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.

Prosper Changes Bidding Guidance & Portfolios Too

In addition to the large changes announced yesterday, Prosper swept a few changes in more quietly. Specifically, they tweaked with their portfolio slices and drastically increased the number of bins used for lender bidding guidance.

First, the portfolios. The conservative and balanced portfolios had the loan criteria tweaked. A quick comparison shows that the conservative portfolio had the minimum bid rate increased by 1% for slices 1 - 3 and the balanced portfolio had the minimum bid rate increased by 1% for slices 1 - 2. This tweak looks intended to raise the average ROI for the portfolio.

On the bidding guidance side, Prosper is now using 103 different categories to provide bidding guidance, up from the 67 established back in January. All 103 will be reproduced below for record keeping since Prosper doesn't maintain a history. The bidding guidance is getting sufficiently fine-grained that there will probably be little wiggle between a specific loan's anticipated performance and the nearest bin. Rats. Lenders looking for an edge will need to go searching elsewhere.

Segment	Credit grade	Criteria
1	AA	No automatic funding, loan amount <$5K, <=20% DTI
2	AA	No automatic funding, loan amount <$5K, >=20% DTI
3	AA	No automatic funding, loan amount $5K-$10K, <=20% DTI
4	AA	No automatic funding, loan amount $5K-$10K, 20-40% DTI
5	AA	No automatic funding, loan amount $5K-$10K, >=40% DTI
6	AA	No automatic funding, loan amount $10,001-$15K
7	AA	No automatic funding, loan amount $15,001-$25K, <=20% DTI
8	AA	No automatic funding, loan amount $15,001-$25K, >=20% DTI
9	AA	Automatic Funding Only, loan amount <=$10K, <=20% DTI
10	AA	Automatic Funding Only, loan amount <=$10K, >=20% DTI
11	AA	Automatic Funding Only, loan amount $10,001-$25K
12	AA	Borrowers with no extended credit data
13	A	No automatic funding, loan amount <$5K, 0 inquiries
14	A	No automatic funding, loan amount <$5K, 1+ inquiries, 0 now delinquent
15	A	No automatic funding, loan amount <$5K, 1+ inquiries, 1+ now delinquent
16	A	No automatic funding, loan amount $5K-$7,499, 0 now delinquent, 0 inquiries
17	A	No automatic funding, loan amount $5K-$7,499, 0 now delinquent, 1+ inquiries
18	A	No automatic funding, loan amount $5K-$7,499, 1+ now delinquent
19	A	No automatic funding, loan amount $7,500-$10,000
20	A	No automatic funding, loan amount $10,001-$15,000, <=20% DTI
21	A	No automatic funding, loan amount $10,001-$15,000, >=20% DTI
22	A	No automatic funding, loan amount $15,001-$25,000, <=20% DTI
23	A	No automatic funding, loan amount $15,001-$25,000, 20-40% DTI
24	A	No automatic funding, loan amount $15,001-$25,000, >=40% DTI
25	A	Automatic Funding Only, loan amount <$5K
26	A	Automatic Funding Only, loan amount $5K-$9,999
27	A	Automatic Funding Only, loan amount $10,000-$14,999
28	A	Automatic Funding Only, loan amount $15,000-$25,000
29	A	Borrowers with no extended credit data
30	B	No automatic funding, loan amount <$5K, <=40% DTI, 0-2 inquiries
31	B	No automatic funding, loan amount <$5K, <=40% DTI, 3+ inquiries
32	B	No automatic funding, loan amount <$5K, >=40% DTI
33	B	No automatic funding, loan amount $5K-$10K, <=20% DTI, 0-2 inquiries
34	B	No automatic funding, loan amount $5K-$10K, <=20% DTI, 3+ inquiries
35	B	No automatic funding, loan amount $5K-$10K, 20-40% DTI, 0 now delinquent, 0-2 inquiries
36	B	No automatic funding, loan amount $5K-$10K, 20-40% DTI, 0 now delinquent, 3+ inquiries
37	B	No automatic funding, loan amount $5K-$10K, 20-40% DTI, 1+ now delinquent
38	B	No automatic funding, loan amount $5K-$10K, >=40% DTI
39	B	No automatic funding, loan amount $10,001-$15K, 0 now delinquent
40	B	No automatic funding, loan amount $10,001-$15K, 1+ now delinquent
41	B	No automatic funding, loan amount $15,001-$25K, <=40% DTI, 0-1 inquiries
42	B	No automatic funding, loan amount $15,001-$25K, <=40% DTI, 2+ inquiries
