zcommodore

Just today, I received the latest "Market Survey Results" from Prosper.  A cursory read of that letter would make you think Prosper is growing by leaps and bounds, and that the latest economic turmoil was accellerating the growth.  Well, the truth ain't quite so pretty.  Here's the evidence....

Chris Larsen said: "the percentage of borrowers with sterling credit that are listing and getting funded on Prosper remains at record levels"

Well, maybe.... (I don't have information on the number of "sterling credit" listings but I do know what the funded loan percentages are.)

I'm not sure what his definition of "sterling credit" is but for him to say it's at "record levels" is a bit of a misnomer.  The total percentage of borrowers with AA/A credit grades getting loans has been gradually trending down since it's peak in November last year.  Here's a better look:

For whatever reason, the percentage of loans going to the poorest grades of borrowers is trending upwards while the other borrower percentages are going down.  This is not good news for Prosper because with the increase, overall default numbers are going to go up.

I will admit that since November, the top level of borrowers getting loans has been a lot higher than earlier in Prosper history but that was largely due to the lender guidance and also the portfolio plans rather than lender's raw choices.

On to the next one.  Here's a good quote, a whole paragraph: "Another key trend we’re experiencing is that as consumer borrowing from traditional financing sources is shrinking, Prosper is experiencing solid growth. Year-to-date, the number of loans in terms of units is up 24% over the same time period last year, and up 37% in September 2008 compared to September 2007. At the same time, loan originations year-to-date in terms of dollars have increased 8% over the same period last year, and are up 7% in September 2008 compared to September 2007."

Well, isn't it convenient that September of 2007 was a low point in an otherwise flat loan-origination trend:

Of course, the increase in dollars loaned of 7-8% year over year is nice but given that even at 2007 levels, it is known he admitted they needed to increase volume by 4-500%, a 7-8% increase isn't very helpful.  Also, the fact that the total number of loans has increased 24% only says they're doing more work per dollar earned since the cost of originating a loan most likely stays roughly the same even if the size goes down.

He made a comment about loan sizes: "At a time when every sector in the economy seems to be under pressure and shrinking, the growth Prosper has experienced is very respectable. However, some may wonder why there is a disparity between unit growth and loan dollar volume growth. The answer lies in the average loan amount being funded on Prosper. Year-to-date the average loan amount is $6,047, down 13% or $925 compared to the same period last year. In September 2008 the average loan amount was $5,544, down 23% or $1,631 from September 2007. This indicates that lenders on Prosper are being more cautious by directing their bids toward listings with lower requested loan amounts."

Here's the real trend:

As you can see, the trend in loan sizes has been smaller overall since November of last year.  In other words, Prosper is doing more work for less revenue at an increasing rate over most of the last year.  Obviously, that's not good.  (Yes, I know they increased origination fees and a number of other things over that time period.)

It's always amazing to watch someone pull out a set of numbers and use them for marketing purposes.  I suspect Chris Larsen is using his "select index" for his figures which excludes a lot of activity on Prosper.  Well, as you can see either way, the overall trend is what Prosper is going to make its money on (or not) so just picking out some subset of numbers and marketing them as indicative of Prosper's performance as a whole is just putting lipstick on the pig.

I hope Prosper is keeping track of these real numbers and acting accordingly.  If not, they're going to be very surprised when they discover things aren't quite as rosy as they're trying to promote. Prosper has a lot of work to do if they hope to become profitable. I'd recommend working on improving collections.  If lenders see improved performance on late loans, they might start bidding again.  I don't think the overall economic turmoil is the problem.