Wednesday, March 31, 2010

This blog has moved

This blog is now located at
You will be automatically redirected in 30 seconds, or you may click here.

For feed subscribers, please update your feed subscriptions to

Read more!

Thursday, August 17, 2006

Improving groups, first in a series of off the cuff rants

Ah, group rewards -- the source of mucho controversy on Prosper forums. Some randomly selected thoughts on the matter:

A)I agree that sourcing borrowers not on prosper, deserves some sort of compensation. My next idea to push will be asking prosper to separate referral fees, which go to the GL, or whoever successfully refers a borrower to prosper who then gets funded -- from group rewards as they exist today.

in other words, pretend that Hi_Max sources a borrower from off prosper. the borrower hates his group, joins fanafi, gets funded. Hi_Max will at that point in time, get a "referral bonus," just as fanafi will get the current type of group leader rewards.

This furthermore allows for increased specialization, and thus, efficiency -- after all, one can refer lots of people to prosper, and get referral fees -- why bother requiring such people to be group leaders? Thus, affiliate agents recruit for referral fees, and group leaders can concentrate on leading groups -- or if they choose, they can still go for referrals as well.

After all, if one wants referral fees, one has to roughly proxy them by creating a standard non-100% shared group, and then invite friends/craigslisters/people at work to your group, and get them funded -- the referral and GL functions are inseparable.

B)basically, as a simple economics problem, group fee effects on borrowers and lenders have to do w/elasticity of borrower demand vs lender demand for loans -- to the degree that it is a borrowers market, borrowers can take the otherwise GL fee'd slive and set a lower rate, and still get lenders to bid on it. (At present, I'd argue that it is a borrower's market if holding borrower quality constant)

in other words, econ 101 says in an efficient market, imposing a 50 cent tax on widgets on sellers vs on buyers, has the same net economic effect on all parties in the end. The person who bears the brunt of it is the person w/least flexibility re: selling or buying the product, not the person who is technically targeted.

a simple to understand example at the extremes (for simple but middle of the road egs, google demand elasticity, tax, etc...

as always, making unrealistically idealized econ assumptions.

say diabetics all have decent amounts of money in our economy, and REALLY value insulin. if the government places a tax on sellers of insulin, rather than buyers, the sellers need only raise the price of their supplied insulin by almost the amount of the tax to offset their losses -- diabetics will still pay nonetheless.

Why lenders boycott certain groups:

C)Some lenders feel that for the same reasons that they bid on social loans for below-market rates, they should boycott UNJUSTIFIABLY high fee groups -- that is, not because the fees exist, but because those groups are demonstrably not value-additive -- or even value-subtractive, or have in the past been proven to lie to get borrowers to join their group. (these lenders are happy to bid on certain fee-charging groups, in other words.)

D)Other big lenders feel that by reducing the future prominence of certain groups by not bidding on their members (groups that don't add value/charge really high fees), offsets the occasional loans that are still worth it today after return adjustment for fees today. This is not as silly as it sounds -- if I'm unable to place as much $'s today in Prosper as I want because borrowers are getting bid down too far (shortage of good borrowers, surplus of lenders), but anticipate that a year from now, I could/would put 10x what I invest today into prosper, shifting the balance of power away from cruddy groups makes sense -- and some groups seem to have responded to this type of pressure (or possibly shifted their rewards to confuse borrowers, or what have you).

Read more!

Thursday, July 27, 2006

What an X% default rate should mean to you, part 5

Excerpted from my full post:

One vital thing that people still seem to fail to consider when it comes to lower credit grade loans (this principle is applicable to other grades, but is less significant):

our default data on HR's, like every other credit grade, comes from new bank card products over a 2 year period. thus, in addition to all the other issues to be considered, such as the mortality curve for loans (that is, where defaults tend to occur)...

the default numbers apply to borrowers of that credit grade who were approved by conventional card issuers for bank card products.

(this is less significant for higher grades, as it is much more likely that the pool of people applying in a given credit grade, is close to the pool of people who are approved for loans in that credit grade. That is, w/the exception of AA's or B's who get far larger loans via prosper than they could via traditional routes, most AA's or B's who get funded on prosper could have, in theory, gotten funded traditionally -- and thus fall within the loans considered for Experian defaults.)

in other words, if every single HR borrower were to be funded, defaults (should)/would be far worse than 19.1%. The question remains -- are we funding more aggressively or less aggressively than traditional issuers, and if more, how much of an offset is there from all the miscellaneous factors that have been brought up thus far?

(I use HR's because the credit grade is open-ended on the lower end -- and this is why i think one of the best improvements would be to further bucket the HR grade, even if defaults for subbuckets are unavailable.)

Read more!

Thursday, July 20, 2006

My take on Prosper's newest set of improvements

see Announcement thread:


(though, the old link to the top 10 still works.... :P)

my personal opinion on ranking these improvements, roughly descending order:


Reporting loan payments to Experian
Borrowers who track their credit closely may have noted that Prosper doesn’t yet show up on their credit report as a tradeline. Starting in the next week or so, we will start reporting all loan repayments (and lack thereof) to Experian. This is an important step in helping Prosper borrowers improve their credit scores with the major credit reporting agencies.
Better interest rate guidance for borrowers
Borrowers will now be given minimum, maximum, and average interest rates for borrowers like themselves when they create their listing. Now there will be no excuse for an HR borrower who creates a listing for $25,000 at 5% interest – this borrower will now see a clear indication at the point that he enters his interest rate that it is way below average.
Email preferences
Now you can choose which Prosper email you actually want to receive in your email inbox and your Prosper “Messages” box. You can even choose to only receive messages from members with a role (borrower, lender, GL), or only members of a specific role. A small caveat: many messages are mandatory and cannot be shut off, but if you experience an email that should not have been sent (or an email that should have that wasn't), please let us know and we’ll get it fixed. Thanks for your help!
Improved messages interface
Now you can select multiple messages at once and mark them as read or delete them in bulk. You can also filter your messages by those received within the past day, week, month, or ever.

I eagerly await the opportunity to avoid a 4 figure count of messages, and trim my mailbox to 2 digits smile.gif

Interesting, possibly useful in reassuring borrowers and GL's:

Funding forecast
The new funding forecast graph (found on every listing page) will let you know the likelihood that a loan will be fully funded. It’s a simple linear extrapolation of existing bids over time, but should help lenders estimate funding and decide whether or not to participate earlier in the bidding process.

Needed for completeness/desired:

Group leader statements
Now group leaders will get their own monthly statements, outlining the details of their group’s loans and corresponding group rewards (if applicable).

Borrowers with listings and loans can start groups
This is really just a bug fix, but now borrowers who have active loans can start their own groups on the site. We have heard from a lot of borrowers who had a great experience borrowing, but were blocked from starting a new group because it would have required switching their membership to the “Group leaders group”. Now that that group is no longer in the picture, borrowers can start a new group at any time.

Bad (only the part where the cap wasn't bumped):
Late fee and electronic funds transfer discount changes
We have changed the fee for late payments generally from “the lesser of 5% or $15” to “the greater of 5% or $15” of the unpaid installment amount, contingent on state-by-state regulations. Additionally, the electronic funds transfer discount for borrowers has been raised from 0.25% to 1.00%. This also effectively lowers the maximum interest rate available to lenders from 28.75% to 28% (in states where there is no rate cap). These changes only apply to listings created after the update.

My issue is with not raising the rate cap to deal w/the additional loss of interest rate. Prosper Jon, what you're saying is only half-true in an economic sense.

QUOTE (Prosper Jon @ Jul-20-2006 12:14 PM)

While the increase to 1% does effectively lower the max lender rate you might see on listings, its not a charge paid by the lenders so you shouldn't need to adjust your bids to maintain your desired ROI.

Most obviously, ROI (return on investment) is a handy heuristic, but not very useful in the absence of other info. For instance, your ROI on buying a lottery ticket from a badly run lottery program might be 50% -- but that's based on the one in a gazillion chance that you win! In comparison, a 8% ROI (expected return) derived from a relatively "safe" investment -- eg, the stock market, over long periods of time, may be rationally and strongly preferred.

I've alrady posted on the following effect as well, but the econ 101 explanation holds here too -- when there be a tax on a good, whether it be levied on the buyer or the seller, the same effect on net utility occurs. the only thing that determines who "actually" pays the tax, is how flexible demand and supply are. (concrete example: diabetics really need insulin. gov't taxes drugstores, tells diabetics that they aren't the ones paying the tax. drugstores shrug, and raise the price of insulin exactly the amount needed to make as much money, after tax, as they did before. diabetics have to buy insulin nonetheless at that higher price.) Thus, saying that the charge isn't explicitly paid by lenders is not that helpful.

Similarly, if for some reason, 1% became 10%, it very obviously reduces the maximum possible ROI for any investor, even w/o risk adjustment, or defaults, to 19% or so -- and again, that's before defaults!

