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.

Additional Details On Prosper's Default Sale

One of the advantages of tracking how loans age is that some interesting tid-bits appear. Prosper finished a just-in-time-for-tax-year debt sale at the end of December. While researching the loan aging during December, I extracted a few details about the debt sale.

Of the 702 loans that transitioned to default from Dec 1, 2007 to January 1, 2008, 672 were 4+ months late and 30 were 3 months late on Dec 1. What's more curious is that 142 loans that were "4+ Months Late" on Dec 1 did not go to debt sale. Now, we know from Prosper that there are 68 loans active in their legal collections effort. What, then, has held up the sale of the other 74 loans? This makes me wonder if there is some detail or factor that reduces the odds of debt sale that may be very relevant to lenders. Time for some investigation.

Latest Debt Sale

With the tax season upon us, Prosper is finishing their last debt sale of the year just in time for 2007 tax year write-offs (because nothing makes a tax filer more cranky than deferring write-offs while having to pay taxes on the associated income).

We completed a debt sale this week which will be evident as of today on the account pages of lenders who own loans that were sold.

When a loan is sold, it is marked as defaulted on the Prosper site and in the performance metrics. If one of your loans was sold you received or will receive an email notifying you of the default and indicating the sale amount. Sale proceeds will be transferred directly into your Prosper account a few days after you receive your email notification.

Here are the details of the sale:
• Eligible loans were more than 122 days past due as of December 4th, 2007, provided the loan was not part of any bankruptcy filing.
• 701 loans were sold.
• Price range: 2.8% - 14.5% (as % of principal).

Pricing is determined solely by the debt buyer and can vary from sale to sale. Several factors were used to determine pricing in this sale, with homeownership, credit grade and state being primary reasons.

The average rates broke down as follows:

Category	Average Recovery Rate
Homeowners	12.5%
No Home AA, A	9.6%
No Home B, C, D	9.1%
No Home E, HR	7.3%
No Home NC	4.3%
All Loans In Texas (with the ex's)	3.5%

The previous debt sale was home owner agnostic, while this one paid top dollar (12.5% average) for home owners. The real kick in the pants happened in Texas. On the Prosper blog, RateLadder commented:

The debt collection law in Texas is very debtor-friendly. For example, certain post-judgment remedies are not available there, such as wage garnishment, and in Texas the homestead exemption is not limited as in most other states. Texas courts often rule in favor of consumers in debt collection cases. Therefore, Texas debts sell for a fraction of what debts from other states do.