ira01's blog

In looking on Lendingstats at all AA loans originated this year, I noticed that there were 44 such loans originated with rates of 18% or more, including one at 30.66% (and 18 at rates of 22% or more).  These 44 loans were made with $782,000 of lender money (13 were for the full $25K, and 4 were for $24K).  It seemed clear to me that these lenders were letting their greed at receiving abnormally high interest rates for AA borrowers (or perhaps poorly designed Portfolio Plans) overcome their common sense -- what "real" AA would pay such pitifully high rates for a Prosper loan unless no bank would touch them?  So although the conventional wisdom is that these lenders are going to be in for a beating, I decided to take a look to see how such loans fared in the past.

There were 25 AA loans with rates of at least 18% originated from Prosper's inception through the end of 2007 (and keep in mind that loans originated in late-2007 aren't even especially "old" yet).  Of these 25 "high-rate" AA loans, EIGHT are already 2-months late or worse -- a whopping 32% of these AA loans.   Moreover, contrary to expectation, these 8 loans were not disproportionately $25K (or even especially large loans for AAs) -- only 2 of them were for $25K, 1 was for $20K, and the other five were all $15K or less (including one for a measly $4K).

Based on this historical performance, I would say it is safe to say that the lenders on the 44 "high-rate" AA loans originated so far this year are going to be in a world of hurt.  I wonder if Prosper's bidding guidance takes the interest rate into consideration (I doubt it, because if it did, these "high-rate" AA loans would show significantly negative expected returns). 

To see who is funding these dregs, I looked at the largest lenders on a handful of the 44 high-rate AA's originated this year.  Unsurprisingly, the same names appeared on many of the loans I looked at (including two lenders who have been discussed on prospers.org before, Lendinglinguist (LS ROI 26.42%, average loan age 84 days), and i8well (16.83%, 56 days)).  These lenders whom I predict to be hurting bad in the future include:  jetsfan (-2.53%, 145 days); GTDriver (29.93%, 23 days); 4U2Invest (22.17%, 74 days); Justicepi (21.71%, 67 days); rhchil009 (22.79%, 13 days); Obedience (21.65%, 69 days); and the "winner" -- Sympathetic (-10.31%, 75 days) (he/she is going to need a lot of sympathy by the time the carnage is complete).  Undoubtedly, these newbie lenders think they are funding "low-risk" AA loans, and are no doubt overjoyed with the extremely high interest rates of these loans.  They are going to be in for a very rude awakening in the future.

Today I decided to take a look at the high-rate A loans and see if the results were the same as with the AAs.  Again looking from Prosper's inception through the end of 2007, there were 45 A loans with an interest rate of at least 19% (ranging up to a high of 29%).  Of these 45 high-rate A loans, 13 of them are at least 1-month late (11 are at least 2-months late) -- 29% of these A loans.  Thus, the abysmal results are pretty much the same for high-rate A loans as they were for high-rate AA loans. 

Unfortunately, it appears that lender greed (or poorly designed Portfolio Plans) has caused much more of these high-rate A loans to originate this year than has been the case for AAs.  So far this year, a whopping 120 A loans have originated with a rate of at least 19%.  And 24 of those high-rate A loans had rates greater than 29% -- something that wasn't even previously allowed.  (While 9 of those 24 super-high-rate A loans were for $25K, 9 were for $15K or less, including 1 for only $5,400, and 1 for $8,500).  Six of these loans were at the maximum 35% rate.  What "real" A borrower is going to pay that much for a loan?

Needless to say, many of the same lenders funding the high-rate AA loans this year are also funding the super-high-rate A loans, including jetsfan, 4U2Invest, i8well, and lendinglinquist.  In reviewing a handful of the super-high-rate A loans, a number of lenders popped up numerous times.  These include:

osmium (-4.26%, 55 days), whose oldest loan is only 93 days, but whose ROI is predicted to be between negative 9.74% and negative 26.28%!  This person was on pretty much every super-high-rate A loan I looked at -- maybe his/her average interest rate of 34.1% wasn't such a good idea after all!

knfbguy (26.9%, 21 days), whose oldest loan is only 44 days, yet he/she has already dumped almost $50K into Prosper.

Zebra2 (29.1%, 24 days) Perolus (28%, 34 days) Jasmel (8.7%, 27 days ) -- average interest rate 35.00% on 88 loans!; DougE66 (29.8%, 47 days); and Moo1966 (10.8%, 48 days).

Someone ought to do these people a big favor and invite them to prospers.org in a hurry.