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[lenderguy]

I don't agree.   

Well, your calculation isn't very accurate... it swings way over to the conservative side.

Your comfort level drops the moment one of your loans falls into a late category.

What does that have to do with statistics and math?

   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.

Actually, I just shrug my shoulders... on a bad day.  These days I don't much care; it's merely an experiment that I am conducting.  I get more emotion from busting out of a poker tournament than I do a Prosper borrower.

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.

Well, we all know that past performance is no guarantee of future returns, don't we?  And I don't agree with your philosophy that the number we have to work with is the only number we will use... that thinking got us into the subprime housing mess, didn't it?   The ability to think beyond the historical data and make accurate predictions is what separates the winners from the losers.

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.   

What, pray tell, makes you so certain of that?  The rates of default on AA loans are much higher than the Experian numbers that were thrown about early in the ball game.  Yes, those numbers applied to a different product, but my gut feeling was that the Experian numbers were going to be "close enough" for our purposes.  IIRC, Experian forecasted default rates of 0.3% for AA borrowers.  It looks like they were off by a factor of 30, no?  My question is why you think the 9.09% number won't change much going forward.  I can't prove it will, but I'm not willing to assume it won't either. 

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.
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[ira01]

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.   

This demonstrates another error in your calculations -- the failure to recognize that not all AA loans have the same 9.09% chance of going bad.  If you were to invest in every AA loan, and if past performance proves a reliable predictor of future performance, then 9.09% of your loans will go bad.  But few, if any, lenders invest in every AA loan.  Thus, your individual "derrogatory rate" will vary.  If you are especially bad or unlucky, your rate may be greater than 9.09%; if you are skilled or lucky, it may be less. 

As just one example, my blog -- http://www.prospers.org/blogs/ira01/2008/08/09/loans_with_very_high_rates_for_their_cre -- analyzes the historical performance of AA loans with very high interest rates.  For the 25 AA loans with rates of at least 18% originated from Prosper's inception through the end of 2007, eight are already 1-month late or worse -- a whopping 32% of these AA loans.  Thus, someone who specializes in these AA loans (and there are, unfortunately, a number of lenders who appear to do so) has experienced a "derrogatory rate" of much more than 9.09%.  And someone who avoids these loans like the plague (to borrow a phrase of recent Prosper significance  ) may have a lower derrogatory rate.

[lenderguy]

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.

The problem with the credit card game is that those offers are good for about a year.  There is *no* guarantee that you'll be able to get another one a year from now.  If I absolutely had to carry $10k (meaning I couldn't pay it back on the spot at any point) I wouldn't want to get caught with my pants down.  A prosper loan at single-digit interest rates is a very good deal for those who need it.  (OTOH, if I were only looking to float a few grand, I'd go the CC route, not Prosper.)  Personally, one of my problems with the Prosper platform is that prime borrowers should not have to wait a week to figure out what rate they will get on a loan.  I don't borrow money for "fun" I borrower it for a reason.

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.   

Prosper should allow us to be more discriminatory with interest rates when we search and when we bid with standing orders.  I can't accept "autofunders are a disaster" without the ability to look at AF's within a given interest rate.  Of course an AA AF at 20% is going to be a disaster!

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.

I disagree.  Look at the performance page, and you'll see that the chargeoff rates are clearly correlated with credit grade.  That means it works. 

[christoofar215]

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.   

This demonstrates another error in your calculations -- the failure to recognize that not all AA loans have the same 9.09% chance of going bad.  If you were to invest in every AA loan, and if past performance proves a reliable predictor of future performance, then 9.09% of your loans will go bad.  But few, if any, lenders invest in every AA loan.  Thus, your individual "derrogatory rate" will vary.  If you are especially bad or unlucky, your rate may be greater than 9.09%; if you are skilled or lucky, it may be less. 

As just one example, my blog -- http://www.prospers.org/blogs/ira01/2008/08/09/loans_with_very_high_rates_for_their_cre -- analyzes the historical performance of AA loans with very high interest rates.  For the 25 AA loans with rates of at least 18% originated from Prosper's inception through the end of 2007, eight are already 1-month late or worse -- a whopping 32% of these AA loans.  Thus, someone who specializes in these AA loans (and there are, unfortunately, a number of lenders who appear to do so) has experienced a "derrogatory rate" of much more than 9.09%.  And someone who avoids these loans like the plague (to borrow a phrase of recent Prosper significance  ) may have a lower derrogatory rate.

I realize that.   The only data we have to go on is the performance.   And yeah, anything could happen tomorrow--like a wave of AA identity fraud loans getting listed and funded on Prosper to drag the numbers down even further.

[lenderguy]

I realize that.   The only data we have to go on is the performance.   And yeah, anything could happen tomorrow--like a wave of AA identity fraud loans getting listed and funded on Prosper to drag the numbers down even further.

But relying too heavily on it is a recipe for failure.  Besides, the default rates change from month to month anyway.  You say they won't change "much" but I won't take that as gospel for quite some time.  We really don't have that many AA loans, let alone enough to make any sweeping generalizations.

In a different thread (or earlier in this one, I forget) gogmagog said that he doesn't put much stock into Fred93's overall site-wide statistic because there's just too many segments with unique behavior to them.  I happen to agree wholeheartedly.  Talking about "all AA loans" is about as useful as talking about Prosper as a whole when making lending decisions on any particular loan.  If you won't loan to an AA at rates higher than 14%, then talking about the general behavior of all AA loans is quite meaningless.  Also, would you loan to an AA with 14 CDQ?  I wouldn't.

[bamalucky]

  And yeah, anything could happen tomorrow--like a wave of AA identity fraud loans getting listed and funded on Prosper to drag the numbers down even further.

Thats already happened before,& Prosper bought them all back when a lender on the old forum found them all to be from the same city.

Oh wait,then a few weeks later Prosper removed cities from the listing to keep that from happening anymore.

[God-Father]

Just curious - once you saviors to all lenders go forward, will there be either a gag order, or at least a gag practice put in place during the litigation?

[BigGulp]

Just curious - once you saviors to all lenders go forward, will there be either a gag order, or at least a gag practice put in place during the litigation?

I've already gagged.   

...Gulp

[bamalucky]

I've already gagged.

Well,you did expose yourself to more of it   

[The_Cat]

Just curious - once you saviors to all lenders go forward, will there be either a gag order, or at least a gag practice put in place during the litigation?

I've already gagged.   

...Gulp

Hi Gulp

[mhs505]

Urbi, this is a completely sincere question -- why isn't this the attorney you are using?   You had already worked with this person, why would you go with an unknown attorney who comes here looking for business?

[bamalucky]

Urbi, this is a completely sincere question -- why isn't this the attorney you are using?   You had already worked with this person, why would you go with an unknown attorney who comes here looking for business?

I'm not Urbi,but i'm guessing "price"

[mhs505]

Urbi, this is a completely sincere question -- why isn't this the attorney you are using?   You had already worked with this person, why would you go with an unknown attorney who comes here looking for business?

I'm not Urbi,but i'm guessing "price"

I don't know, hopefully he will answer.  I have just been wondering why 'they' never pursued what they started here with their letters to Prosper, which is why I am asking in this thread.  <shrug>

[Urbi_et_Orbi]

Urbi, this is a completely sincere question -- why isn't this the attorney you are using?   You had already worked with this person, why would you go with an unknown attorney who comes here looking for business?

Circumstances changed dramatically.

[Cushie]

Huh...is that one reason that xraider doesn't visit anymore.