Weekly Chimp Movie - Dances With Wolves

"Ta-what?"

I'm watching you, Portfolio Plans.

I'm watching you, Portfolio Plans.

After the latest revision, where the Conservative Portfolio Plan estimates a 5.10% return, I'm watching you.



Andrew was cool enough to post an update to the Prosper Official Blog Friday which outlines a new feature to Portfolio Plans (PP's).

When an update is made to the Portfolio Plans, Prosper lenders using these Portfolio Plans are offered the opportunity to either update their PP's to the latest criteria and bid rates or to ignore them and use the existing criteria and bid rates of the old and outdated plan they originally signed up for.


How many Portfolio Plan lenders using the Conservative Plan be willing to lend at an estimated return of 5.10% instead of the 7.34% offered in the previous revision?


It should be relatively easy to track.

In the past, the Portfolio Plans were so widely accepted that any loan falling within the criteria of the plan would be bid down to the lowest bidding rate offered by the plans because so many Prosper lenders were participating in them.

Now, if a loan is found that is funded, yet the going interest rate is not that of the minimum bid rate of the latest PP revision, but is that of an older version of the Portfolio Plans, then I would say that most PP lenders did not accept the change, and are still letting PP's bid at the old rates.

That is, if this happens, Prosper PP lenders did not accept this recent change of reduced minimum bid rates.


The revised rates for the Conservative PP are just too low to accommodate the risk involved in P2P lending on Prosper, in my honest opinion.

Waaayy too low.

Portfolio Plans Changed Dramatically

Prosper’s Portfolio Plans changed dramatically last night.

I haven’t had the time to really get into these yet, but the minimum bid rates on some of these segments are ridiculously low.

Here is the Conservative Plan’s minimum bid rates: (criteria can be found on Prosper.com)

Slice 1:
Minimum bid rate: 5.90%
Estimated loss1: -0.22%
Adjustment2: 0.00%
Servicing fee: -1.00%
Estimated return3: 4.68%

Slice 2:
Minimum bid rate: 7.20%
Estimated loss1: -1.05%
Adjustment2: -0.05%
Servicing fee: -1.00%
Estimated return3: 5.10%

Slice 3:
Minimum bid rate: 7.70%
Estimated loss1: -1.41%
Adjustment2: -0.04%
Servicing fee: -1.00%
Estimated return3: 5.25%

Slice 4:
Minimum bid rate: 8.10%
Estimated loss1: -1.66%
Adjustment2: -0.02%
Servicing fee: -1.00%
Estimated return3: 5.42%


The estimated return for the Conservative Portfolio Plan is 5.10%. Seriously, you gotta be kidding me.

Some of the minimum bid rates in other Plans are wayyy low as well. The conservative manual bidder is going to have a rough go at finding many lending opportunities. Once I have more time to look at the new changes more closely, I’ll see if there’s even any hope left for me. My initial thought is that my Prosper lending career / hobby is over…


I wonder if all those lenders that are signed up for these plans realize that the PP criteria and interest rates have been changed so dramatically?

Imagine the poor soul signing up for the Conservative plan yesterday with an estimated return of 7.01% only to have this changed last night to an estimated return of 5.10%, and not know it.

I'd be furious...

ETA: It appears Prosper has updated the plans so changes to Portfolio Plans may be updated or ignored by the lender, as detailed here by Andrew. Smart move. ;)

Latest ROI Results

To my utmost surprise, my only “Late” loan made a payment (wahoo!), so at the moment I have no “Lates”. Of course there are plenty of loans one month late or worse, but without any “Late” loan statuses, I know that at least for 15 or so days there won’t be any more loans falling off the cliff into Collection Agency territory.

I went through and recalculated my Prosper ROI using Excel’s XIRR function today. Here are the results:

ROI: 7.90%

Average Loan Age: 409 days

Total Account value: $27,311

Total Loan value of late Loans: $1,121

When I use the XIRR function, I count all loans one month late or worse, and subtract that from my total account value (giving them $0 value). There are several bankruptcies in there (BK) so it’s fair. Plus, I haven’t had much luck getting any of these baddies to cure. Booo Collection Agency!

I also use the “Loan Value” figure from the Loan Detail page instead of the remaining Principal because there is a bunch of accrued interest in there. Since I’m not counting on these deadbeats to pay me back, I shouldn’t expect to see the accrued interest either.

