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[ira01]

I notice Gog didn't reply anymore when provided with the 30% link.
He either passed out or got tired of being shown facts.

He could have other things to do with his time. 

As I clearly stated above, he WAS POSTING in this thread.  Then he apparently decided not to after having started.

I use tabbed browsing, so I had another thread queued up to read.  I moved on, then went to bed.   

I have long held that that graph shows nothing of any importance.  Any graph that lumps AA and HR in the same batch, is useful only as trivia.  Also, counting number of loans as a single group is useless as a metric, since the credit grade distribution and expected default rate is different. 

As can be seen here, from March 2006 through June 2007, in EVERY SINGLE MONTH, from 25% to 35% of every dollar lent that month is already defaulted or delinquent.  You can try to spin that by saying it lumps different credit grades together if you want to (hey, it's a free country), but to any rational person, that is a clear indication that Prosper is an utter failure for lenders as a group.  Are some lenders making decent money?  Sure.  And some people fall out of a 3rd story window and don't get hurt.  But more lenders are getting killed than are doing very well.  The median LS ROI for lenders with >20 loans and >6 months average loan age is 2.57% -- considerably less than 100% liquid, FDIC-insured savings accounts. 

Moreover, this discussion began as a comparison to E-Bay -- as I noted before, if 25% to 35% of every buyer dollar disappeared due to fraud, E-Bay wouldn't have lasted for a year.

[lenderguy]

CR,

I know this won't be a popular post from me, but most of your problems here seem to stem from your own mis-steps and not Prosper's mismanagement.  I'll tell you why.  The most glaring error I think you made was that you assumed way, way too much... especially for a one-of-a-kind investment startup on the internet.

I trusted their verification process was similar to every other lender in the US. Why did I think this? I have taken loans out before, once with Quicken an internet based Loan Company. I had to get a notary to verify my identity before I faxed them back the paper work for getting a Loan.

First, did you actually *read* what happens on the borrower's end of things?  There was never any mention of a notary public required.  I've never had *any* financial document notarized.

More importantly to me at the time was the identity theft guarantee they made. I actually thought they would attempt to ensure they would not have to pay out by Identifying who was actually asking for the loan, my mistake. I guess they did ensure that they would not have to pay out on identity theft. If it was not for that guarantee I actually would not have put money in the system. I would have taken that $500 bucks and spent it on myself.

Prosper claims they take commercially reasonable steps to verify identity.  I think they would win their argument in court, tbh.  I'm fairly certain most ID theft cases arise from family -- and really, ahead of time, there are commercially reasonable limits as to how much verifying can be done.  I mean, come on, my dad has all of my contact info, my ss#, you name it.  If Prosper calls him up, how is Prosper going to really know who they are talking to?  They won't. 

Now, how they handle alleged ID theft cases is a different story.  If they find they are paying out too much in claims, I guess they should reconsider what "commercially reasonable" ID efforts are then, right?

I trusted the 5 star group rating system that they had. You will note many of my loans were for a specific group, my mistake.

You're kidding me, right?  How much involvement did you have with the platform before you started lending?  And if it was none, then why didn't you do any real due diligence prior to investing?

I believed their quoted default rates were actually true. I followed their advice, bid at a percentage equal to what I wanted to earn plus the default rate for that credit grade, my mistake.

What quoted default rates are you referring to?  Early on, that Experian data was irrelevant to the platform, and I think anybody who has sharp critical thinking skills knew it.  The overall average number that CL would toss around in the media is a different story, but largely useless.  After all, the overall site wide default rate had absolutely no influence on any specific loan on which I bid. 

Did you double check their advice on bidding rates?  I did, and maybe it was ok for a quick "newbie rule of thumb" but I also knew it was far from perfect.

I thought collections would be handled better and there would be law suits chasing after the dead beats. There was a period in my life when I did not handle money very well, and I ran into this. Straightened up my act real quick, my mistake.

Really?  There was a point in my life where I didn't handle money well either, but I never got sued... I got lots of phone calls.  I also knew that if I were to get sued, it would be by a third party and NOT the original creditor.  Honestly, and you can check my posting history to verify this if you want, but I have always been on record as saying that my lending activities assumed that collections would be ineffective.  I knew that the most drastic action Prosper would take while I still had rights to the loan (and the ability to recover) was phone calls, letters, and emails.  It's way too easy for a deadbeat to ignore those, so I expected no recovery.

If you look at my dialogues with Fred93, you'll notice that I advocated for a system that would allow Prosper lenders to benefit from aggressive collections techniques (ie lawsuits, garnishments) and not selling that off to a third party at the 120 day mark. That's where Prosper is going with the NAT thing, albeit slower than molasses. 