43	B	No automatic funding, loan amount $15,001-$25K, >=40% DTI
44	B	Automatic Funding Only, loan amount <$5K
45	B	Automatic Funding Only, loan amount $5K-$15K, 0-1 inquiries
46	B	Automatic Funding Only, loan amount $5K-$15K, 2+ inquiries
47	B	Automatic Funding Only, loan amount $15,001-$25K
48	B	Borrowers with no extended credit data
49	C	No automatic funding, loan amount <=$5K, <=20% DTI, 0 inquiries
50	C	No automatic funding, loan amount <=$5K, <=20% DTI, 1+ inquiries, 0 now delinquent
51	C	No automatic funding, loan amount <=$5K, <=20% DTI, 1+ inquiries, 1+ now delinquent
52	C	No automatic funding, loan amount <=$5K, 20-40% DTI, 0 inquiries
53	C	No automatic funding, loan amount <=$5K, 20-40% DTI, 1+ inquiries
54	C	No automatic funding, loan amount <=$5K, >=40% DTI
55	C	No automatic funding, loan amount $5,001-$7,499, <=40% DTI, 0-2 now delinquent, 0-1 inquiries
56	C	No automatic funding, loan amount $5,001-$7,499, <=40% DTI, 0-2 now delinquent, 2+ inquiries
57	C	No automatic funding, loan amount $5,001-$7,499, <=40% DTI, 3+ now delinquent
58	C	No automatic funding, loan amount $5,001-$7,499, >=40% DTI
59	C	No automatic funding, loan amount $7.5K-$10K, 0-1 inquiries
60	C	No automatic funding, loan amount $7.5K-$10K, 2-5 inquiries
61	C	No automatic funding, loan amount $7.5K-$10K, 6+ inquiries
62	C	No automatic funding, loan amount $10,001-$15K, 0-4 inquiries
63	C	No automatic funding, loan amount $10,001-$15K, 5+ inquiries
64	C	No automatic funding, loan amount $15,001-$25K
65	C	Automatic Funding Only, loan amount <=$5K, 0 inquiries
66	C	Automatic Funding Only, loan amount <=$5K, 1+ inquiries
67	C	Automatic Funding Only, loan amount $5,001-$7,499
68	C	Automatic Funding Only, loan amount $7.5K-$14,999
69	C	Automatic Funding Only, loan amount $15K-$25K
70	C	Borrowers with no extended credit data
71	D	No automatic funding, loan amount <$3K, 0 now delinquent, 0-1 inquiries
72	D	No automatic funding, loan amount <$3K, 0 now delinquent, 2+ inquiries
73	D	No automatic funding, loan amount <$3K, 1+ now delinquent
74	D	No automatic funding, loan amount $3K-$7,499, 0 now delinquent, 0-2 inquiries
75	D	No automatic funding, loan amount $3K-$7,499, 0 now delinquent, 3+ inquiries
76	D	No automatic funding, loan amount $3K-$7,499, 1-2 now delinquent
77	D	No automatic funding, loan amount $3K-$7,499, 3+ now delinquent
78	D	No automatic funding, loan amount $7.5K-$10K, 0 now delinquent
79	D	No automatic funding, loan amount $7.5K-$10K, 1+ now delinquent
80	D	No automatic funding, loan amount $10,001-$25K
81	D	Automatic Funding Only, loan amount <=$3K
82	D	Automatic Funding Only, loan amount $3,001-$7.5K
83	D	Automatic Funding Only, loan amount $7,501-$25K
84	D	Borrowers with no extended credit data
85	E	No automatic funding, loan amount <$5K, 0 now delinquent
86	E	No automatic funding, loan amount <$5K, 1-2 now delinquent
87	E	No automatic funding, loan amount <$5K, 3+ now delinquent
88	E	No automatic funding, loan amount $5K+
89	E	Automatic funding only, loan amount <$5K, 0 now delinquent
90	E	Automatic funding only, loan amount <$5K, 1-2 now delinquent
91	E	Automatic funding only, loan amount <$5K, 3+ now delinquent
92	E	Automatic funding only, loan amount $5K+
93	E	Borrowers with no extended credit data
94	HR	No automatic funding, loan amount <$3K, 0-1 now delinquent, <=20% DTI
95	HR	No automatic funding, loan amount <$3K, 0-1 now delinquent, >=20% DTI
96	HR	No automatic funding, loan amount <$3K, 2+ now delinquent
97	HR	No automatic funding, loan amount $3K+, 0-2 now delinquent
98	HR	No automatic funding, loan amount $3K+, 3+ now delinquent
99	HR	Automatic funding only, loan amount <$3K, 0-2 now delinquent
100	HR	Automatic funding only, loan amount <$3K, 3+ now delinquent
101	HR	Automatic funding only, loan amount $3K+, 0 now delinquent
102	HR	Automatic funding only, loan amount $3K+, 1+ now delinquent
103	HR	Borrowers with no extended credit data

