ira01's blog

Here is an updated graph of the 12-month moving average of Prosper's loan originations, with August 2008 added. 

(Click here for larger image.) 

As can be seen, the trend is now down again (which is due to the fact that August 2008 originations were down over half a million dollars from August 2007). 

It will be interesting to see what happens this month.  Because September 2007 was Prosper's worst month for originations in 2007, it should be relatively easy for Prosper to show a year-over-year increase this month, which will, of course, raise the 12-month moving average. 

Although Prosper rates an F for most of what it does, its marketing department clearly deserves an A for its ability to get articles published that read as if they were Prosper press releases.  There have been a bazillion articles published about Prosper, and they almost all may as well have been written by Prosper.  Typically, they uncritically regurgitate Prosper's misleading statements about its default rate, lender performance, etc. 

But finally, there is a hard-hitting article on The Motley Fool, a well-respected financial site --  http://www.fool.com/investing/value/2008/08/29/avoid-this-company-like-the-plague.aspx.

"If [online person-to-person lending] worked, it would have been a tremendous win for all involved. It's too bad that online-lending pioneer Prosper.com botched the execution of that concept. Sure, any start-up will have growing pains. It's how a company responds and adapts to those pains that really matters.

On that count, Prosper has earned an F."

The Motley Fool article (which mentions both Fred93 and me) spends most of its time on Prosper's federal bankruptcy court filing in the Oakland Gaerke case, in which Prosper makes the startling (and ridiculous) claim that "it is denied that Prosper loaned any money directly to the Plaintiff or Defendant, Ashley Gaerke."  Prosper's position in that case is that it merely facilitated separate loans made directly from lenders to the borrower.  This is, of course, 100% contradicted by Prosper's various legal agreements, including the Lender Registration Agreement, the Prommissory Notes, Prosper's FAQ, and its SEC filing.  Fred93 blogged about this issue in depth here, building on a prospers.org thread started by xraider (who discovered this case) here.

The Motley Fool article also spends some time on the performance of Prosper's loans, noting that "[f]ully 18.5% of all dollars loaned on Prosper between its inception and the end of June 2008 have gone delinquent. Some individual months look substantially worse: More than 35% of the dollars loaned in February 2007 are in some stage of evaporating."  The article also describes several of my complaints about Prosper, apparently taken from my long-running (and soon to be updated and blogged about here) thread on prospers.org titled My Summary of Prosper's Problems. 

Kudos to The Motley Fool and its author Chuck Saletta!

Most Prosper lenders know that both Lendingstats and Eric's provide graphs showing Prosper's loan originations each month.  Lendingstats graph, which is available here, categorizes loans by their origination date, while Eric's, available here, categorizes loans by their listing start date.  Both provide useful information for analyzing Prosper's loan originations over time.  As can be seen, there are monthly ups and downs, and there are some variations that appear to be seasonal as well, such as an uptick around Prosper Days.  What neither graph provides, however, is a clear picture showing the overall trend of Prosper's originations. 

It occurred to me that the best way to show that, would be a graph showing the 12-month moving average of Prosper's monthly originations.  That way, each 12-month period includes a full year of originations, thereby eliminating the effect of seasonal variations.  Using Lendingstats data (which is therefore categorized by origination date), I prepared a table of monhly loan originations over Prosper's entire history, and calculated each 12-month average (the spreadsheet with the data is linked below).  I then graphed these 12-month averages against time.  Here is the graph:

(Click Here for a larger image) 

It It appears to me that there was a noticeable flattening of Prosper's origination growth after April 2007, which accelerated for several months.  Then the growth rate picked up for two months starting in October 2007 (probably due to Prosper's aggressive marketing of second loans), before essentially disappearing after November 2007.  For example, the average originations for the 12 months ending December 2007 was $6.75M, and only $6.77M for the 12 months ending April 2008 -- almost completely flat.  In May 2008, the 12-month origination average began to increase again somewhat (probably from the elimination of rate caps due to the WebBank venture on April 15), although at a fairly sedate rate that has continued for the last few months (although the July 2008 average would have been considerably lower without the huge number of loans originated in the last two days of July (149 loans for $879,000)). 

Put another way, it took about two months for the 12-month average to increase from (about) $2M to $3M, another 2 months to increase to $4M, and another 2 months to increase to $5M (May 2007).  This was the period that Prosper was growing originations strongly.  But then it took three months for the moving average to reach $6M, and nine months for it to hit $7M (May 2008).  Absent some major change in Prosper, it appears that average originations have pretty well reached a plateau in the $7M a month range.

I believe this graph has to be deeply troubling to the venture capital firms that have invested in Prosper (particularly in light of Prosper CEO Chris Larsen's public statement last Fall that loan originations needed to increase 400-500% in order for Prosper to just break even).

Here is the spreadsheet containing the data I used (monthly originations, 12-month totals, and 12-month averages):  Prosper Monthly Loan Originations

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.

Welcome to my new blog about Prosper.com.  To get things started, I intend to copy some of my favorite analysis that I previously posted on prospers.org.  Over time, I will add new original content.

I am ira01 on Prosper.com and on prospers.org. 

Although I am a lawyer licensed to practice in California, nothing I write here should be construed in any way as constituting legal advice.  Nor is this blog intended as advertising or solicitation for legal services of any kind.