I knew there were risks to lending and if I was losing money and the majority of prosper lenders were not, I would definitely know it was entirely my fault. I admit I am not a financial wiz, let alone a financial professional. But even Financial Professionals got their ass handed to them. The majority of lenders with more then a few loans and loans greater then 3 months old, are losing or are starting to lose money.

I actually feel like Prosper stole my money. Oh they did not directly steal it no. They just CHARGED me so someone else could steal my money.

With the irrational exuberance in which lenders chased subprime loans, I'm not surprised many portfolios are in the crapper.  SO MUCH of the early loans were in the subprime areas, and guess what?  Financial professionals who did significant amounts of subprime lending away from Prosper got their butts handed to them too.  How many banks have failed?  How many CEO's are out on their bum?  Additionally, lenders have been pricing loans at rates that are too low, compounding the problem.  Look at the current average loan rates for the E and HR group -- they differ by about 1%.  Yet, the HR's were to predicted to be significantly more risky.  Where was the risk premium in the loan rate?  Lenders screwed the pooch on that one, that's for sure.  Absolutely none of that is Prosper's fault.

Do I believe Prosper is perfect?  Oh heck no.  I believe they're too dense to realize they have problems, and are way too slow in correcting them.  My absolute biggest pet peeve is for the callous disregard in which they treat the Lender Registration Agreements.  I'm not a lawyer, but they have a contract with me...  a contract which they walk all over whenever it suits them, and there is absolutely nothing I can do about it.  Right now, that alone is the single biggest reason why I don't lend anymore.

BTW, if you think I'm bitter over my returns, check them... lendingstats has me at a pretty decent ROI, especially considering the age of my loans.  However, I'll caution you -- I'm quite certain my true return is pretty close to zero.

[Gogmagog]

As can be seen here, from March 2006 through June 2007, in EVERY SINGLE MONTH, from 25% to 35% of every dollar lent that month is already defaulted or delinquent.  You can try to spin that by saying it lumps different credit grades together if you want to (hey, it's a free country), but to any rational person, that is a clear indication that Prosper is an utter failure for lenders as a group. 

To any rational person, including C,D,E,HR loans in the same batch of default characteristics as AA,A,B loans, is downright dumb.  Also, the data there doesn't show that 25%-35% of the dollars are defaulted or delinquent, it shows that 25-35% of the dollar denomination of the loans defaulted.  A loan that paid for 1.5 years, then defaulted, is vastly different than one that stopped paying after 2 months.  Regardless, Prosper does suck for newbie Lenders who start off in the lower-mid credit grades.  I would never argue with that.  Starting with higher risk loans in a new environment is a Lender choice, and not really Prosper's fault.  If you want to assert that Prosper should no longer allow newbie Lenders to loan to Ds or Es, I would agree with that also. 

Are some lenders making decent money?  Sure.  And some people fall out of a 3rd story window and don't get hurt.  But more lenders are getting killed than are doing very well.  The median LS ROI for lenders with >20 loans and >6 months average loan age is 2.57% -- considerably less than 100% liquid, FDIC-insured savings accounts. 

Yes.  Prosper sucks as an investment for the vast majority of people.  It is too much work to eak out a minor profit.  The only reason someone should be Lending on Prosper is if they enjoy it, not because it is a good investment.

Moreover, this discussion began as a comparison to E-Bay -- as I noted before, if 25% to 35% of every buyer dollar disappeared due to fraud, E-Bay wouldn't have lasted for a year.

If 25%-35% of every dollar was lost to fraud, you are right.  However, in order to be an accurate comparison,  1/3 of eBay's business would have to be in the "Former Nigerian Dictator Garage Sale(WARNING HIGH FRAUD POTENTIAL)" category.  I have a feeling that the people in the section selling Beanie Babies might not care about the aggregate stats.

[mhs505]

Finally, there are some other rational people around posting. 

[112233]

Finally, there are some other rational people around posting. 

ira has been posting. perhaps you just missed them.

[mhs505]

Finally, there are some other rational people around posting. 

ira has been posting. perhaps you just missed them.

[christoofar215]

To any rational person, including C,D,E,HR loans in the same batch of default characteristics as AA,A,B loans, is downright dumb.  Also, the data there doesn't show that 25%-35% of the dollars are defaulted or delinquent, it shows that 25-35% of the dollar denomination of the loans defaulted.  A loan that paid for 1.5 years, then defaulted, is vastly different than one that stopped paying after 2 months.  Regardless, Prosper does suck for newbie Lenders who start off in the lower-mid credit grades.  I would never argue with that.  Starting with higher risk loans in a new environment is a Lender choice, and not really Prosper's fault.  If you want to assert that Prosper should no longer allow newbie Lenders to loan to Ds or Es, I would agree with that also. 

Any rational person would see that your statement is just stupid.

