Lenders haven't been good at pricing risk. If risk was priced appropriately, lower grades would provide a better net return than higher grades. Higher risk should correlate with higher returns. Therefore, the return on Ds should be higher than the return on Cs
Let's not forget that "risk" is not just that the borrower will stop paying--Prosper might go bankrupt or have legal issues, there could be an earthquake in SF and all the data is lost, interest rates could go up, inflation can erode your returns, etc.
We should be getting 15%+ across all grades, since we're buying debt from an internet startup that releases no public financial statements and has an untested business plan, is burning VC cash and whose growth has stagnated.
Right about now some clueless lender who pops up to say, "Well, I just hope to beat money market funds or CD's". Put the dunce cap on and sit in the back of the class.
Bama is right (yet again); we are fools here to keep lending at these rates. Nothing wrong with lending on Prosper, but lenders are mispricing the default risk and are about 900-1200 basis points off.
