Where Will That Rebate Check Go

With the IRS blasting an estimated $105 billion dollars toward the public, the great question is where that check will go. I'm skeptical that it'll provide the economic stimulus that folks in government were expecting - I've always assumed that folks will use it to pay off credit card bills or buy their next tank of gas, neither of which stimulates the US economy. But paying off bills will get some Prosper loans paid down. The Orlando Business Journal is estimating that $28 billion of the $105 billion (26.6%) will go toward debt repayment, implying that a lot of money will flow into Prosper loan repayment.

I'll be watching for increased prepayments and, hopefully, some recovery from those doggy late loans while the checks roll out between now and the end of July.

Prosper.com April Marketplace Survey

Prosper's April Marketplace survey was an interesting read. Mostly for the disclaimers at the bottom. Prosper's definition of "Attractive Risk-Return Tradeoff" was insightful.

Attractive Risk-Return Tradeoff: For purposes of this survey release, listings are considered to have attractive returns if, based on historical loan repayment performance of Prosper borrowers with similar characteristics, they are priced sufficiently to compensate lenders for risk. Risk includes both the risk of non-payment by the borrower and other risks associated with people-to-people lending. In general, as the credit quality of the borrower declines, the range of possible returns widens, requiring a larger risk premium to compensate the additional uncertainty. The amount of risk premium required to compensate for a given level of risk is a subjective judgment. The following formula is used by Prosper to determine if a listing is priced adequately to have an attractive risk adjusted return: Maximum Borrower Rate > Risk Free Rate¹ + 3.25% + (Expected Annual Default * 1.5) + Prosper Servicing Fee. All lenders should make there own judgments with respect to what constitutes an adequately priced listing.

¹ Risk Free Rate = 2-year CD national rate on BankRate.

This is a great equation and similar to what I've used in my lending ever since the bidding guidance was introduced. I've always used the 3-year CD as my baseline, but to each their own. A quick look on BankRate has the 2-year CD peaking at 4.10% and the top 10 rates above 3.73%. The great irony in this is that Prosper's conservative portfolio does not achieve an attractive risk-return trade-off as of a few days ago (the minimum post-fee/default rate would need to be greater than 3.73% + 3.25% = 6.98%, not the 5.10% currently shown).

And of course, there's Chris Larsen's commentary:

In April, we saw the supply of loan listings with an attractive risk-return tradeoff hit an all time high and approximately double compared to the prior month. At the end of March, the supply of loan listings with an attractive risk-return tradeoff was approximately $5 million; and at the end of April the supply increased to approximately $11 million and has remained at that level into May.

This significant increase in the supply of loan listings with an attractive risk-return tradeoff is attributed to the fact that on April 15 we commenced our business arrangement with WebBank, a Utah-chartered industrial bank. Through our agreement, all loans originated through the Prosper marketplace resulting from listings posted on or after April 15, 2008 are made by WebBank under its bank charter. Prosper provides services to WebBank in connection with the origination of such loans and Prosper services loans made to Prosper borrowers on behalf of registered Prosper lenders who purchase such loans. In effect, this partnership opened the platform to more borrowers, who may have previously been constrained by low state rate caps.

Also in April, we saw the supply of prime borrower listings hit an all time high, accounting for nearly half of all loan listings in terms of dollars requested. Prime borrower originations also reached its record level of 43% of funded loans.

Currently, the significant increased supply of quality listings is providing more attractive bidding opportunities, which is making it easier for lenders to efficiently deploy more money onto the platform.

Let me explain... No, there is too much. Let me sum up. When Prosper went nationwide at 36%, we got a lot more borrowers. Prosper thinks that it is a great time to be a lender.

And LendingStats confirms this. Their new bidding activity feature confirms that 63% of bids are going through to fully funded loans.

Prosper.com Feature Upgrade

Prosper did a feature drop the night of the 18th, and Andrew posted about it on the Prosper blog. This was an infrastructure drop, with improvements to the backend, but nothing visible right now:

• Improved institutional lender support
• Improved credit report reporting (for borrowers)
• Preparation for bankruptcy tracking
• Improved data handling for loan origination

The most interesting item for lenders is the bankruptcy tracking upgrades.

As of this release, we’re automating more of our bankruptcy tracking to set the stage for us to be able to start giving lenders the bankruptcy chapter number and filing date in the future.

More information = GOOD.