Finally, this is a less prominent effect, but going with the 10% example (for ease of explanation), if C borrowers w/bank drafts only come onto prosper, they'll leave when they realize that to offer lenders 13% or so, they need to pay 23%. The 1% has the same effect, only far smaller -- so you're marginally reducing supply as well.

None of this is meant to detract from the very real need for Prosper to save money on bank drafts, or reduce default (perhaps) by increaseing incentives for ACH'g

Don't know what the offsetting cost is on Prosper's end, and I assume this is a good change:

Bank account verification changes
We have made two big changes to bank account verification:
[*]Everybody will now be able to use the “instant account verification” option that lenders have been enjoying for a few months now. This will take a lot of headaches out of the account verification process, and will speed the process greatly for many borrowers and group leaders.
[*]New borrowers (without verified accounts) will not be able to verify their bank accounts until their listing has reached at least 5% funded. Prosper’s costs for bank verification are significant, and in an effort to reduce unnecessary bank verifications (on borrowers who are never going to get funded), we are introducing this requirement. We don’t think it will significantly affect lenders’ willingness to bid on listings (currently, verified bank accounts are not a huge factor), but it is something new that lenders should keep in mind.

i believe prosper andrew referenced the fact that borrowers can now, like lenders, use a CashEdge like interface to automatically verify accounts instantly -- if they bank w/one of the many online banks that are big enough to be listed w/cashedge and choose to let cashedge do auto confirms, and they know their online banking info. Thus, no more verification deposits for most borrowers and lenders.

HOWEVER, I have never been able to add new bank accounts w/the cashedge-like instaverify system, and have ALWAYS had to do manuals on prosper. (This was true even after the prior announcement that lenders could do insta0verifcation. I've added ~10 accounts, the latest one within the last 2 weeks -- no dice.)

EDIT: Sorry -- I didn't realize each new account was hurting so much -- I went back and counted 10+ unsure.gif

My suspicion is that lenders joining before the last instaverification announcement, might have gotten the benefit of instaverifying -- but old lenders adding new accounts would not, due to some bug.

QUESTION TO ALL: has anyone seen the instaverify interface (specifically, lenders joining before or after the announce date who subsequently added new bank accts from large, online banks)?

Read more!

Monday, July 17, 2006

Delinquencies in last 7 years in credit summary, actually means 90 day delinqs in last 7 years

Registered lenders viewing listings' extended credit summaries, will see lines like:
Now delinquent: 1
Delinquencies in last 7y: 1
Public records in last 10y: 0

Keep in mind, however, that while the now delinquent may actually refer to a bad debt from 6 years ago, the delinquencies in last 7y may skew in the opposite direction:

fine print here...

Many newer lenders may fail to realize that this field only picks up on 90 day lates -- so if the prospective borrower were 60 days late 50 times over the last 7 years, this field will still read 0.

Read more!

Sunday, June 25, 2006

Appropriate levels of diversification for lenders

I frequently hear people discussing the inadequate diversification of various lenders' Prosper portfolios.

Here's the thing -- other than for tax/mental bucketing/liquidity reasons, who the heck should care if your Prosper portfolio is inadequately diversified?

Leaving aside the issue of what "inadequate" diversification means, rational investors should only care about their total portfolio profiles. Insofar as my Prosper portfolio is horribly unbalanced, but its risk/return/correlation profile makes my entire portfolio higher return, lower risk, and less correlated with bad states of the world, say, I'm still better off. A separate question would be whether an even better total portfolio outcome would be possible with a different Prosper allocation strategy.

I could see Prosper trying to keep lenders diversified so people don't start causing mega negative publicity when their Prosper only portfolio goes underwater due to one default, but other than that...

[Inspired by an exception to pninen's typically well thought out (though equally frequently overly harsh :) ) set of posts...]

Read more!

How I Look at Current Delinquencies, from traveler505

A post from traveler505 on the forums recently caught my eye:

A BK followed by current delinquencies is absolutely a red flag, unless the "now delinq" can be shown to be a reporting error. It is not uncommon for an account that was included in BK to be reporting as "now delinq", so I don't always believe the numbers in the scorecard.

When there are current delinquencies but no BK, I look for evidence that the borrower did what I call a "paperless bankruptcy". In a "paperless bankruptcy," a debtor who could and probably should have eliminated all of her debt in BK, simply decides to stop paying all or most her existing creditors, and then waits for the accounts to get old enough that she can begin applying for new sub-prime credit and gradually rebuild her credit rating by handling the new accounts (and any of the old accounts that survived the "paperless bankruptcy") responsibly.

[Edited to clarify: I think the initial decision is usually to stop paying and hope for the best. The decision to start rebuilding usually comes later.]

A "paperless bankruptcy" is probably harder on the debtor than BK (since they will be dealing with continued collection activity, and the rebuilding process will be slower), and a bit better than a BK for the old creditors (since some of the debts will likely get paid, or be converted into enforceable judgments, rather than all of them being discharged). It is possible that the choice of "paperless bankruptcy" signifies a desire to pay the old creditors once the debtor's financial house is in order, though I suspect that the repayment of old creditors rarely actually occurs, for a variety of reasons.

However, when a borrower who declared BK 2 years ago and a borrower who did a "paperless bankruptcy" at the same time both arrive at Prosper, their scorecard will look very different, even though their actual payment history is similar. The BK will show one "public record" but no "now delinq" on his scorecard, while the "paperless bankruptcy" will show many "now delinq" -- one for each of the old creditors that she stopped paying two years ago. All else being equal (including progress on credit rebulding), I regard these two borrowers are nearly equal risks, the only difference being that the BK borrower is prohibited from filing BK again for a period of time, and that the old creditors may successfully garnish the wages of the "paperless bankruptcy" borrower, negatively affecting her ability to pay new debts (and suggesting that I should look more closely at DTI). (My observation is that two-year-old chargeoffs/collections are fairly unlikely to result in garnishments or executions against bank accounts, but others may have a better set of data.)

This is why I complain so vociferously about the lack of chronological information for the "now delinq" number, and the failure to differentiate between open and closed accounts in the "number of accounts" line. If there are open credit lines, and no account has become delinquent in the past 2 or 3 years, I suspect "paperless bankruptcy". If accounts have joined the "now delinq" field recently, I see a red flag and move on.

I do have an answer to the question of how [] helps, but I'll save that for another time; I've been long-winded enough. [In case anyone is wondering, I've never seen "paperless bankruptcy" advocated as a strategy there or elsewhere; I offer it here purely as a sociological observation of debtor behavior, including my own past behavior.]

Read more!

Tuesday, June 20, 2006

Nonattender's letter to prosper

Making it more clear that I'm quoting a user with the handle of nonattender who posted something interesting on forums, and that I'm not implying that I'm writing a letter to prosper as a nonattender/someone dropping out from the prosper game. :)

I find it particularly disturbing that we no longer get updates about site changes (front or back end).. Also that we get no timelines or even hazy forward looking statements regarding non-controversial in-the-works improvements / planned changes.

I also find it interesting that, while Prosper doesn't have a community presence AT ALL, one of Zopa's executives has enough interest in the Prosper community to have recently signed up to our unofficial ProsperLenders forums... will that get the red names buzzing over this issue?

Prosper: The new transparency looks a great deal like the old opacity. I think you might find that your customer base is very devoted, and will stick with you through the growing pains (which they feel as much as you do) - if only you'd do them the slight courtesy of keeping them, in the broadest sense, in the loop.

That doesn't (necessarily) mean hiring a community manager to... deal with the community. But it does mean that we'd like to occasionally hear what's going on, preferably from someone who knows..

Example: I'd love to know how Prosper was marketed to eBay sellers. I appreciate Shira's pictures (and think that's a very smart and positive way to interact with the community), but push it just a little further: Am I going to have to call up fellow PowerSellers who attended Live to see exactly how you guys are proposing a synergy between the use of Prosper and eBay?

I don't think anyone is asking "show us your books", "reveal your patented technologies" or even "run any changes you might make by US first".

It's more like "Hey, we're over here, remember us? How's Prosper growing?"

Take a visible interest in the community - they're interested in you.

Read more!

Friday, June 09, 2006

Be aware of how much group rewards/leader fees cost over 3 years!

This is intended as a supplement to "Everything You Ever Wanted to Know about Group Rewards, But Were Afraid to Ask -- The Long Version."

First off, "group rewards" are better termed "leader fees." Even in a 100% shared group, all that happens is that a borrower doesn't get penalized with respect to the rate at which he or she can list his or her loan -- there is simply no automatic numerical advantage or bonus at all for being a member of such a group. The borrower doesn't get hurt, that's all.

However, it is true that certain groups offer valuable services that less directly, but still significantly, help borrowers. Membership (or sometimes, vetted membership) in such groups can increase lender confidence in the borrower, and may lower the final rate that a loan closes at (if lenders bid the rate down), or drive an unfunded loan to become fully funded.

Do note that the lower your credit grade, the larger the group bonus needs to be to offset the "leader fees" that are taken from your listing.

Pretend that you are an E borrower living in chicago who is a member of a 0% shared group.

