Thursday, May 22, 2008 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.

1 comment:

James Jr. said...

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