Tuesday, October 9, 2007

Prosper's September Lending Market Summary

Prosper released their September market summary. Check it out for all the details.

Their noteworthy section included some interesting statistics. Apparently self-reported computer programmers are the least likely to default, followed by government workers, the nebulous analyst, and then mechanical and electrical engineers. This is a fun statistic (since I'm either a computer programmer or electrical engineer, depending on the day of the week), but don't adjust your bidding based on it. This is self-reported information, and the cynic in me expects the number of computer programmers applying for loans to magically jump.

Also noted was that the lowest default rates by state were Minnesota, Ohio, New Jersey, Colorado, and New York. This information conflicts with Lending Stat's analysis of state diliquency rates. I suspect that this is because Lending Stat looks at loans that are late as opposed to loans that have gone into default and have been sold off.

And, from Chris Larsen's market commentary:

When the Fed cuts interest rates people often expect mortgage rates to drop. However, this is rarely the case given that mortgage markets typically anticipate rather than react to moves by the Fed. On the flip side of the coin, the variable credit card and savings rate markets react sometime after the Fed moves. In fact, some variable credit cards have a 90-day window to make adjustments reflecting the rate cut. So the question is: did the Prosper marketplace anticipate or react to the Fed rate cut?

Many might assume that the Prosper marketplace would act less like the mortgage markets and more like the credit card and savings rate markets given that the latter compete with Prosper. Nevertheless, the month over month drop in average borrower rates indicates that the Prosper marketplace may have anticipated the Fed cut.

For example, in September the average borrower rates for all prime and near prime loans funded in the Prosper marketplace were 12.29% and 18.22%, respectively; down 0.37% and 0.28%, respectively, from August.

What is interesting about these percentage drops is how close they are to what was widely anticipated to be a quarter-point instead of a half-point reduction by the Fed. However, what remains to be seen is whether the market will continue to push rates down further in line with the Feds surprise move.

I want to highlight the decrease in Prosper loan interest rates. Chris Larsen has attributed this to the decrease in the Fed interest rates. Because these two items were correlated, does not imply causation. I suspect a much more pedestrian effect was causing the decrease, and it's less press release friendly. As zcommodre has noted, there was a significant decrease in funded loans in September compared to August and Eric's CC shows a similar drop in listings (Marketing 101 says don't put that in a press release). However, there did not appear to be a commiserate drop in lenders. The same dollars chasing fewer borrowers looks like an Economics 101 supply and demand problem. I'd expect the average interest rate to drop under those conditions regardless of what the Fed does.

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