Update: LoanChimp also has a write-up on this

Simple Receipe For 100% Funded Prosper Loan

As I had previously observed, Prosper seems to have more lenders chasing loans than there are borrowers to take the money for some classes of loans. One such class encompasses just about anything that's inside one of Prosper's standard portfolios. If a borrower wants to get funded, all they need to do is qualify for one of the portfolio slices (I count 21 slices spanning AA - D loans) and choose a starting interest rate above their appropriate slice's minimum bid rate, and they'll be 100% funded.

And this is without all the inconvenience of having to write a description, prepare a budget, have a plan for what to do with the money, or have much of an income. Someone could sign-up, verify their ID, write "I promese to paid it too u back", and they'll be fully funded. The only requirement is to have a sufficient credit score and be able to prove your income, should Prosper challenge the stated income. The second problem can be avoided by claiming 1 dollar a year in income a low income.

This is why I don't use the portfolio plans and why I think the portfolio plans will have degraded performance relative to the predicted performance. Manual bidders won't bid on the outliers who pull the slice's estimated return numbers down. Eventually, the statistics may even out, but it'll take more time, and the current portfolio users will get frustrated in the process. The size of this problem will be the guiding factor for how much of a performance delta can be expected.

Update: ZCommodore has noted that most slices have a DTI requirement, typically DTI <= 40% or DTI <= 70%. Income will have to be slightly more than $1, but $10k - $20k should do nicely. The downside to all this is that, at Prosper Days, Prosper indicated that they're less likely to verify small incomes because they find it very likely to be true.

So Why The Weak February Loan Numbers?

After a strong showing in January, Prosper's monthly loan totals have dropped to about $5.7 $5.9 million. With this disappointing return, I started digging through the loan activity to find some likely culprits. I think Prosper is having problems delivering borrowers. As anyone who's tried to bid in the last month can attest, there's brutal competition in the auctions. It feels like there's lots of money chasing too few loans. Fortunately, there's some statistical backup.

First, Lending Stats tracks membership growth as well as active membership and February was not a good month for finding borrowers. February showed 5.04k active borrowers versus 8.29k in January, and Prosper only added 3.97k new borrowers in February versus 8.01k in January. Those are huge drops in borrower numbers, making me wonder how they managed to hit $5.7 M.