Here is the Loan Value and credit grade of each of my late loans:

$80 – AA (BK)
$49 – D (BK)
$74 – C (BK)
$89 – A (BK)
$50 – HR
$50 – B
$118 – AA
$129 – C (BK)
$140 – D
$32 – B (BK)
$34 – AA
$60 – D
$62 – D
$32 – C
$56 – C
$64 – B

Even AA grade borrowers can be deadbeats and not pay back their Prosper loan. Booo deadbeats!

Bidding Guidance Variation Explained?

In my last post, I looked at the differences in loss figures shown in the Bidding Guidance and the Performance Page from which these figures are based on. (here) Andrew from Prosper dropped in to explain what might be happening.


“Andrew from Prosper here. What you're seeing is expected – on some of the credit grade segments, we manually adjust the default rate up or down. We do this in one of three cases: 1) if the segment is very thin, and the performance page doesn't provide any data at all, 2) if the segment is thin, and the performance page uses default roll rates, but we think the actual roll rates will be higher or lower, or 3) in the case of E and HR borrowers, where the credit grade definition changed in Feb 2007.”


But I have to say, I’m still a little confused by the process which Prosper derives its Bidding Guidance historical loss figures. I decided to take a closer look at non-auto funding AA grade loans.

In Andrew’s three cases, case 1 and case 3 do not apply (there is PP data and these are AA loans). So we’re left with case 2: “if the segment is thin, and the performance page uses default roll rates, but we think the actual roll rates will be higher or lower”

Here is a table of AA grade non-auto funding credit slices. It shows the number of historical loans in each slice, the number of late and defaulted loans, and the loss projection (net default + adjustment) shown on both the Performance Page and the Bidding Guidance.



As you can see, yes, these slices are very thin. So it appears that Prosper is tweaking the roll rate assumptions when calculating the figures used in the Bidding Guidance. What is the process for tweaking? I have no idea.



At the end of the day, what we are seeing is slightly higher (except a few cases where the increase is substantial) loss projections displayed in the Bidding Guidance. This difference falls in the lender’s favor, so I guess it’s a good thing.

The only problem I have is that I cannot recreate these figures even though the criteria are clearly spelled out at the bottom of the Bidding Guidance page. I recommend that Prosper revise the first footnote to more properly define where these numbers are coming from:

"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 Jan-31-2008, measured as of Mar-10-2008, and tweaked a little based on intuition, our magic 8 ball, and input from our credit consultants Carnac Magnificent Consulting, LLC. Actual performance may differ from estimated performance due to many reasons, for example, worsening economic conditions."

Discrepancies Between Bidding Guidance and Performance Page

Something strange is going on with Prosper’s Credit Segment default projections and the Bidding Guidance which utilizes them.

Prosper clearly defines that estimated losses are created from very specific data:

“Estimated average annualized loss rate based on the historical performance of Prosper loans for borrowers with similar characteristics, originated between Jun-01-2006 and Jan-31-2008, measured as of Mar-10-2008. Actual performance may differ from estimated performance due to many reasons, for example, worsening economic conditions.”


When the latest Credit Segments were released last Monday (4/14/08), I naturally saved a copy, and then proceeded to recreate each segment on Prosper’s Performance Page so that I could generate the historical loss rate for each slice. * On a side note, I wish Prosper would show the loss rate in the Credit Segment table provided on the website. This would save me a TON of time. *

Prosper’s Bidding Guidance uses the loss rates for each Credit Segment to display to the lender on the bidding page. For example:



But when I recreate this specific Credit Segment on Prosper’s Performance Page, I get a much different result:

Prosper is displaying a historical default rate of 4.98% (net defaults + adjustment), but I can only recreate a total loss of 2.84%, nearly half of what is displayed.

This particular listing is of interest to me because the borrower is the husband of the forum regular mhs505. I had the chance to meet mhs505 at Prosper Days 08, and would feel comfortable bidding on this listing. Actually, I already have, and might just bid more.

Unfortunately for those that do not know this borrower, all they will see is the projected loss provided by Prosper of 4.98%. This projected loss is more than 2% higher than what I believe should be displayed. Of course, this could impact the final rate this borrower sees by as much as 2%. Ouch!


But wait, there’s more.

I took it upon myself to (randomly) check some other default projections shown on the Bidding Guidance and compare them to the default projections I recreated on the Performance Page. Some match exactly, but often there is a difference, although not as drastic as the case above.

