Print

[ira01]

Third, for the thousandth time, the writeoff issue is irrelevant at this point in the calendar.  As long as Prosper gets the loans sold off for sure by December 31, we all get exactly the same ability to write them off as if Prosper sold them tomorrow.

Is this right?  If I have a loan that originated in, say, June 2007, don't I get to call it a short-term capital loss if it's sold before June 2008, while it becomes a long-term capital loss, with different (less favorable) tax consequences, if it's sold after that?

Given the debt-sale prices being quoted, wouldn't many lenders be better of if P------ simply declared the loans to be uncollectible, ie "bad debt"?  As I understand it, having $100 in "bad debt" is generally going to be better from a tax perspective than having, say $97 in long-term capital loss.

Your first paragraph is correct.  However, as discussed elsewhere in the last few days, relatively few Prosper loans are going to be sold off less than 1 year after origination, even if Prosper had its shit together.  A loan has to be 5 months old before it is even eligible for sale, and that's if the borrower doesn't even make the first payment.  Most borrowers do make at least the first several payments, however, whether because it looks too suspicious if they don't or because they still have the loan proceeds lying around with which to make the first few payments.  And with even quarterly JDB sales, most loans won't be sold until a month or two after becoming eligible.  When all is said and done, most defaults are going to be long-term capital losses, even without the issue of delaying a sale due to lowball offers.

The first part of your second paragraph is incorrect, because Prosper can't just declare a debt "totally worthless," which is the standard for bad debt, when it clearly is worth something given the (admittedly low) offers by the JDB bidders.  

If Prosper were truly working in lenders' best interests, it might try to segregate 4+ month lates that could be sold within 1 year of origination, and sell that off (maybe even monthly) even at 1% or less if that was the best offer.  Most lenders are probably in the 25% bracket, so that would give them 10% additional value being able to write that off as a short term capital loss versus long-term capital loss at 15%.  In fairness, given the relatively few loans that would probably qualify, it might not be worth the effort.  But those are the sorts of things that it would be nice if someone at Prosper at least thought about, to see if there were areas with win-win possibilities for lenders and Prosper.  Unfortunately, the evidence is that Prosper really doesn't care much, since Prosper doesn't see lenders as its customers.  

[iLIE]

Perhaps they could just give them away.10% better tax advantage is more than the loans would bring in a sale.

[NPX]

Thanks, Fred and Ira, for your replies.

Ira, I think that you, with the viewpoint of a veteran .org member, may be underestimating the number of loans that could be sold off within a year of origination, for two reasons.  First, many lenders here have quit lending, so they will have relatively fewer newer loans than in a representative population.  Second, we'd like to think that the lenders here who are still lending are doing a better job at it, and will make relatively fewer loans that will turn bad right away.  For these reasons, most of the late loans that folks here would like to see go are well beyond a year past origination, but for the entire population of Prosper loans, I'd bet that somewhere between 5 and 10% of loans should be sold off within a year of origination (and that's 5-10% of all loans, which might be as much as 1/3 of all defaults).  That's part WAG and part just eyeballing Fred's late loan curves, which seem to me to show that (at least prior to July 07), roughly 10% of loans were 1+ late within six months of origination, which puts them in the ballpark for a within-a-year-sale if the sales were happening quarterly.

As for my second paragraph, I should have included the word "could" and phrased the question as an expression of wishful thinking.  It just seems wrong to wish for a loan to go bankrupt rather than to have it sell, doesn't it?

[Cushie]

Another thought - why doesn't Prosper sell the debt and report the loss as earned money to borrowers to the IRS?  Wouldn't the borrowers be hit with a huge tax bill next year?  I'm vague on how this works, but I know it does.

[Staneslav]

a

[cubbiesnextyr]

Another thought - why doesn't Prosper sell the debt and report the loss as earned money to borrowers to the IRS?  Wouldn't the borrowers be hit with a huge tax bill next year?  I'm vague on how this works, but I know it does.

Doesn't work like that, the only way to hit the borrower up with a tax liability is to forgive all or part of it.  The amount forgiven is then taxable income.  When you forgive the debt though, it's $0 to the lenders. 

[Staneslav]

a

[Heavens2Murgetroid]

Another thought - why doesn't Prosper sell the debt and report the loss as earned money to borrowers to the IRS?  Wouldn't the borrowers be hit with a huge tax bill next year?  I'm vague on how this works, but I know it does.

Doesn't work like that, the only way to hit the borrower up with a tax liability is to forgive all or part of it.  The amount forgiven is then taxable income.  When you forgive the debt though, it's $0 to the lenders. 