Absolutely NO classes of loans exist where the spread between the derogatory rate (Charge off plus all late categories) and the APR is positive.    Prosper's performance has shown that once a loan goes into a 1+ month late status, it is destined for the trash heap of default.   That's a worse lending performance than even the most poorly managed credit card companies.

Look at the supposedly highest quality Prosper loans in the AA category.

The derogatory rate is 9%.    That means if you put 100% of your capital on AA loans, you should expect 9% of your principal of not being recoverable, and from the PMI Performance page, 3% of the principal is GUARANTEED not to be returned, but for all intent and purposes, we'll count all derogatory statuses together because we're dealing with a FIXED APR product.

OK, so 9% of your money is gonna fall into a black hole... so if your loans are getting bid down to 9%, that means your best hope is to only break even on AA loans.



So, that might lead you to believe that you should set a bidding floor of 9% on AA loans and only bid higher.    That's a problem, too.    AA people supposedly have great credit, so they have better options of getting short term loans than Prosper.   Most people with FICO scores above 745 can get credit card offers that put Prosper's generous terms to shame.


Look at the AA defaulters.    There's AAs who have a start APR up in the high teens and even in the 20s.   Autofunders were also a disaster.      All of your AA people who are listing on Prosper at high interest rates are all people who are desperate because they have reached a lending ceiling or it's clear that they are in financial distress even though they have had a decent track record of paying their bills on time.   

We've seen plenty of AA listings where the borrower is loaded down with a questionable HELOC.   There have been plenty of AA and A listed borrowers who also BK'd on Prosper. 

It's clear from 06-08 lending that SCOREX is not anywhere near a clear determinant of risk and SCOREX is a product for assessing risks on revolving short term debt with low balances.

[christoofar215]

Oh, I forgot to mention...


EVERY SINGLE AA borrower who comes on Prosper says the exact same thing about their HELOC when asked "why don't you just use your HELOC instead of listing on Prosper?"

They all lie and say one of these things:

-  They want to pay the HELOC off to zero and not use it anymore
-  They are using the HELOC for home-related expenses only and are using the Prosper loan for something else
-  Oh if I have any problems, I can exercise the HELOC at any time and pay off the Prosper loan in full whenever I want to.



They will NEVER tell you:
-  I am overleveraged... [heh, ask anybody at Creditboards if they feel they are overleveraged and they will act like you just said "FUCK YOU" to them.]
-  I am upside down on my mortgage and/or on my HELOC, so the bank won't let me access it
-  I have exercised the entire credit line and I can barely make the minimum payment on it
-  I just got a letter from the bank telling me my HELOC has been frozen b/c I missed a payment
-  My house is in foreclosure so the HELOC will be defaulting soon and showing as a DQ balance.

[ira01]

Look at the supposedly highest quality Prosper loans in the AA category.

The derogatory rate is 9%.    That means if you put 100% of your capital on AA loans, you should expect 9% of your principal of not being recoverable, and from the PMI Performance page, 3% of the principal is GUARANTEED not to be returned, but for all intent and purposes, we'll count all derogatory statuses together because we're dealing with a FIXED APR product.

You are failing to take into account the fact that you get some principal back with every payment, so a "derogatory rate" of 9% doesn't mean that you lose 9% of your principal.  At 8%, about 31% of principal has been repaid after one year (at higher interest rates, a lesser portion of principal will have been repaid).

[christoofar215]

Look at the supposedly highest quality Prosper loans in the AA category.

The derogatory rate is 9%.    That means if you put 100% of your capital on AA loans, you should expect 9% of your principal of not being recoverable, and from the PMI Performance page, 3% of the principal is GUARANTEED not to be returned, but for all intent and purposes, we'll count all derogatory statuses together because we're dealing with a FIXED APR product.

You are failing to take into account the fact that you get some principal back with every payment, so a "derogatory rate" of 9% doesn't mean that you lose 9% of your principal.  At 8%, about 31% of principal has been repaid after one year (at higher interest rates, a lesser portion of principal will have been repaid).

I understand that.   I should mention that is under the assumption of a 12 month note just to make things a bit simpler.   Even with that, the spread between AA loans going questionable or bad is at a real rate that overshoots the APR those loans net.

[Fred93]

Absolutely NO classes of loans exist where the spread between the derogatory rate (Charge off plus all late categories) and the APR is positive.    Prosper's performance has shown that once a loan goes into a 1+ month late status, it is destined for the trash heap of default.   That's a worse lending performance than even the most poorly managed credit card companies.

To do this subtraciton in a meaningful way, you should be subtracting ANNUAL rates.  So you have to annualize that derogatory rate before you subtract it from the already-annual interest rate.  In fact, this is already done for you in the ROI box at the top of the prosper performance page.  They've included the fees, and also the adjustment for lost interest.  Easiest to just use their calculation.  (Their is some magic in how they incorporate roll-rates into the calculation, whereas you might like to just consider everything delinquent as bad (ie 100% roll rates), but other than that, they got it right.)