Second, Prosper has emphasized portfolios to lenders, and all evidence is that any loan that fits into a portfolio slice is getting snapped up and fully funded in less than a day. Just looking at the 6 slices in the Balanced portfolio (the Feb 27 version), there is not one loan that meets the portfolio criteria that isn't already 100% funded and at the minimum portfolio interest rate.

Slice 1	Credit grade: AA Debt to income ratio: ≤40% Loan amount: ≤$9,999.99 Automatic funding: Only Now delinquent: 0 delinquent accounts	Loan Search
Slice 2	Credit grade: AA Debt to income ratio: ≤40% Loan amount: $15,000.00+ Automatic funding: Exclude Now delinquent: 0 delinquent accounts Public records: 0 in last 10y Inquiries in last 6m: 0-1 inquiries	Loan Search
Slice 3	Credit grade: A Debt to income ratio: ≤40% Loan amount: $7,500.00-$14,999.99 Automatic funding: Exclude Now delinquent: 0 delinquent accounts Inquiries in last 6m: 0-1 inquiries	Loan Search
Slice 4	Credit grade: B Loan amount: ≤$7,499.99 Automatic funding: Exclude Now delinquent: 0 delinquent accounts Inquiries in last 6m: 0-2 inquiries	Loan Search
Slice 5	Credit grade: C Debt to income ratio: ≤40% Loan amount: ≤$7,499.99 Automatic funding: Exclude Now delinquent: 0-2 delinquent accounts Inquiries in last 6m: 0 inquiries	Loan Search
Slice 6	Credit grade: C Debt to income ratio: ≤40% Loan amount: ≤$7,499.99 Automatic funding: Exclude Now delinquent: 0 delinquent accounts Inquiries in last 6m: 1-2 inquiries	Loan Search

I am concerned that Prosper's recent hike in the origination fees pushed away otherwise solid borrowers. Prosper's income is up, but it's hard going for their lenders. Therefore, Prosper's March mission, if they choose to accept it, is to bring in the borrowers.

Note: There have been some hiccups in the Prosper XML data which have probably prevented Lending Stats from updating it's Loan Funded statistics. Their loan amount numbers are a few days old. The same could be said about their active borrowers numbers, but it would take a statistically improbable rush of new borrowers to change my conclusions.

Update: Prosper's final Feb numbers came in at $5.9M. Better than my original swag of $5.7M, but well short of January.

Interesting Portfolio Date Range

Prosper had an interesting disclaimer on their estimated loss information associated with the portfolio plans.

1 Estimated average annualized loss rate based on the historical performance of Prosper loans for borrowers with similar characteristics, originated between Oct-31-2007 and Oct-31-2007, measured as of Nov-30-2007. Actual performance may differ from estimated performance due to many reasons, for example, worsening economic conditions.

It's either a typo, or that was a great lending day for them. I'm going with it being a typo (2006 - 2007?), but it provided some entertainment for the morning. I need to get out more.

Update: Wow. That didn't take long to get fixed. You'd think Prosper read this blog or something

¹ Estimated average annualized loss rate based on the historical performance of Prosper loans for borrowers with similar characteristics, originated between Jun-01-2006 and Oct-31-2007, measured as of Nov-30-2007.

Chimp's Take On Portfolios and Guidance

LoanChimp has taken to writing about Prosper's statistics behind the portfolios and lender bidding guidance. They're good reads and worth understanding if you're interested in more than push-button lending. This is not to say that Prosper's advances here are bad - far from it. Generating statistics from actual loan data is a huge improvement over the Experian data. The problem is that this data is limited. Prosper has only been loaning for 2 years and is heavily weighted toward loans in the first year. Since Prosper issues 3 year loans, some heavy extrapolation is required to fill in the gaps. It is important to consider the limitations on the statistics you're working with.