I say forgive all but a dollar or two and leave the rest on their credit report as a current deliquency until they mail all the lenders a bunch of checks for a handfull of dollars.

Then file the appropriate paperwork so that the IRS knows they had some extra earned income due to forgiveness.

Someone else may know this better, but unless the DQ is over 100, I don't think it effects your credit score.   That might just be collections debt though.

[Staneslav]

a

[Mtnchick]

Another thought - why doesn't Prosper sell the debt and report the loss as earned money to borrowers to the IRS?  Wouldn't the borrowers be hit with a huge tax bill next year?  I'm vague on how this works, but I know it does.

Doesn't work like that, the only way to hit the borrower up with a tax liability is to forgive all or part of it.  The amount forgiven is then taxable income.  When you forgive the debt though, it's $0 to the lenders. 

I say forgive all but a dollar or two and leave the rest on their credit report as a current deliquency until they mail all the lenders a bunch of checks for a handfull of dollars.

Then file the appropriate paperwork so that the IRS knows they had some extra earned income due to forgiveness.

Someone else may know this better, but unless the DQ is over 100, I don't think it effects your credit score.   That might just be collections debt though.

I wouldn't know... I pay my bills...

Someone have a Creditboards account they can use to ask?

[patio11]

I had a credit score increase when I removed a $29 DQ from my report.  (It was on there in error.)  I'm guessing this was largely true because my report was pretty thin and pretty clean.  If you've had 10 cards for a decade and have missed your mortgage twice in that time, the fact you're capable of losing a $29 bill doesn't tell the bank anything they don't already know.

[Beachey]

<poof>

[ira01]

The first part of your second paragraph is incorrect, because Prosper can't just declare a debt "totally worthless," which is the standard for bad debt, when it clearly is worth something given the (admittedly low) offers by the JDB bidders.  

What if Prosper made a standing offer to buy any bad debt for $0.01 on the dollar, they could even then charge $0.01 on the dollar for the service to make it a wash.  So if you choose to take the full loss (especially within the year), you could.  If Prosper really thinks they could get more for this debt in the future, it would even be profit stream for them. Only issue is Prosper could hold indefinitely and continue to artificially inflate returns.

I think the IRS would have something to say about this.     Just because Prosper offered to buy at 1% (especially as part of a scheme to be able to take short-term capital losses), doesn't mean that the debt is only worth 1%.  If there is someone out there willing to pay 3%, for example (as there apparently is), then that is the value.  As I posted above, I think the legitimate way to deal with this issue would be for Prosper to hold monthly JDB sales to unload all Late-4 loans that are between 11 months and 11 months 29 days from origination at whatever price it can get, in addition to "regular" quarterly debt sales to unload everything else.  But, as I also noted, it may be the case that there are so few loans where this matters, that it isn't worth the effort.

[BrassKnuckles]

Just reading some of the comments on this one...

(Link again is http://blog.prosper.com/2008/05/30/debt-sale-update-2/)

WasatchLife | June 2nd, 2008 at 11:28 am
Are “RateLadder” and “Chrisfs” Prosper employees? I sure would to hear answers to all these questions from someone official.

RateLadder | June 2nd, 2008 at 1:27 pm
@WasatchLife

I am under contract as the Editor-in-Chief of the Prosper Blog and not technically an employee… On this post, I did not say anything not already in the original post. I was just trying to point out a sentence that I felt answered one of the questions HollowOak asked.

Chrisfs | June 3rd, 2008 at 1:54 am
I am not a Prosper employee. My thoughts are just that, my thoughts, but I usually try to find backing before I say something.

[Urbi_et_Orbi]

Just reading some of the comments on this one...

(Link again is http://blog.prosper.com/2008/05/30/debt-sale-update-2/)

WasatchLife | June 2nd, 2008 at 11:28 am
Are “RateLadder” and “Chrisfs” Prosper employees? I sure would to hear answers to all these questions from someone official.

RateLadder | June 2nd, 2008 at 1:27 pm
@WasatchLife

I am under contract as the Editor-in-Chief of the Prosper Blog and not technically an employee… On this post, I did not say anything not already in the original post. I was just trying to point out a sentence that I felt answered one of the questions HollowOak asked.

Chrisfs | June 3rd, 2008 at 1:54 am
I am not a Prosper employee. My thoughts are just that, my thoughts, but I usually try to find backing before I say something.

RateLadder is a contractor, with an office (folding desk) at Prosper's HQ.

AFAIK, Chrsfs is just taking a long time to detox from the Kool-Aid.