In the list below, the first number is the Credit Segment (#), the next is number shown on the Bidding Guidance page (BG) , and the third is what is shown on Prosper’s Performance page (PP), using the appropriate date ranges:


#...............BG.................PP
01...........0.19%...........0.19%
03........... 1.53%...........1.29%
06........... 4.98%........... 2.85% -- example shown above
07........... 5.74%........... 4.50%
13........... 0.61%........... 0.58%
16........... 1.25%........... 1.25%
19........... 4.39%........... 3.85%
20........... 5.24%........... 6.53% -- the only one I found that was less
22........... 4.47%........... 4.47%
30........... 2.80%........... 2.80%
33........... 3.27%........... 3.05%
34........... 11.21%........... 11.21%
39........... 7.56%........... 7.56%
50........... 4.38%........... 4.38%
51........... 7.49%........... 7.49%
60........... 17.95%........... 17.95%
71........... 5.57%........... 5.57%
74........... 6.61%........... 6.61%
75........... 15.22%........... 15.22%

It seems from the quick sample that I took that there were no problems in the C and D grade loans, 1 problem in the B grade, and 3 problems in each the A and AA grade.

Most of the variation is pretty small. I’ve noticed these discrepancies in the past, but because they are so small I’ve never put much weight on the differences. Plus it seems there has always been some slight differences shown on the performance page depending on what day you use it and at what phase the moon is in. If that was the case here, I would expect all the figures to show some variation, but that is not the case.

While I hope I’m not screwing something up on the Performance Page because then I’ll feel really dumb, I kind of hope that I am. (It’s pretty easy to make mistakes on the Performance Page, as I had to make corrections to a recent blog post regarding some results.) But I’ve checked these several times and have a high level of confidence on the figures shown above. Please correct me if I’m wrong.


But, if I have not made a mistake, then Prosper has some explaining to do (especially to those AA borrowers that fall in Credit Segment #6 - 21 listings, at the moment) Why are there differences between what is shown on the Bidding Guidance page and the Performance Page?

Weekend Chimp Movie - Alien

Could You Spare a Dollar?

I’ve been perusing through the recently updated Bidding Guidance from Prosper (BG dated 4/14/08), and something jumped out at me.

The loan size ranges for each credit segment are all a bit, um, wonky. Maybe I should be a little more specific. The upper limit of the loan size ranges are wonky.

For example, the lowest loan size range for each credit grade is “less than $5,000” (or $0 - $4,999) ; except the C grade, which is “less than or equal to $5,000” ($0 - $5,000).

Also, when the upper limit is $10k, it is usually “less than $10,000” (up to and including $9,999, but not $10,000). Except segments 9 & 10 (AA) and segment 26 (A). These three are up to and including $10,000.

While there are these few quirks, there does seem to be at least a little consistency when selecting the upper loan size limit. For loan sizes less than $10,000, the upper limit is a “less than” figure (i.e. $4,999, $7,499), and sizes $10k and up, the upper limit is a “less than or equal to” figure (i.e. $10,000, $15,000).


So, why do I think this matters? Do I really have that much free time on my hands?


Let’s see how much difference a dollar makes.

(Using Prosper’s performance page and the criteria for this version of the Bidding Guidance, that is Loans originating between 6/1/06 – 1/31/08, observed on 3/10/08. Default rates shown below include the sum of the net default and adjustment figures from the ROI estimate table.)


Segment #9 – EDIT (I screwed this one up, nevermind. I'll look at it closer later.)


Segment #16 – A, No automatic funding, loan amount $5,000-$7,499, 0 now delinquent, 0 inquiries

Historical Default Rate: 1.25%

Instead use upper limit of $7,500 and recalculate:

Historical Default Rate: 2.46%


Segment #30 – B, No automatic funding, loan amount less than $5K (0 - $4,999), less than or equal to 40% DTI, 0-2 inquiries

Historical Default Rate: 2.80%

Instead use upper limit of $5,000 and recalculate:

Historical Default Rate: 4.25%


Segment #71 – D, No automatic funding, loan amount less than $3K (0 - $2,999), 0 now delinquent, 0-1 inquiries

Historical Default Rate: 5.57%

Instead use upper limit of $3,000 and recalculate:

Historical Default Rate: 11.52%

(those $3000 D loans in this slice must be killer)


See, a dollar really does make a difference!


Now, I should add that there are some cases where the extra dollar hurts the performance of the credit segment.

For example, take a look at the C grade, non-autofunding segments 49-54. These don’t follow the pattern, as the upper loan size limit is “less than or equal to” $5,000. (all other segments show the range 0 - $4,999)

Just by adding in that extra dollar, the performance of 5 of the 6 slices is actually worse than it would be if the slices were 0 - $4,999. I won’t list them here, check it out yourself.