Prosper Newsletter: Portfolio ROI Falls

Prosper sent out a monthly newsletter that hit my email box today. The most astounding thing has been the rather notable fall in the portfolio ROI.

I had a hard time believing that the conservative portfolio estimated return had dropped to 5.10%. I remember the heady days of 8% anticipated returns with the Conservative portfolio. With Bankrate showing some 3-year CDs offering 4.45%, what exactly is the attraction? I cannot see the added risk of the Prosper lending market being worth about a half a percent, especially when the principle is not guaranteed and there's no way to get the money out (yet) if you need it.

Only Prosper could pinpoint what's driving this, but several rate cuts and banks desperately competing for high quality borrowers probably isn't helping.

April Prosper.com Collections Update

Yes, I'm alive. I took a week off for my brother's graduation. Unfortunately, no internet where we were staying. D'oh. I'm digging back in. On to the substance:

This is part of my ongoing series monitoring collections efficiency (March's report for comparison). For a reminder on the methodology, I took a snapshot of all of Prosper's loans on April 1 and compared their current status against those same loans on May 2 (operator error, once again). Presumably, loans that don't get further behind have some kind of money extracted in the collections process (not so valid on this run - see below). The statistics are below.

	Total	Got Better	Stayed The Same	Got Worse
Current	14456	226 1.5%	13895 96.1%	335 2.3%
Late	223	56 25.1%	31 13.9%	136 60.9%
1 month late	292	32 10.9%	26 8.9%	234 80.1%
2 months late	235	18 7.6%	11 4.6%	206 87.6%
3 months late	260	7 2.6%	7 2.6%	246 94.6%
4+ months late	946	6 0.6%	930 98.3%	10 1.0%

The Signs Of Collections (SOC) statistics are below. Signs of collections percentage is calculated as the percentage of the loans that either improved or stayed the same.

Month	1 Month	2 Months	3 Months	Total
April '08	19.8%	14.2%	5.2%	39.2%
March '08	24.4%	12.4%	11.3%	48.1%
February '08	13.7%	9.3%	4.7%	27.7%
January '08	20.6%	12.8%	8.0%	41.4%
December '08	23.0%	2.8%	3.8%	29.6%

Since I screwed up and didn't get the data until May 2, this report will be slightly negative. This is because Prosper calculates loan lateness based on the date in a month (and not 30 / 60 / 90 days) and loans that came due between the May 1 and May 2 will not be properly counted. Overall, there has been a mild trend toward improving odds of squeezing money out of a loan that has gone late.

The "4+ months late" category is very hard to quantify percentage wise. The default sales make month over month comparison very difficult, so I'm not going to try.

Default Sale Delayed

I like that Prosper is putting up more posts from their folks on their blog. Today's post was an update on the default sale by Doug Fuller. The punchline - the bad-loan marketplace is buyer market and a seller's nightmare:

As a result of these efforts, Prosper received a record number of bids on the sale file (eight). Unfortunately, all of the bids were extremely low. As I mentioned in my last update, the debt market was “flooded” by credit card issuers in March. That backlog has not dissipated.

At this point, we have not accepted a bid to buy the portfolio. We are actively soliciting alternative bids and proposals and are working through the alternatives. We are working to get the best price possible and appreciate your patience in this matter. Without compromising the status of negotiations, we will keep you informed on the process.

If you want confirmation, go through Portfolio Recovery Associates (bad debt collector) latest earnings conference call transcript. They're all a flutter about how there's lots of debt swirling around that can be purchased on the cheap, in part because actually collecting on the debt is getting more difficult. This does put Prosper in a bind. As debt ages, it becomes worth less. But if they wait, market conditions may improve. At some point, waiting longer will be entirely bad, but it's hard to say when it'll happen. Good luck to Doug Fuller on making that call - he'll be vilified regardless of what he does.

More On State Sales Tax Collections

State sales tax collections are a strong indicator of whether a state is going into a recession or not. This is useful information for lenders since loan default rates are known to correlate with recessions. After my last post on this, Calculated Risk has dug up a useful graphic from a Rockefeller Institute report that gives a heat map for year over year sales tax collections changes.

Green is positive change in collections, and blue is a negative change. There's a lot of blue in there. Presumably, lending to green states would have a below-average risk because the economies are still thumping along and any laid-off workers could find new employment, hopefully in time to pay off their loans.