Your state rate cap is 9% (because you live in Illinois), your leader takes 5% annual interest on your loan, and as a result, lenders viewing you loan see you as offering only 3.75%.

9% - 0.25% -5% = 3.75%
max Illinois rate - 0.25% chunk in case you sign up for bank drafts - 5% leader fees = divine intervention necessitating loan.

Here is a chart showing the amount of interest you will be paying to your group leader every year, depending on your credit grade and your leader's shared reward levels:

And, an overly simplistic, back of the envelope (aka, makes the math/finance nerd side of me want to tear out my hair) approximation of how much "rewards" cost borrowers:

Let us assume a $5,000 loan over 5 years (assuming that an E or HR borrower lists at 25%, in a 0% shared group, which means that 5% is going to the group leader and 20% to the lenders):

I use Prosper's loan calculator:

Total payments over 3 years for a $5000 loan at 25% rate:

Total payments over 3 years for a $5000 loan at 20% rate:

Amount you've paid to your group leader:
$7,156.77 - $6,689.42

According to the loan calculator, 50% rewards mean.

Total payments over 3 years for a $5000 loan at 22.5% rate:

Amount you've paid to through 50% shared group leader:
$7,156.77 - $6,920.88

My advice? There are no groups out there that I know of that are worth the pain of 0% and 25% shared levels. And, unless your leader adds value, there's no reason to sign up for anything but 100% shared groups (or as I like to call them, 0% leader fee groups -- like mine :) )

[rant on]
Prosper currently describes group rewards in such a confusing fashion (for instance, choosing to term these taxes on borrowers and lenders "group rewards," rather than "leader fees"), that most of the new borrowers I've spoken to have no idea how much group fees cost them, or that they cost anything at all. This must be fixed![rant off]

We now return you to your regularly scheduled programming.

Read more!

Sunday, May 28, 2006

Contemplating borrower budgets using objective metrics

As listings improve, and borrowers provide detailed budgets, lenders naturally begin to wonder about expenditures and over-optimism -- can one, after all, get by w/just $75 on gas in LA?

My small contribution to the cause, and tackling the issue of grocery and food budgeting, a 4-5 minute google research excursion:

It is not easy to figure out what Americans do with their money. First, you have to ask enough people so that the answers are statistically representative. Second, those you ask must keep tedious track of their spending. Third, the data must be organized into meaningful categories or the details will overwhelm.

Fortunately, the Bureau of Labor Statistics does all of this with the Consumer Expenditure Survey, an annual data collection effort that reveals who spends how much on what. For more than ten years, New Strategist has been tracking CEX results to uncover trends in household spending. The latest findings reveal an aging population that responds eagerly to technological change, but also pinches pennies to cover the rising cost of a middle-class lifestyle. Here are the top ten trends, category by category.
The Consumer Expenditure Survey (CE) program consists of two surveys collected for the Bureau of Labor Statistics by the Census Bureau — the quarterly Interview survey and the Diary survey — that provide information on the buying habits of American consumers, including data on their expenditures, income, and consumer unit (families and single consumers) characteristics.

big pdf for above, see page 3 for nice summary:

Extract for 2004 annual figures for households (or as they put it, "consumer units"):
pre tax income avg: $54,453
Food at home:$3,347
Food outside of home:$2,434

One could multiply by cost of living in a given city, though there are obviously econ/stats issues w/doing so as anything more than a rough approximation.

To be really precise,
offers a cost of living index focused SPECIFICALLY on grocery items...

Isn't it cool what fast typing and an ability to pick good keywords can do in 5 minutes? And keep in mind, formatting this for others took far more time than actually digging up the data...

OK, as my bar-prepping chica stares at me with disdain and sings along to the worst of the 80's, 90's, and today, maybe painful honesty would reclassify "cool" as "lame..."

EDIT: from braillist on Prosper forums:
Here's a U.S. Department of Agriculture site that gives information about how much it should cost to feed a family.

Read more!

Tuesday, May 23, 2006

Prosper-imposed rate cap raised to 29%...and full-featured standing orders and searches now available

...'nuff said. (Subtract off 0.25%, of course, for the infernal bank draft option...)

Also, advanced search now allows for almost every imaginable combination of criteria -- and even cooler -- every advanced search criterion is now applicable to standing orders! As befitting more complex searches, they can now be saved as well.

Plus, listings now stay viewable for 1 year, rather than 30 days.

Read more!

Saturday, May 20, 2006

Prosper makes the Wall Street Journal, and!

Wall Street Journal article viewable here.

If you want to engage in some good old fashioned pumping (but no dumping), click on the email button on the upper right hand side to send it to someone.

This helps the article move up the list of "top/most emailed articles," and will hopefully bring more publicity to

Cool, but less likely to drive financial volume, on

Props to my kitty!

Read more!

Tuesday, May 16, 2006

An open source, eBay-inspired, Q&A resource for each loan listing -- with GreaseMonkey, Q&A is integrated into loan listing pages

Many Prosper users have long wished for an eBay-style Q&A on each loan page, where lenders could ask borrowers questions about their loans.

I provide an open source solution to the problem at

where further details are available.

Without GreaseMonkey, functionality is still present via bookmarklet, but integration of Q&A with prosper loan pages is drastically reduced.


An incomplete summary:


1.Use this wiki to interact with borrowers and lenders and group leaders on loans.
Shortcut to a loan commentary page:
(insert appropriate loan number in place of YYYY)

2.If you use Mozilla, download Greasemonkey, and the script below, and every person w/the script will be able to view the same wiki page for each loan, inserted into PAGE OF EACH PROSPER LOAN THAT YOU VIEW ON PROSPER.COM.

Please note the following disclaimers:

1.The beauty of this system is also its weakness -- only a few people are verified so far on this system, and anyone can make edits to almost any page. This will hopefully change with time, but MUST be remembered.

2.People can post whatever they want, but others can equally easily restore older versions of pages by clicking on history.

3.Just because you see someone post something, doesn't mean it is true -- unfortunately, anonymity is a vilely empowering experience for some souls.

4.My suggestion for verification in the early days: If you, as a lender, borrower, or group leader, register for this wiki:

a)use your username
b)put a comment in your official profile stating your username here is in fact yours.

Many Prosper users have long wished for a eBay-style Q&A on each loan page, where lenders could ask borrowers questions about their loans. This wiki's purpose is to serve as an open source solution to address this shortcoming. (Emphasis on low-maintenance models here.)
Wikipedia on wiki’s:
A wiki enables documents to be written collectively using only a web browser. A single page in a wiki is referred to as a "wiki page", whilst the entire body of pages, which are usually highly interconnected via hyperlinks, is "the wiki"; in effect, a wiki is a very simple, easy-to-use user-maintained database for searching information.
A defining characteristic of wiki technology is the ease with which pages can be created and updated. Generally, there is no review before modifications are accepted. Most wikis are open to the general public without the need to register any user account.
The advantage to using a wiki is that editing is a cinch, and anyone can ask questions and post comments. This could also be a powerful potential disadvantage, but for the fact that any changes made to the loan commentary are clearly visible, public, and reversible as well, and older sets of unmodified comments are equally easy to access.

Whenever possible, edit as a registered user rather than a guest, to make everyone’s lives easier.

So, for instance, go to to see if a page already exists for that listing (or choose any listing number you like). If it exists, you'll be able to edit it. If nothing's there, go ahead and edit it.

Shortcut to a loan commentary page:
(insert appropriate loan number in place of YYYY)

I’ll offer templates later on, but I’m just playing w/this for now – feel free to give me comments, or start editing/creating loan commentary pages.
There are 2 implementations of the same concept:

A.Version 1.0 of my open source, eBay-style Q&A section on loan listings, for people who don't want to install Mozilla, GreaseMonkey, and a new script:

Open the link below in a new window:

and follow the instructions specified therein.

B.Version 2.0
The really cool version:
Actually adds the prior Q&A to the bottom of each loan page that you view within the Prosper website, so you don’t even have to leave to view it.

All software is presented as is, with no implied warranty/liability. Use at your own risk.

For the following scripts, you might need to change your browser. It's worth it, trust us. Here are the instructions for getting started:

  1. Use Mozilla Firefox as a browser (I've tested older versions, 1.0.7 works)
  1. Download GreaseMonkey (0.5.3 should work)

Once you install GreaseMonkey, you will need to close and then restart Firefox. Once this is done, open any of the files in the list below.

A bar will appear at the top of the screen, indicating that you've found a valid GreaseMonkey script.


Click 'Install' to install.

Note: GreaseMonkey is a very powerful tool. Be careful with the scripts you download/install. If you have any questions about the legitimacy of the script, confirm with author first.

  • 05/10/06:
This script adds a Wiki "comment" page directly to the user, group, or listing pages that you view on - cellardoor, norcal_cct. See a sample snapshot here.

I can be reached at addy.JPGabout this new wiki and prosper hack.

Please note that hack, in this context, does not connote or denote any form of illegal or TOS-violating behavior; rather, I also refer to as a hack, borrowers' use of their profiles, which were alterable, to complement their listings, which were inalterable short of withdrawal and relisting, as a stand in for the eBay-style Q&A so direly lacking.