(edited out while I check on something)


So, when bidding on a loan that is on the cusp of a credit segment, do a little extra due diligence. And give me a dollar…


* - “less than” signs don’t do well in blogger for some reason, otherwise I would use them…

Prosper Bidding Guidance Changes 4-14-08

On Monday there was another major update to Prosper’s Bidding Guidance (BG). The most significant change is that the BG went from 67 to 103 credit segments. Wow!

Credit grades were sliced even further than before based on loan request size. Here is a summary:

(the following are for credit grades AA-D, non-autofund listings only)

AA – From 4 to now 8 segments:

Loan size segments were:
$0 - $9,999
$10,000+

Now:
$0 - $4,999
$5,000 - $10,000
$10,001 - $15,000
$15,001+


A – From 5 to now 12 segments:

Loan size segments were:
$0 - $7,499
$7,500+

Now:
$0 - $4,999
$5,000 - $7,499
$7,500 - $10,000
$10,001 - $15,000
$15,001+


B – From 6 to now 14 segments:

Loan size segments were:
$0 - $7,499
$7,500+

Now:
$0 - $4,999
$5,000 - $10,000
$10,001 - $15,000
$15,001+


C – From 6 to now 16 segments:

Loan size segments were:
$0 - $7,499
$7,500+

Now:
$0 - $5,000
$5,001 - $7,499
$7,500 - $10,000
$10,001 - $15,000
$15,001+


D – From 4 to now 10 segments:

Loan size segments were:
$0 - $9,999
$10,000+

Now:
$0 - $2,999
$3,000 - $7,499
$7,500 - $10,000
$10,001+


In our time on Prosper before the Bidding Guidance was launched in October 07 *, the Experian default rates provided to us were based on credit grade only (and for loans with less than 20% DTI). Unfortunately, many lenders were under the impression that the default probability for each loan was the same regardless of loan size. As a result, too many loans funded that were too big for the borrower to pay back.

To see the effect the Bidding Guidance is having by segmenting risk into loan size slices, take a look at this month’s Market Survey. In March 2007, the average loan size was $6,935, while last month, March 2008, the average loan size was $6,536.

Ok, it’s not a huge drop, but it’s significant since the makeup of the “average” loan has also changed. In March 07, 29% were considered Prime loans, while 14% were considered Sub-Prime loans.

Here in March 08, a full 39% of loans are Prime, while only 5% are considered Sub-Prime. So, while the average creditworthiness of borrowers has increased over the past year, the average loan size has decreased. We have the Bidding Guidance to thank for that.


Before LendingClub shut down, I had briefly joined to check them out. The one thing I really liked about the way LendingClub set interest rates is that loan size had an automatic affect on interest rate (LendingClub set the rates based on a number of criteria. There was no auction like Prosper.) This was going to be one of the many points I planned on blogging about regarding the differences between LendingClub and Prosper. But then LendingClub had to go into it’s “quiet period”. They have no idea how much time they saved me… :-)

This recent change to the Bidding Guidance is a great improvement over the very narrow loan size ranges offered before by the Bidding Guidance (and is light years ahead of where we were prior to the BG). By slicing up each credit grade by various loan size ranges, the Prosper lender can now clearly see how much impact loan size has on default probability. Of course it’s not the only factor, but it’s still very important.

Next, we'll speculate on some of the interesting loan size ranges selected for this Bidding Guidance revision.



* I should note that when the Bidding Guidance was introduced in October 2007, there was no segmentation by loan size. Loan size was not introduced into the BG segments until January 2008.

Lending Presentation Series on Pause

After a much needed blogging break last week, I'm back.

At the moment, I'm in the middle of my PD08 Lending Presentation series, but I'm gonna have to put that on hold while I post about some other stuff.

Have no fear. To view all the presentation posts together, just view the tag "Lending Presentation", or click here...

*enter chirping crickets*

March 08 Warm n Fuzzy Index

March 08 Warm n Fuzzy Index:
54% - 38/70
(Last months reading: 54%)


7/10 - Personal Performance: Remains unchanged. 7.5% ROI using Excel's XIRR function counting all 1+ month late loans as $0

6/10 - Peer Performance: No Change.

6/10 - Prosper Management: No Change.

8/10 - Platform Improvement: No Changes.

