Morton Fox (mortonfox) wrote,
Morton Fox
mortonfox

Prosper Revisited

Bailey's Arboretum

It rained heavily overnight, in the morning, and in the afternoon. One good thing about the rain is it brought the temperature down to around 60°F and it remained at that temperature even after the rain stopped. Probably will get warmer tomorrow so I'll enjoy it while it lasts. In the evening, I went to a fruit market in Ramsey to add to my supply of Rome apples. There, I saw that they once again had a 50% discount on sushi, so I got chirashi sushi and a California roll.

I haven't written about Prosper in quite a while. So how has it been going? It's okay. No loan delinquencies so far and I've gotten an APY of 9.52% on a portfolio of 45 loans. It's not among the highest yields they have but it's fair, considering that I've been conservative and invested only in loans that stand a good chance of getting repaid. I also haven't been as hands-on in the lending process as I thought I would be. I usually just check in once or twice a month to see what's going on and to bid if there are any new listings that fit my criteria.

I've been reading a few blogs and websites on Prosper lending and the consensus seems to be for diversifying across credit grades, investing some money in AA, A, and B loans for stability and some money in C, D, E, and even HR (High Risk) loans for higher yield, writing off any loans that default. I disagree. I've stuck with AA and A loans. In fact, marketplace performance stats support my approach. Using Prosper's marketplace performance tool, I generated the following Estimated ROI table for the date range November 1, 2005 to March 1, 2007:


Estimated ROI
Performance metric AA A B C D E HR
Average lender rate 10.37% 12.24% 14.94% 17.24% 20.73% 24.20% 24.20%
Rate adjustment (interest and fees) -0.09% -0.14% -0.49% -0.65% -1.24% -2.62% -4.14%
Net defaults -2.38% -3.10% -7.28% -8.69% -13.47% -27.85% -44.72%
Prosper servicing fee -0.49% -0.49% -0.48% -0.48% -0.47% -0.44% -0.40%
Average annual return 7.41% 8.52% 6.69% 7.43% 5.56% -6.71% -25.06%


As you can see in the table, average return peaks at the "A" loans. After that, defaulting loans start eating into returns to such an extent that investors in "E" and "HR" loans actually lose money on average! I would say that "D" loans aren't worth the risk either since you can do almost as well in bank CDs and some online savings accounts.

It will be interesting to compare this to loan performance stats from Zopa once they enter the US market.
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