Read more!

Sunday, May 07, 2006

Props to Rodney King

As Prosper expands, and more and more new lenders and borrowers sign up and start posting on Prosper forums, more social friction inevitably ensues. My role on Prosper is almost entirely that of a lender (and all-purpose gadfly on forums and blogs), but I suspect that much of said friction could be fairly easily avoided.

This is hardly set in stone, of course -- there are always obnoxious and unrepentant individuals from all walks of life, and (relative) anonymity of the internet never helps things any.

Recently, as I read a borrower's forum post about buying an engagment ring, I found this comment of note (certainly not an original thought, and certianly one that's been posted about elsewhere), but a well put and well timed comment nonetheless:

Apollo's comments on this loan:
Lenders and borrowers see the world through VERY different eyes. Im still fresh enough from the other side of the fence to see both sides.

What moremoneymarc is saying is that you are a couple with high potential, thats a good thing. Starting out is a very exciting thing for young couples and you want to make it a happy time in your life. Youre fresh from the degree farm and itching to make your mark. A job is lined up with a good salary, good.

Borrowers eyes: job on the line, good salary, ability to pay. Fiance graduating soon, more money coming then. $152 easy payment. No sweat. FUND ME!

Lenders eyes(mine at least): New job, no history. Fiance not graduated yet = no extra income yet. Two student loan payments, could be hefty. Wedding and honeymoon coming up. Most likely a luxury apartment or house to be bought. Likely a new chapter means lots of new goodies, furniture and such.

I dunno, thats how I see it. If you were already moved, had 6 months under your job and possibly even already married and wanted to upgrade a first ring, Id be game.

One months salary ISNT a lot of cash. Its pretty conservative. BUT, spending a months salary in advance of having 3-6months in the bank? Just runnin a bit toward the redline is what we're saying.

Read more!

Thursday, May 04, 2006

A horribly oversimplified Excel model for modelling defaults

Please, please first read (or skim) my 4 posts on "What an X% default rate should mean to me" -- which cover loans from the perspective of lenders

Default Rates, Part I
Default Rates, Part II
Default Rates, Part III
Default Rates, Part IV

UPDATE: Same file, but slightly more user friendly: don't hotlink it here...

Read more!

Wednesday, May 03, 2006

Something new under the sun (a legal in spirit and letter method of getting around rate caps)

Courtesy of economics_phd on Prosper forums -- I consider this one of the most original hacks I've seen thus far:
Here's my first contribution to " for Dummies," by cellardoor and atlantageek.

Suppose you're an E borrower who wants to borrow $1000 but can't get funded because your state cap is 15%. The logic below would also apply to the 24% Prosper cap. Let's say someone would be willing to fund you at 20%. I propose a simple mechanism to side-step the caps.

1. Have the lender start a group if she isn't a leader already.
2. Set the rewards at 0%, at least until you've listed your request.
3. Make your request for $2000 at 10% (this is the max you can offer, since you'll pay 5% in group rewards).
4. Bid $1000 on your loan.
5. Get the group leader/lender to bid the other $1000.

Notice that the group leader gets 5% rewards on $2000, which is like getting 10% rewards on the $1000 she bid. This is in addition to 10% interest. Voila, we've created a 20% loan for $1000.

I could see this actually forming the basis of a group with a well-funded lender willing to loan on the order of $500-$2000 to many people with small requests trying to avoid caps. Maybe someone with a particular ideological disdain for caps. Libertarian group?

This is somewhat difficult to set up, of course, and would typically require high commitment levels/comfort with a particular borrower.

Since one can't bid on one's own loan, one would also have to get a friend/spouse/relative to sign up and bid the money for you...

Read more!

Why removing higher risk borrowers from Prosper would be a bad decision, and why my personal portfolio has little room for Zopa

Someone recently proposed that we remove higher risk borrowers from Prosper altogether. I disagree (see Excel file at end of post as well).

1)Consider further segmentation of the HR bucket

2)Eventually, raise rate caps

3)But first, increase overall lender education. Encourage social grouping or something similar for lenders, which hopefully will reduce the degree of ill-considered lending (quasi-gambling, in many cases -- not that there's anything wrong w/gambling, unless you consider it investing, and aren't a professional -- which seems to be the case for many a lender).
I suspect this may have to be a non-Prosper sponsored entity (such as the forums I recently opened to all lenders who made a successful bid in response to recent forum events), given the understandable and necessary desire (business-wise, anyway) for to regulate free speech and err on the side of censoring impolite and hurtful, even if legal and efficiency-increasing behavior. There are routine and enormously risky/seemingly ridiculous patterns of behavior on the part of novice lenders that will come back to bite Prosper in the butt unless they are tempered.
The rate cap rationale seems to have failed (that is, force people to only bid on HR's that have considerable group-based social enforcement, or else expose more information to lenders by implying a negative rate of return if one were to bid blindly on the average HR loan) -- new lenders still seem to bid blindly on many HR listings as long as they put out the max rate -- even if said rate implies a negative return for such lenders, before even considering the effects of adverse selection.
I've even considered greasemonkey scripts, or something similar, for loan listings (see below).

Quoting dave from Zopa on Prosper
There are, without question, good HR borrowers - but finding them, without accidently lending to a 'bad' HR borrower is incredibly hard. And you only need 1 defaulting borrower to take down all your returns from many fully paying back borrowers.

A single HR borrower defaulting doesn't much affect the returns on the rest, assuming rates are high enough and diversification adequate, any more than if a single hi-quality borrower defaults (which eventually will occur, Zopa's record notwithstanding -- see below). In fact, if anything, a single high-grade borrower defaulting has a far worse effect on an equally sized pool, given the much thinner margins offered to high grade lenders (even if the likelihood of such an event happening is that much less).

Dave's claim seems silly to me -- given a portfolio of 10 identical $1000 loans, w/1 default at 18 months, using a fairly hacky model I threw together in Excel:

1)at rates of 35.75%
Original funding: $10000
Total $'s returned assuming no defaults
Total $'s received:

2)at rates of 23.75%
Original funding: $10000
Total $'s returned assuming no defaults
Total $'s received:

See excel file here above for details and approximations. Please DON'T HOTLINK!

5)Social and economic benefits for lenders:
Comments from dave of Zopa on Prosper:
I think norcal_cct is right - you can get good returns without HR borrowers, and the risk : return trade off is more favourable. Lending to sub prime borrowers is a very, very different ball game from lending to prime borrowers. Many financial institutions have been burnt badly by trying to play that game - and we didn't want our lenders to get torched!

The higher risk marketplace -- D/E/HR -- offers a much different risk/reward/correlation payoff than the higher grades. Furthermore, the higher grades are dominated, Sharpe wise, by alternative investments. (Even w/respect to correlations, there are ABS' and even more retaily products that give exposure to the same risk factors.)
The Zopa model would be basically useless to me personally, though useful to certain sets of investors who have capacity constraints or financial sophistication needed to pursue alternatives.
In addition, the payoffs accruing from high-grade lending are not as bad as, but close to, those of selling deep out of the money put options -- lots of high return, low risk payouts for long periods of time, but w/massive negative events every once in a while that easily crush all of the previous performance -- and on a Sharpe basis, look far worse than a large basket of (non-adversely-selected) higher risk loans. (In bad states of the world, HR's may also default much more, and are more suceptible to bad events -- but the mathematical multiplier on default rates is going to be much higher for higher quality loans. Furthermore, people will be far less emotionally and mentally prepared for such defaults in the high grade bucket, vs the higher risk buckets.

6)Social and economic efficiency for borrowers:
From the perspective of borrowers, there are plenty of better alternatives to P2P borrowing in the vast majority of cases if one is high-grade. However, higher risk borrowers have few, or no non-ruinous lending sources to turn to, even after proper risk adjustment.

7)As an example, one of the frequent claims (which may be correct in some cases) made by borrowers after extended credit info was made available was that the summary misstated the actual report. Perhaps a segment of customer service dedicated to vetting such claims would be of help (though there are still issues of things misreported on the reports themselves), but this is an not very scaleable solution.

More generally, even better and useful/open source in spirit, would be a eBay-style Q&A segment on each listing. Some sort of greasemonkey script for each loan page (assuming one uses Mozilla Firefox as a browser, rather than IE), distributed among lenders and made by lenders, might be a good alternative, though it will only increase the gap between tech-savvy/overall better informed lenders, and newer, less sophisticated lenders. Until Prosper better integrates forums w/lenders able to view lender-only info for borrowers, adds Q&A, etc, I continue to support my privately run forum open only to registered lenders as a stopgap solution.

Read more!

Monday, May 01, 2006

Prosper repurchases loans from lenders

Hmm...interesting post by Jon Witchel (or some other Jon employed by Prosper), Prosper's CTO, on forums, which officially confirms that has purchased a late loan from lenders. Based on private comments from other lenders, the purchase was made not only at par, but also w/accrued interest added on.