First, LC looked at how the bidding guidance has changed over time:

Based on some very rough analysis *, the performance of the original credit segments simply fell apart since their creation. For example, the best performing segment, #1 (AA No Automatic Funding, 0-1 inquiries) went from a projected loss ** of -0.44% to -1.42%. Ouch!

I applaud Prosper for creating the bidding guidance and give them much credit for revising the guidance recently. This kind of stuff is really great for us lenders. But as we’ll see shortly, the latest guidance is falling apart too (although not as badly).

And second, he's turning his attention to the portfolio plans:

At the moment, there is no way for a Prosper lender to track the performance of the Portfolio Plans (PP) unless the lender is actually using them. One could use the performance page with criteria from the PP credit segments, but there is no way to filter out by interest rate - the results would include loans where the PP's were bid off.

Fortunately for us, a relatively new lender stated on the Prosper forum * that he created his/her entire lending portfolio with PP's, a combination of all four. I present to you: JohnSmith2k

Digging For Gold Around Prosper's Portfolios

This was a guest post on Prosper's new blog.

When Prosper created their portfolio plans, they added a tool to help new lenders enter the marketplace. It assembles a portfolio of loans whose only objective is to track the average loan return in the specific market slices, much like index funds have done with the stock market. Want to play it conservative, you buy a S&P 500 Index. Feeling aggressive? Try the EAEF Foreign Stock Index. If a lender is interested in tracking the loan market, new lenders can establish portfolios without the learning curve of manual bidding.

Those of us who take a managed fund approach to our lending by using manual bids will have to be careful because the portfolio plans will change the bidding environment. If the portfolios are widely adopted, we should expect loans within the portfolio's umbrella to be in higher demand. Higher demand for certain loans will result in lower interest rates for those loans, lowering the possible return on investment. A similar effect has been found when the S&P 500 adds a new stock to the portfolio.

At the same time, it creates opportunities to find nuggets that are outside of Prosper's four portfolio plans. This is risky territory (otherwise it would be inside the portfolios), but risk is a problem for lenders when they're not paid appropriately to take on the risk. Careful efforts to mitigate risk can drive down the net defaults and appropriate bidding can compensate for the remaining risk. For example, non-autofunded C grade loans with 0 delinquencies and 2 to 3 inquiries are more dangerous than those with the balanced portfolio preferred 0 or 1 inquiries (-9.05% vs. -5.02% net defaults respectively). If you take those 2 to 3 inquiry loans and further constrain bidding based on other risk factors like DTI and loan amount (DTI less than 20%, amount less than $10k), it's possible to find listings that have better net defaults (-3.97%) than those found in the portfolio criteria.

This was just one of many opportunities. Prosper doesn't add these more finely tailored criteria to the portfolios because there aren't enough listings to support the volume of loans portfolios demand. For individuals willing to dig deep around the periphery however, it's a veritable gold mine.

Update: I'm pretty sure that the "C" credit grade standing order criteria shifted slightly since I wrote this. When I did my research, Prosper did not have DTI < 70% and the employment status criteria in the standing order. Why, oh why can't I wait until the last minute like all the other procrastinators?

Hiccup In Portfolio ROI Estimation

Prosper refreshed the statistics for the bidding and portfolio ROI in the last day or so. The new statistics are for loans underwritten between June 1, 2006 and Sept 30, 2007 as viewed from Oct 31, 2007. Prosper Andrew has suggested that it takes several days for all of the ACH transactions to settle out in the statistics, which I'm guessing is why they don't use Nov 30 as the observation date.

This a good thing. It's an indication that Prosper is working to keep the statistics relevant and up to date. The one downside for this update is that it hiccuped on the conservative portfolio:

It looks like one of the standing orders that make up the portfolio had a hiccup and it polluted the calculation.

Update: Appears fixed as of 1:30 PM CST