2/10 - Listing Selection/Volume: Up one point. Back up to normal levels, about 2200-2500 listings. Still, very poor selection.

2/10 - External Influences: Down 1 point. The economy sucks. I would make this a “1”, but I’ll reserve that for worst cases.

7/10 - Viability Forecast: No Change.

Summary: Meh. After a flurry of activity since Prosper Days 08 in February, March was pretty boring. Not much changed. April, however, is shaping up to be very interesting…

See you next month!

Past Index Readings:
54% - February 2008
46% - January 2008
43% - December 2007
50% - November 2007
57% - October 2007
54% - September 2007

What is the Warm n Fuzzy Index?

Weekly Chimp Movie - Jerry Mcguire

"Show me the monkey!"

Success is possible.

Quick Chimp Tip for the New Lender # 12
(part 14 of my Prosper Lending Presentation)

Diving head first into Prosper Lending without doing your own due diligence is like cliff diving without checking out the water below first. Prosper is, after all, only two years old. The data is young. The data is thin.

Relying on a numbers only approach could be dangerous if you don’t know what you’re doing or don’t know where those numbers came from. Even a person with good credit could succumb to the temptation of rescuing their online girlfriend from a Nigerian hospital.

Relying only on a descriptive/interpretive approach (of listing descriptions) could also be dangerous if you don’t know what you’re doing. People lie. A lot of people lie. You’ve got to train yourself to spot and avoid the red flags.

That’s why I prefer a mixed approach – a little of the numbers and a little of the horse’s mouth (descriptions straight from the borrower). Both of these need to jive together and make sense. Still, you need to learn what the heck to do.

If Prosper lending was easy, every Prosper lender would be making great returns. Unfortunately that’s not the case. Go to Eric’s, and in the filter show only lenders with average loan ages greater than 300 days. Ouch.

If you’re serious about Prosper lending, take the time to do your homework. Chances are, you’ll be well rewarded for your effort.

It is possible to do well on Prosper. You’ve just got to put in the time to educate yourself and understand the Prosper marketplace.

Learn From Your Mistakes

Quick Chimp Tip for the New Lender # 11
(part 13 of my Prosper Lending Presentation)

Instead of getting upset over late loans, the best thing you can do is analyze the late loan and learn how to avoid similar loans in the future.

Sure, you can always go to Eric's cool website to look up late loans and learn from those, but when you're on a loan that goes late and have real money at stake, the lessons you learn seem to have a much bigger impact.

However, I do not recommend bidding on junk loans to accelerate your learning experience...

Instead, Take a Deep Breath

Quick Chimp Tip for the New Lender # 10
(part 12 of my Prosper Lending Presentation)

Instead of getting upset over late loans, just sit back, take a deep breath, and relax.

Remember, there isn't anything you can do about it anyway. Don't let a late loan spoil your day...

Don’t get Mad

Quick Chimp Tip for the New Lender # 9
(part 11 of my Prosper Lending Presentation)

When your loans start going late, don’t get mad. There’s really not much you can do about it anyway.

You could yell and scream like the loan chimp you are, but that doesn’t result in anything but a broken monitor and high blood pressure...

Loans Really do go Late

Quick Chimp Tip for the New Lender # 8
(part 10 of my Prosper Lending Presentation)

So you’re relatively new to Prosper and have been happily bidding away. You’ve been careful about the loans you’ve selected, and you’re quietly cheering on each one of your borrowers; like that nice family with the cute baby, the pretty girl that is about to graduate from college, and that guy that wants to refinish his basement.

As those dancing daggers appear and clear on your loans as the first and second payments are processed, you feel great. You’ve helped random people on the internet and made a little money to boot. Life is good. But then…

Even with the best lending strategy, some loans really do go late and default. Don’t be surprised when they do…

Quick Chimp Tip for the New Lender – 6 & 7

(part 9 of my Prosper Lending Presentation)

#6 – Ask Questions…

Many times, there are some holes in the information we receive about a listing. Sometimes, what the borrower states in the Listing Description isn’t entirely clear and needs clarification. Also, while we’re given quite a bit of credit detail about the borrower, it’s still not a full blown credit report. Sometimes the numbers just don’t make sense.

Ask the borrower a question! It’s super easy. Just be wary that the borrower can just tell you what you want to hear. And if the borrower doesn’t answer your question? It’s easy to just move on to the next listing.

Prosper’s Q & A feature is valuable tool, so use it…



#7 – …but be Nice!

Don’t be an ass when you ask borrowers questions…