Obviously, it is in Prosper's pre-IPO/competing for mindshare interests to do so, though I wonder what factors are necessary for bailout on a given late loan. Perhaps they're accepting implied responsibility for the early, gold-rush days of Prosper lending, when vetting and internal confirmations weren't quite as good?

More comments later, but obvious economicky thoughts that come to mind are moral hazard, moral hazard, moral hazard :)

However, I can attest to the fact that not all late loans have been repurchased.

Original link on forums here

At least they plan to leave the loan status within groups unchanged -- so in other words, defaulting loans in Group X will still show up under Group X's loan grid -- the only difference is that the lenders will (presumably) be consolidated into one lender, Prosper.

Read more!

Friday, April 21, 2006

Strong criticism of Christian Second Chances Group

I'm not particularly upset that I have a late loan given my bidding risk profiles (in which some % of my bids are non-qualitative, mathily modelled only, w/some sanity checks. I would of course be far less happy if some of my personally vetted loans defaulted though...)

Also, given that I ascribe no signal to membership in this group (and maybe even negative signal), I'm not particularly surprised by the group leader's behavior either.

Let me be clear, I have nothing but respect for the genuinely religious whose acts match up with their professed beliefs. For instance, after confirming that a priest was looking for a loan, and that his identity had not been stolen, I happily put down a roughly $2,000 bid for his loan.

However, in the case of this group leader, his use of 50% shared rewards (and past advertising of this as a "good" thing), made me rather suspicious of his motives. There are plenty of groups where the leaders go to much more trouble, and offer 100% rewards, or at worst, 75% rewards, for far greater service to borrowers and lenders.

Someone who pays lip service to Christian ideals, and does minimal vetting, if any (given the way he was spamming people in the past to join his group), but takes a huge slice and says/said that a 50% slice is a huge favor to borrowers -- that's just unconscionable (but apparently, profitable while the pyramid scheme lasts).

Remember what this means in $'s and cents -- for an E or H borrower, this leader gets 2.5% -- not of the original loan amount, but 2.5% annual interest on the loan over 3 years! That $5000 37.5% loan that s/he "got" funded -- that's a $100 right there if it pays off.

S/he also gets additional match reward $'s up front (in addition to the % rewards) as well.

Some people might say, doesn't the ongoing 2.5% slice align incentives? Well, no -- the far bigger incentive is to line up lots of loans, and hope as many get funded as possible, suck the money from the ones that had basically no added value but were honest and got funded, and ignore the ones that don't. (If s/he were willing to actually do some work, on the other hand, build up reputational capital, that'd be a different story.)

Most of all, I think that the utter lack of concern on the part of the group leader, and failure (to the best of my knowledge, and other lenders' knowledge) of southbay, the group leader to respond to ANY lender communications over THE LAST SIXTEEN DAYS is demonstrative of what I suspected all along. Anyone care to speculate as to whether s/he's been nonetheless continuing to recruit/respond to new borrower requests to join the group? Post here if you've done so in the last 16 days...

In the past, I've been reluctant to privately message borrowers to tell them that they're getting a bum deal w/their group -- no intelligent lender would give extra credence to membership in this or that group, and a 2.5% rate difference in a capped world can be huge for an E or HR borrower (sometimes, w/0% shared, it is a 5%!! difference!). Going forward, it may be a different story, depending on rules about spam. (So far, I've restricted my advice to comments in posts by borrowers in forums on how to get more bids, or those who PM me for advice.)

Until now, I was unwilling to make any public comments about this group, as much as I wanted to, because I did not have definitive public evidence. However, I was personally certain of the sheer crapulence of this group, and would have been perfectly willing to bet 30% of my annual salary that this would be one of the first few groups to have truly late payments), and willing to tell other lenders this in non-public forums (fora?).

Someone wittier than I has already said something like "It doesn't seem very Christian of this group leader to ignore all lender questions, and I won't be giving him any Second Chances, either."

Now that's a T-shirt motto that I'd buy!

I'm offering a $15 paypal payment to the person who comes up w/the best T-shirt motto on the topic of this group's behavior. You can post profane comments if you must, as long as you're witty, but those get automatically disqualified -- I need something actually wearable (and that cafepress will let me buy). If fewer than 15 "real" comments from different posters are posted, I reserve the right to not pay out -- though posters should feel free to submit multiple possibilities for consideration.

Comment below, or email them to me!

Read more!

Thursday, April 20, 2006

A unrestrictive forum for lenders to discuss borrower details

...'cuz "unrestricted" would also be wrong...

Because the official forums are not fully integrated with our Prosper ID's, there is currently no private forum on this board for lenders to discuss borrower details w/o violating their privacy. As such, there have been some fairly sketchy loans that have been partially discussed on the forums, but without limitation to lenders only.

I am hosting an Unofficial, Unaffiliated with Prosper, Prosper Lenders Discussion Group.

Entry is only allowed to participants who have demonstrated through the official Prosper messaging system that they have a Lender account with Prosper. There is no other restriction on membership -- I deliberately intend to keep this group as open as possible, and this is no replacement for the more private, invitation only groups for lenders out there.

If you wish to gain access,
1.Go to
and click on register to create a username for yourself for the forum -- this MUST match your user ID as a lender on Prosper

2.I will need to confirm your status before admitting you. To do so, please message cellardoor through's official messaging service and inform me that you've registered using the same username there as on Prosper.


Easiest way to message me:
Go to
and click contact member.


Read more!

Wednesday, April 19, 2006

My loan portfolio, as of last month

Click on the image to see the full sized version of my loan portfolio.

Read more!

Friday, April 07, 2006

Everything You Ever Wanted to Know about Group Rewards, But Were Afraid to Ask

This explanation is best digested in combination with Prosper’s official help guide to group rewards – I wrote it in response to another lender's question. Plus, I had to spend more time on the group rewards help page than the rest of the help pages put together to decipher Prosper's advice. (Yes, I read fast, but that’s not the only reason :)) Any failures of this guide to correspond to actual lending practices lie with Prosper, not with the author. For more details, see the official Prosper Help page:

Group rewards areincentives for borrowers/group leaders to belong to groups/get people to join their groups. They come primarily in the form of some X% of interest rebated on a given loan to the borrower and/or group leader.

The size of the reward depends on 2 things:

1)Credit grade of borrower

2)what % of group rewards are shared by the group leader.

b)for borrowers:

1)How credit grade affects rewards for borrowers:

Assuming that rewards are 100% shared, these are the reward levels:
Credit GradePayment Reward
AA, A0.50%
E, HR, NC5.00%

This part seems silly to me, insofar as their only net effect on borrowers is to lower the max rate they can list at, since the rate to a lender is always shown net of all group rewards. (If you have group rewards accruing to you as a borrower, your max effective listing rate is reduced by the amount of the reward.) After all, the lender doesn't care about much besides the ultimate rate that s/he receives. (To be very technical, since rewards aren't actually issued for ~3 months, this isn't strictly true, but whatever... "Payment rewards are paid after a 3-month withholding period to ensure the loan isn't bad right out of the gate. After 3 months, all current month payment rewards earned for that month are paid. At the end of the loan term, any remaining rewards withheld are paid in full.")

2)How % of group rewards shared affects rewards for borrowers:

The rewards above are earned if the group shares 100%.They're halved if 50% sharing applies, reduced to 0 if 0% sharing applies, and the same goes for 75% and 25% sharing (sharing is granular, in 25% chunks).

So, you ask, what happens to the rest of the rewards if not 100% shared?

c)for group leaders:
They get the slices of reward forgone by the borrower -- under 100% sharing, they get zilch. Under 0% sharing, they take it all.

d)why did I say that rewards come PRIMARILY in the form of X% rebates? Because there's one other component of group rewards that can only accrue to leaders -- the match reward.These also depend on the same 2 things -- credit grade of borrower, and % sharing of group.Under 0% sharing, match rewards for the group leader are:
Credit GradeMatch Reward
AA, A$20
E, HR, NC$10

Under 100% sharing, there are no match rewards; under 50% sharing, all match rewards are halved.BORROWERS NEVER GET MATCH REWARDS! So, if a leader opts for 100% sharing, Prosper doesn't give anyone match rewards! These are "received one month after match if the loan is still outstanding (not repaid) and payment is current." Again, for more details, see the official Prosper Help page

Insert editorializing:
E/HR Borrowers, recognize that if you join a group w/0% shared rewards, you're effectively paying 5% of interest on your loan to your group leader over the next 3 years or so! (And $10 up front, but that's typically nothing in comparison.) Keep this in mind when you choose your group!!!

Remember that group reward levels at the time of your loan start are what matter! Once you list in a 0% shared group, even if your leader has a change of heart and switches to 100% shared, unless you relist, you're out of luck!

I personally wouldn't go w/a group with less than 75% shared rewards, whether I'm an AA or an HR.

Read more!

Monday, April 03, 2006

Advice to borrowers who are writing loan listings, updated

0.Spellcheck and good grammar are important – this can seem silly, but people are put off by shoddy-looking borrower statements – ask your group leader for help if necessary.

