferred all of our lenders to have made a profit, a low single digit loss for Prosper lenders in the context of the worst recession since the Great Depression shows great promise for peer-to-peer lending as an alternative asset class for investors.  Even a broad index like the S&P 500 saw an annualized loss of 6% in the past three years.  Most individual investors have experienced performance substantially worse than this in their investment portfolios and 401k accounts.  Something Mr. Gimein fails to discuss.

Mr. Gimein also fails to mention that historically there has been a significant amount of social lending through Prosper’s marketplace.  Social loans are deliberately underpriced relative to their stated risk by lenders in order to benefit borrowers with unique or challenging circumstances.  Although we do not have a way to isolate the impact of these loans on performance, there is no doubt that they have had a downward impact on some lender returns.

Mr. Gimein also seems to find fault with the steps Prosper has taken to improve the lending process and provide lenders with additional information to improve their lending decisions.  Prosper has instituted a minimum credit score requirement of 640 to request a loan from Prosper’s lenders as well as a bid floor. Prosper also introduced a new rating system in July 2009 that incorporates the historical performance of over 29,000 Prosper loans into the rating of new borrowers looking for loans.  Although the new rating system uses the same letter grades to rank order risk, the meaning of the letters has changed significantly. This has resulted in a change in the composition of Prosper’s listings, which allows lenders to more accurately assess risk and set prices for prospective borrowers.  This change in rating methodology is well documented on Prosper’s site and lenders can easily compare the impact of Prosper’s new rating system on loans originated under the older system.

The early results from the new rating system are excellent.  Prosper is estimating returns for lenders above 10% for loans originated since our July re-launch and the early data supports these expectations.  Below is a graph comparing the delinquency performance of loans originated by year with the loans originated in the third quarter of 2009.  As you can see, the proportion of loans that are 31 to 120 days past due for the loans originated under the new rating system are dramatically lower.

Prosper was launched to the public in February of 2006 and was about 18 months old when the credit crisis turned our economy upside down.  The crisis that followed saw a dramatic increase in defaults for all classes of consumer loans.  Large banks with years of lending experience saw a dramatic increase in consumer defaults and posted significant losses.  Prosper was clearly not immune from the economic environment, but looked at in the proper context, peer-to-peer lending has weathered the storm relatively well and as a result is well positioned for a bright future.  At a time when financial markets are in upheaval and consumers are facing a dwindling set of credit alternatives, Peer-to-Peer lending deserves better than a flawed, out of context evaluation from a seasoned journalist, and a respected Web site, that should hold themselves to a higher standard.

I am sure American Banking News is re-typing this (poorly) as I write this.

[christoofar215]

The people at Prosper are so thrilled they have the "great recession" to hide behind as a way to mask their incompetence, now that they're running out of mirrors and the smoke is beginning to clear.

I love how 2006 and 2007 loans are now "credit crisis loans".


Were we in a credit crisis in 06 and 07?   Well, were we?   I wasn't.

[onthefence]

I left a comment on the blog.

Your comment is awaiting moderation.

Xenon481 | January 20th, 2010 at 2:33 am

Can you please comment as to whether this graph contains data for loans that are greater than 120 days past due? The labels on your graph indicate that such data is not included. Any delinquency graph that does not contain that information is useless and errant.

There is only two ways a loan can drop off that graph.  It is either cured OR goes past 120 days.  Take a wild guess as to which way they go.