[lenderguy]

I understand that.   I should mention that is under the assumption of a 12 month note just to make things a bit simpler.   Even with that, the spread between AA loans going questionable or bad is at a real rate that overshoots the APR those loans net.

Why do you hold to the notion that risk mitigation rate = failure rate?  Desired return + risk spread = charged interest rate is far from the best way to do that calculation.

[christoofar215]

I understand that.   I should mention that is under the assumption of a 12 month note just to make things a bit simpler.   Even with that, the spread between AA loans going questionable or bad is at a real rate that overshoots the APR those loans net.

Why do you hold to the notion that risk mitigation rate = failure rate?  Desired return + risk spread = charged interest rate is far from the best way to do that calculation.

I don't agree.   Your comfort level drops the moment one of your loans falls into a late category.   The first thing that happens when you go into the account screen and you see a new loan is get tagged with <15 is:  "WTF?!?!  GODDAMMIT!" or in the case of the older lenders (on account age, not your actual age)... a groan or a sigh.


On AA's, the chances of 100% of loans entering some sort of derogatory status through the life of the loan is 9%.   That statistic is based on all known loans to date.   Going forward that statistic could change, but that's the number we have to work with.

Does that mean charging a 4.75% APR will guarantee a yield of 0%?   No, because the rate at which AA is going to default and go late in the future can change, but it's not going to change dramatically.    To guarantee a zero or positive return, you have to charge 9%--which covers up the loss rate no matter when in the lifespan of the loan the loss is actually realized.   

Of course, it's better for you if your loss occurs late into the loan, especially near payment #23, when you've collected enough interest payments to make up for the loss in principal... however that does not mean you actually recovered.   What actually happened was that your money was held "in limbo" during that entire time when it could have been put into more useful securities that would actually yield a return, and hopefully at a rate faster than the rate of inflation.

That is the time-value of money.   If rampant inflation occurs during the life of your fixed rate note, your borrower prospers while you as a lender suffer.   Assuming the borrower is able to climb the inflation ladder upwards by increasing his or her wages, the payment becomes less trivial to the borrower whereas the profit gains, the value of the money earned by the lender, diminishes.

[christoofar215]

More about my 9% calc on AAs...


This is statistically a guaranteed risk recovery rate under the absolute worst-case scenario that once you invest 100% of your money into AA loans, the 9.09% default right when the first payment is due  [only a handful of AA loans have actually done that, but there have been some AA defaults that occurred only after 1 payment was made].


You can still realize a gain (profit) by charging an APR of 7% on AA loans, or even 6.5%, but you invite more and more risk for each basis point that you go lower.   The loss risk disappears to absolute zero at 9.09%, which is the rate AA loans enter a derogatory state throughout their entire lifespans, and also eliminates the remote case where you find all your insolvent loans the instant Prosper originates them.


Inside the AA credit grade, if you are still lending, I would set a bidding rate in between no lower than 8.45% and exclude all AA listings asking for a rate higher than 13% to get rid of the desperate people whose credit reports don't reflect their financial doom.   Even then, I bet you that you will still see dismal returns when you could have just put them into a better yielding CD which is secure and insured by the FDIC.

On the bottom rungs of the SCOREX scale, Es, and HRs are super unprofitable at any percentage offered, Ds only at the maximum percentage [but that rate is so high you shouldn't be lending to Ds asking for loans higher than $3K b/c of the large payment amounts].


With A/B/C borrowers... if you're trawling the listings looking for high rates, you're pretty much doing the same thing you'd be doing at a craps table in Vegas;   praying you don't roll snake eyes.

[lenderguy]

More about my 9% calc on AAs...

This is statistically a guaranteed risk recovery rate under the absolute worst-case scenario that once you invest 100% of your money into AA loans, the 9.09% default right when the first payment is due  [only a handful of AA loans have actually done that, but there have been some AA defaults that occurred only after 1 payment was made].

Is there a mathematical proof for that?  I can run the numbers on an Excel spreadsheet, so it's not that I'm disagreeing with your statement.  I just hesitate anytime the word "guarantee" is used in connection with Prosper

The loss risk disappears to absolute zero at 9.09%, which is the rate AA loans enter a derogatory state throughout their entire lifespans, and also eliminates the remote case where you find all your insolvent loans the instant Prosper originates them.

You do mean to qualify that by adding "for a large enough portfolio" don't you?

Inside the AA credit grade, if you are still lending, I would set a bidding rate in between no lower than 8.45% and exclude all AA listings asking for a rate higher than 13% to get rid of the desperate people whose credit reports don't reflect their financial doom. 

One of the flaws with automated bidding on Prosper is that you can't specify an upper limit on the interest rates for each credit grade.  That's become a bigger and bigger flaw over time.