1.Clear, detailed descriptions of what you need the money for, what kind of significant debt you already have – and, this is important, an explanation of how you’ll be able to pay it back:

An example of an acceptable, though certainly imperfect, listing:

I am a 30 year old mother of 2. I lost my job of 6 years at Bellsouth in May of 2005. I have currently been at my present job since August of 2005. This job does not pay as much as Bellsouth. In the process of me losing my job, I got involved in some payday loans. I have been only able to pay the finance charges on these loans as I have so many of them. This situation has caused me to fall behind on some more important bills as these payday loans hit my bank account directly. I am issuing out about 800 dollars a month for these payday loans. If I could pay off these loans, I could save an extra 600 dollars a month to catch up on other important bills. I am not a bad person. I only made some desperate decisions at a desperate time. I need to pay off the following: Sonic Cash (600.00), Ezpaydaycash (375.00), Cash Now Newengland (750.00), Cash Today (289.00), Cash In A Wink (675.00), Nationwide Cash Advance (375.00), Fast Cash (325.00), AIP (279.00), Cash Zip (288.00) and 1 overdue mortgage payment of 1100.00. I make 30160.00 yearly plus an extra 500.00 a month in child support. All of these payday loans come due every 2 weeks and the finance charges range between 25.00 - 175.00. Please help.

Some excellent advice from GogMagog:

In your loan, don’t dwell on your problems, talk about your solutions. Briefly mention your credit problems, but tell them to look at your profile for more information. Lenders look at loans in a list of dozens. Place something like this near the beginning of your loan… “I have had problems with debt in the past (see my profile), but this is how I plan to make it right.” You are taking a lender’s money, they want to know it is in good hands. You need to SHOW them you have a plan.

  • “I have 2 credit cards that are at 24% and 30% interest. This 18% loan will help me reduce that rate.”
  • “I have a car loan that has a $200 payment, by refinancing with Prosper, my monthly payment will drop to $150 a month.”
  • My car broke down and I need a new one. My bank won’t lend me $3,000 for a used car. They only loan $5,000 and above, and the dealer financing is at %25!
  • I have a payday loan for $500 that I just can’t afford to get rid of. It costs me $30 every two weeks to prevent default. I need $1,000 to pay off the loan, and give me a cushion so that I don’t have to live from paycheck to paycheck.

2.Details on your employment:

If you have an ebay userID w/lots of sales, post a link inviting lenders to contact you through your ebay store/ID.

Your place of employment doesn’t have to be flashy or impressive – just honest and full of confirmable detail. For example, saying that “I work at a big firm in Atlanta” is much worse than providing as much of the following information as possible (fictional examples):

-that you work as a secretary at Ling Architecture, LLC

-that your firm’s web page can be found at

-that your company email address is

-that your extension at the company is x8765

-that someone can call you at the main number listed on, and ask to be transferred to you by name

-that your salary is $28,000

-that your paystubs (w/social security number crossed out) are either available upon request, or already posted on a web page reachable here

-that someone in Human Resources at Ling Architecture (or failing that, your boss) will let your group leader to call him/her (again, through the main number listed on the website) to confirm your employment and salary.

3.Disclosure of past credit history woes, and explanations of what happened. Many borrowers w/bad credit got there due to bad luck, rather than spending up to their credit card limits on expensive luxuries and then going bankrupt. If you’ve gone bankrupt before, please don’t lie about it – bankruptcy filings are publicly available information on the web, and people are frequently willing to accept there were (medical) circumstances beyond your control (if, for instance, your credit report says that you wrote off several large hospital bills), or that you’ve turned over a new leaf (if your credit report shows no lates in the past year or so).

-Perhaps you can post the negatives and derogatories summary portion of your credit report, anonymized, of course. (See this post for more detail.)

4.If you’re willing to, give people your phone number and encourage them to call you (within reason) – it makes them less likely to worry that you’re not Mary Smith, but merely a 14 year old hacker who someone else’s identity to borrow on Prosper. In my experience, people feel a greater sensation of connection once they actually speak to a borrower (as opposed to just sending emails back and forth).

5.Your profile should be used for two things:

One, to give enough information to make people comfortable w/you as a borrower, and to put a human face on what can otherwise be a very asocial process.

Two, because you can change your profile at any time, but you can’t alter your loan once posted, you should make your profile a question and answer page for lenders. THIS IS VERY IMPORTANT – within your loan listing, say something at the end like: Please go look at my profile here (include a link to your profile) to see questions and answers from other lenders. Do so – if a lender asks you a reasonable question, answer it and post the Q&A in your profile.

6.Overall, do as much of the lenders’ due diligence for them as possible:

-if you’re a college graduate, provide an alumni association phone number where they can confirm that you graduated from that college.

-if you want a loan to fund your education, include a transcript (again, w/ your account number and social security number crossed out).

-if you want to post hospital bills or payday loans (again, w/sensitive information crossed out) that express your need, do that.

-if you claim that you have plenty of money, but want to take out another cheap prosper loan to fund a real estate project, include a picture of a bank statement after removing account info, home address, etc.

-or, maybe include the address that you’re working on fixing up.

7.Technical issues:
Prosper loan listings and profiles limit the number of images you can attach. Say you need more, but don't have a web site to put them on. One free way to post images (that I've never used, and have no affiliation with, other than googling it up first)

8.Special considerations for E/HR/NC folk, but relevant for everyone:
Given the new rate cap of 23.75%, you'll have to really be thorough if you want to get funded. In particular, you should start out with the smallest loan possible -- many lenders worry that people will come onto, take out a huge loan, and then default -- if a borrower's credit is poor to start with, there is little incentive besides personal ethics for someone not to do so. If you can demonstrate on confirm your ethics over the Internet somehow, or use a decent proxy (I confirmed that one guy was a priest, for instance) for it -- great -- however, most people will be unable to do so. As a result, you have to think seriously about the size of your loan -- make it as small as possible, while still helping you meet your original purpose (and preferably have enough left over to set aside as a cushion for one month's payment).

9. The lender’s thought process…more closing words from GogMagog:

Lenders want reassurance. There is a persistent myth that people with bad credit squander their credit frivolously on shopping and beer. This is a persistent thought, mostly because EVERYONE knows a deadbeat like this somewhere in their lives. A clearly worded, properly spelled and capitalized, response to a question goes a long way to making the Lender feel that their money is safe.

Some Lenders perform more checks, on their potential loans than others do. These diligent Lenders are crucial to the Prosper system. They want to make sure their money is in the hands of responsible, though financially strained people. They are the ones who send you messages about your loan, or yourself, asking for more information. They also tend to report to Lender groups and mail out lists of their findings.

Read more!

Saturday, April 01, 2006

A quick and dirty thought...

There are plenty of ABS's (Asset Backed Securities) out there of credit card debt, car loans, etc etc that are sold to institutional investors. I suspect the edge here is that institutions aren't willing to accept packages of HR/E debt (much as historically, junk bonds weren't new issues -- they were always fallen angels that were originally credit grade, but then tanked).Ironically, if we allow plentiful data on new issue high risk loans to be generated, I wonder if we're squeezing ourselves out and allowing the big boys to come in. I mean, there might still be disintermediation edge, but not so much loan supply edge anymore. I hope Chris Larsen's rhetoric is real, and that a big part of the business plan doesn't consist of retail investors taking the risk w/new issue E/HR debt, manipulation of the market to minimize adverse selection(or even cause positive selection), so as to provide better asset class return series for the institutional investment rounds...

Edit: For clarification, my strong belief is that no institutions are willing to take prepacks of HR borrowers w/unsecured, non-short term loans -- anyone have evidence to the contrary?

Read more!

Friday, March 31, 2006

Living in interest-ing times, standing up for principle (or is that my principal), and other punny clichés best left to the dogs...

Alternatively, The netizens are restless.

Several interesting things happened today on (in order of significance to me as an investor, not in order of how riled up they made me or others):
1)Default rates have now been affirmed to be annualized. 'nuff said.
2)The rate cap on loans has been changed to 24% from 36%.
3)It was explicitly reiterated that group leaders are not to use any credit reportage stuff at all to determine membership in groups (see below for details)
Other fairly good site-design, data provision, group ranking algorithm stuff got lost in the furor. HTML explosions have finally been banished from messaging, apparently…

Side notes:
I also got to speak over the phone w/Chris Larsen (CEO of Prosper, founder of E-Loan, and, in the latter capacity, the first person to push FICO (credit) scores out to the public at large) for a fairly decent chunk of time today, which was a bit odd. I mean, my day job allows me that kind of access to CEO’s and CFO’s all the time, but it is fairly weird when my track record of posting on an internet forum brings that about…

I don't think that I, as a fairly discerning investor/lender, will be much hurt by the changes at Prosper in the short run (or even that much in the long run, as long as Prosper survives). Turmoil tends to benefit the paranoid, after all. If anything, despite my oft-stated pursuit of high risk loans, my weighted average interest rate is 26% or so (I haven't been loaning simply by the numbers, except in ~.25 of my original, smaller allocation to Prosper -- which converts to ~6% of my current allocation), and I've been investing a fair amount in people constrained by rate caps under 24%, but otherwise well suited for loans.

1)From the very start, default rate data has been handled rather poorly -- and sadly enough (for others, since I’ve never assumed otherwise), my worst case analysis was right. That is, default rates given are annualized. This actually has a more concrete effect on lenders and borrowers than anything else -- we've been told that they're for 3 year terms, then 2 year, then 2 year but annualized, etc -- when one is investing in poorer credit, this is a HUGE difference in expected returns.

2/3) I've already said a lot on the subject on the Prosper forums
(and relearned, for the umpteenth time, the valuable lesson that one shouldn't mix math and being 'riled up).

I primarily think that the rate cap change was:
a)handled poorly/disclosed poorly/discussed poorly (though this was perhaps intended to prevent listing runs)
b)sucks horribly for HR's who don't happen to perfectly fit the "join the affinity group to lower your rates" model, especially in light of reiterations that group membership is not to be conditioned upon credit reports.
c) interesting re: "Group leaders may not obtain or use a credit report, require prospective members to provide a credit report, or to provide authorization to obtain a credit report, as a condition to group membership" This seems to leave open the possibility of asking for reports, or more properly, anonymized portions of reports, under other circumstances. For instance, so long as group membership is not conditioned upon credit report, after you accept someone, can't you then ask for a partial/anonymized report when deciding how heartily to endorse someone who is already a group member?

Or, if asked by a lender who is not a group leader? Or, verging close to the spirit-vs-word-of-the-law-line here, if spontaneously sent to group leaders by borrowers (since action upon such things is impossible to ascertain)? For the record, I'm out of the group leader game, except for people I know from the off-line world, so please don't send my unsolicited reports or assume that I'm trying to skirt the rules for my own benefit here. I'm merely hoping to probe (as I did before with default rates and a million other things), an area that remains foggy, and hopefully, will be better clarified by Prosper.

I was overly (though again, perhaps less than most) impressed that Chris Larsen ended up giving various lenders and/or posters (including myself) calls over the course of the day, and that he was surprisingly responsive (and unsurprisingly, a little hoarse by the end of the day). [Actually, to clarify, I was impressed by his responsiveness, especially in light of various news reports that paint him as a fairly public interested but outspoken/stubborn guy w/ “fire in his eye."]

(Please comment below if you also got a call – I’ve only been able to speak to one other person about it, and I’m very curious about what else he said – or else click on my profile and email me.) Of course, I rapidly reminded myself that doing spin control is clearly in his best interest (as a large equity stakeholder), and that he only did so in the wake of the massive (for the internet) furor amongst lenders. And, somewhat damningly, he still hasn't chosen to make any public announcements about the motivations behind the rate cut, but has instead has made various oral comments to various lenders, perhaps with the ulterior motive of allowing calming but uncommitted comments to emanate outwards and become increasingly disseminated, while being fairly able to distance himself from the results. (Again, I’d be pleasantly, and only mildly surprised if he did put out some sort of message onsite, but I’m still waiting for it – and I suspect it would have helped matters greatly had the change been given the prominence it deserved, rather than buried in a bunch of other updates within a forum posting.)

A rough recap of his comments, again in descending order of significance:
1.Prosper is very concerned about the influx of HR 36% instafunding money that seems to be adversely selecting (I'd say particularly disturbing to me was an E rated guy I previously noticed, whose post literally consisted, in its entirety, of "I need $10k -- I'm willing to pay the maximum rate").Chris wants to protect lenders, and move the dominant model back toward that of HR's seeking credit enhancement through groups. He admits that the math makes it fairly hard on HR’s, but credit enhancement via affinity group could make it happen.

Fine, but really, this isn't the ideal way to address it. The rationale is plausible, but from my "what if I were living on Planet (Traditional) Economicus (where everyone's an amoral Einstein w/perfect self control, and no one does anything, ever, except out of self interest)," I'd give it a 55% honesty rating. (I’d maybe give it 75% ‘cuz I’m not that cynical, and Chris Larsen the guy is probably a resident of Planet Earth. Plus, on Earth, I’d be underweighting the genuine possibility that having made a fair amount of money, his utility starts getting more and more enhancement from public interest-y success – not a one to one trade, but still...)

a)After all, guess what – the sketchy HY loans are not funding fully anyway, so intelligent lenders seem to be aware of the problems w/blindly going into such auctions. And, the less sophisticated/well funded ones aren’t filling those auctions regardless.
b)Prosper's going to end up with a whole lot more HR 24% instafunding money that seems to be adversely selecting, so if they're trying to clear the pool of such people, it ain't gonna work that quickly by only reducing rates (which doesn’t rule out other silent screening measures they may be implementing in conjunction with this one, of course). If anything, it tends to make it harder to separate the sketchy from the nonsketchy by compressing them even closer together. Also, what happened to the old measure of nonsketchiness – loan history? Look for the guy who’s been relisting repeatedly, increasing interest rate gradually, and you get a pretty good sense – though again, you might not catch the nonsketchy but desperate.
c)Given the default rate imbroglio, who was bidding on any auction w/a real sense of expected returns, with or without adverse selection? C'mon -- we've gone from being told that HR default rates over 3 years are 19.1%, to 47.05% (making various basic assumptions, yadda yadda).
d)While he didn't broach this topic, I already was aware of an upcoming ABC special on Prosper. From a business angle, the rate cap remains perhaps understandable, in light of the expected effects of the program, which is sure to bring in a deluge of people (not just Georgians from the Clark Howard show). I’d still argue that more proactive management could have prevented much of the ickiness that's expected to ensue, and much of the ickiness that this change could have been predicted to bring about.
e)Prosper still seems fairly fixed on affinity group model, rather than verification-oriented groups – just an observation. I still think there’d be plenty of economic value to the Prosper investment club system – every month, 25 lenders each come up with one vetted loan, and everyone invests $50 in each one. No one busts their butt to do due diligence, but diligence and diversification still occur.

2.He believes that HR credit enhancement can occur through groups, and is more than willing to consider the possibility (my nonexact take on his phrasing/presentation, though he is undoubtedly motivated to give the impression of seriously considering this) of raising rates in the future -- after the model settles the way he, and other microlending-inspired individuals, believe it should settle. Comments already on record.

3.A group of features that he emphasized could be realized in the near to medium term, that I already think are great ideas/have asked repeatedly on forums for, and that he wanted kept confidential for now. I’ll respect that. By the way, I spoke over the phone w/one of the other lenders he spoke to – w/o breaking confidentiality, we were able to rapidly ascertain that we’d been told about the same things, and to keep them confidential.

Some speculation, within confidentiality:
a)He genuinely wants some of the loudest posters to know (or believe) that these changes are in the works, so that they’ll calm down (or, in that kraazy internet lingo that all the kids are talking these days, STFU).
b)He knows that most people told to keep mum won’t, and as a result, he’ll have all the benefits of positive publicity with none of the drawbacks, given the hedging potential of plausible deniability -- in case the desirable changes fail to come to fruition/take a lot longer to materialize, or are spun from thin air. The latter seems overly cynical – if nothing else, I’d assume that he’s a good enough businessman to recognize good ideas when he sees them.
c)I need to start reapplying more of my analytical tendencies to my real work.

4.I now know which user Chris Larsen is – and no, I’m not telling. And no, it isn’t skibum. And yes, it wasn’t a big surprise (to me, at least, but then, I over-research everything).

One other thing – the update has changed group ranking metrics. I’m a fairly big fan of this, as I’ve already pointed out how easy it is/was to game the system, if one were willing to forgo the interest on a decent chunk of money during the desired high-ranking time – which I was. Though, I’d also point out that my group was pretty damn good, and I felt that it lived up to its gamed ranking.

And, another comment. I'm well aware that I'm developing the rep of being Homo Economicus. However, I'd add that I'm, if anything, a behavioral economist. Do I believe that various behavioral tenedencies (affinity effects, reciprocity, etc) can be leveraged so that much of the dead weight loss from an artificial rate constrains can be sidestepped? In microlending contexts, sreu, but in the substantively different environment of Prosper? Well, not without more evidence. But would I bet against it? No. Would I rather 24% be the cap if that would work -- well, yes, but I am a bleedign heart liberal, right?

Finally, I'm skipping all the business analysis related stuff -- I clearly believe that Prosper can survive w/24% rates and no HR borrowers (neither of which I'm assuming wil necessarily be the case, nor can I make irrefutable arguments for), and I understand why as a business looking to dominate the marketplace, forgoing some of the extremes makes sense -- so would anyone else, I'd hope. What Prosper really needs, again, is better disclosure -- c'mon, do you have to make the Prosper forum boards your drug of choice in order to discover this stuff? There's gotta be a better balance between insane lack of transparency (again, see default rates) and then having the CEO call up individual lenders (again, definitely appreciative here) to deal w/the backlash.

Edit 4/1/01: Eventually, a Prosper representative made an official forum post basically affirming the main points of what Chris Larsen mentioned, including upcoming improvements -- specifically, various opt-in measures for borrowers to provide more summary information for lenders to view (along the lines of my "derogs and negs" summary). Hopefully, this isn't Prosper's "April Fool's!"

Read more!

Wednesday, March 29, 2006

YAFEP, Yet another financial economics perspective

This post rips off by my own, earlier post, and only about 20 million financial economics 101 classes…and applies

1.I suspect that sustainable return rates, after adjusting for default, from E borrowers +- one grade, will be far better than stock returns. My real job, my own research, my academic experience, all lead me to believe that over the long term, stock market returns will be in the 4-10% range. Or, you could just assume what most mainstream economists believe -- 4-10%. It is certainly possible to be investing during an unparalleled era of prosperity (most of the 90's), but as a result, people's expectations of long term stock market returns are ridiculously high -- 20%+ long term comes to mind. In contrast, the risk factor of lending to individuals w/poor credit seems unlikely to dry up anytime soon. That's where the edge is, I bet -- you can make money from disintermediating banks when lending to A borrowers w/minimal risk, but also minimal returns -- its going into the subprime markets where banks fear to tread, where the inefficiencies are really juicy (and potentially, so too is the risk of losing your shirt).

2.I suspect that large, well diversified baskets of loans are safer than a similar basket of stocks. Let me explain what I mean by "safer": To rehash stuff I've posted before:

a)insofar as you believe default correlations among individual prosper loans are close to 0/can be chosen to get close to 0 (very bad economic states notwithstanding -- I recognize the 0 assumption is totally unrealistic)...
b)insofar as you can diversify across _lots_ of prosper loans, you can get much closer to 0 risk than with stocks(again, exaggerating to some degree here as well).

In one paradigmatic financial economic framework, individual stocks have systematic risk (risk that anything in the stock market possesses) and idiosyncratic risk (risk particular to that company only), uncorrelated to other companies' idiosyncratic risks. By diversifying over enough companies, you push the risk of your portfolio down to just systematic risk, and that's what economists tell you to do.

Similarly, for prosper, I would say that the proportion of idiosyncratic risk for a specific loan to the systematic, personal loan market risk, is far greater than the analogous ratio for individual stocks, so w/sufficient diversification, your rock-bottom market risk, in absolute terms, is much lower.

Realistically, the 0 correlation assumption is fairly unlikely, because even if you look at subprime lenders like Providian, you see that they got knocked around when the economy went downhill and subprime borrowers defaulted a lot more...However, insofar as we aren't just doing credit card loans (and hopefully, not getting greedy, like Providian management did)-- instead, we pick from everything from breast implants to cat breederies to student loans to travel cards to medical loans, we do get better diversification protection...though, as always, this makes Experian historic default probabilities even less likely to be appropriate for our loan predictions.

Note: An imperfect, but useful example of correlation values as ranging
between -1 and 1:
-1: if stock a goes up 1%, stock b goes down 1%
0: no relationship between price moves
+1:if a goes up 1%, stock b goes up 1%
(You could also replace all of Stock B moves with some other constant factor -- that would still keep the correlation measures constant)

Note: I'm to some degree conflating levels of risk w/correlation between assets, which isn't the ideal way to describe these phenomena...

Note: Another example of what I mean by risk...say you have 100 million HR loans of equal size and riskiness, and every single one is completely unrelated to the others (again, a hugely extremely wrong assumption I'm making for the sake of argument). If so, if the true default rate of HR loans is 19%, it would be infinitesimally unlikely for the number of defaults to be very far from 19 million. If you know for sure that this will happen, it's not a particularly risky asset anymore. Or, think about betting on a fair coin -- heads, I give you a million dollars, tails, you give me 900,000. Clearly, even though you expect to make $50,000 from this bet, you probably don't want to take it on because it is too risky (unless you're a lot wealthier than I am :) ). But what if I told you that for each flip, I give you 10 cents/you give me 9 instead, and that we could play 10 million times? You have the same expected return, but you're almost assured to make close to $50,000 every time.

Note: I suspect the 0 correlation assumption rapidly weakens w/credit grade.

Note: I'm really arguing for better Sharpe ratios for consumer loans.

Read more!

Tuesday, March 28, 2006

Income verification and self-reporting

So, one of the cornerstones of lending is the Debt-to-Income Ratio, or DTI. It roughly takes all of a borrower's minimum monthly payments, adds them together, and then divides that number by the borrower's monthly income. Because income is self-reported on Prosper, many lenders complain that its usefulness is nonexistent. While I certainly agree that there are various tweaks available to the existing system, I think that DTI is good enough for most loans, and that we're hardly bound for a lemon market. There are plenty of signalling possibilities -- if nothing else, income verifications can be performed with the help of the borrower and his or her employer.

Further detailed thoughts on the matter:

1.Sometimes people are honest -- even online.
2.Many people assume prosper has ways of checking your info out that give it, and big info-sucking corporations a little too much credit. This is not entirely without basis -- I, for one, was surpised to find that the year of one's car for a car loan is embedded in your credit profile data (and not like, account name=TOYOTA 2005 LOAN) -- and this datalet becomes a credit profile confirmation at times.
3.Many people fear being caught lying, maybe more than they should -- probabilistically speaking, not ethically.
4.Others would lie, but rationally believe that the upside isn't worth the risk of being caught.
5.Spot checks help -- knowledge of spot checks (even exaggeration of frequency) help even more.
6.Consider it a form of resume inflation -- just another cost of doing business in America. People tend to exaggerate, but most people do it in proportion to their starting point, and are rationally cautious about doing so, so just scale down the resume-equivalents a notch and lender estimates will be roughly right.
7.The most egregious examples tend to stick out like a sore thumb, even if prosper fails to catch them.
8.Standard practice in the credit card industry, etc, is to not verify for credit lines of 25k or less; insofar as income exaggeration contributes to default rates, the statistics for default that we see already take this into account, to some small degree.

My (sometimes) immodest proposals:
1.Prosper states that it is a felony when you lie on their application (but there's obviously minimal risk of prosecution). I suppose they could make it much more prominent, like in SCREAMING RED LETTERS w/vintage 1998 website cool WAV music and dancing animated GIF flames, along with a clickthrough path that requires you to click 20 dialog boxes.

Or, make an example of some guy who rounds up his income from 97,550 to 98,000 -- throw the book at him, Johnny!

2.Prosper spot checks should be/are probably focused on outliers -- particularly (numerically) unlikely combinations. Not sure what these criteria are, but I assume a HR individual w/ 300k annual income in the back woods of Michigan (don't get me wrong, I like back woods, I like Michigan, some of my best friends are from Michigan) will get the hairy eyeball more than the 80k income guy w/a C rating in midtown Manhattan. Prosper -- the kindlier, friendlier tax auditor you've always dreamed of.

3.More important than the existence of random spot checking, I think, would be the clear and prominent announcement to all borrowers that random income checking occurs and will result in loans (and teeth) being pulled. As I recall, when I checked out the borrowing process side of the equation, the announcement was either not present (beta site), or else it was not particularly prominent -- someone who has more recently submitted a loan request might want to weigh in here (I was, and will soon be, purely a lender). Insert Orwellian site announcements, "Lender cellardoor has been caught falsifying his aerobic exercise time to monthly mortgage debt ratio -- he will be forced to pay off his house by doing sponsored walk-a-thons. We know your IP address -- you could be next, "and you're done.

Strictly speaking, at that level, who needs actual income checking? A sufficiently strongly worded disclaimer that income checking does occur will have the same deterrent effect (though perhaps this would be illegal insofar as lenders are misled as to the degree of assurance they can have in the markets).

After all, take personal tax audits for people who aren't filthy rich -- presumably, the deterrence effect is far more valuable than the actual value of successful (positive) revisions to non-rich people's tax payments due to audits. After all, the main problem with pretending to audit w/taxes is that taxes are frequently discussed and done every year -- a policy of prominent announcements of audits w/o concommitant actual auditing, would rapidly be discovered by taxpayers (not to mention that IRS workers wouldn't all be able to keep a secret, etc). However, the borrower community is much more dispersed, and less likely to be as persistent as the lender community.

4.Every credit card app I've seen typically has some sort of "you attest that everything you say is true, and you acknowledge that there can be criminal penalties if you lie" clause. Anyone know if this might be the equivalent of a "ski lift clause?" The story goes, lots of ski lifts have people sign papers waiving their right to sue the ski lift owner, no matter what happens to them; typically, signing such a document is legally meaningless/unenforceable, but still dissuades many people from suing in the wake of minor (or even not so minor) injury. I mean, you get the deterrent effect even if there's no real legal penalty to lying. On the other hand, I'd assume that large corporations like AMEX, don't typically use ski lift clauses. Not because they wouldn't even if they could get away with them, but because the marginal benefit isn't worth the headline risk.

This is Emmanuel Goldstein, signing out.

Read more!