Saturday, June 30, 2007

Prosper lenders avoid high risk loans

Earlier this week I put together a list of all the top Prosper blogs. As I was reading, I came across an interesting post from January on Money Walks. The article, Blame the Lenders? Or the Borrowers?, showed that high risk and E-grade loans made up a full 80% of the listings at the time. Money Walks also discovered that lenders were allocating nearly 50% of funds to those risky credit grades. This surprised me and I decided to take a quick look at current open loans.

At the time of this writing there are 2554 open loans. 48% are high risk and 19% are E-grade. A full 67% of loan requests are from these risky credit grades - not quite as high as earlier this year but still very high.

So, are lenders funding these loans? Of the open loans I ran a quick search to see which ones have already been funded at least 75%. Only 8 of 1221 open high risk loans (<1%) are on their way to funding. Not much better for E-grade - 6 of 476 (also 1%). How about AA and A credit grades? 18 of 67 (27%) of open AA loans are at least 75% funded while 13 of 67 (19%) A loans meet the criteria. It appears that lenders have learned their lessons over the past months and are now avoiding high risk borrowers. The money is now flowing to those with good credit. Of course, many of these loans I looked at have just opened so the percentage is not representative of how many will be funded by the time the bidding closes. It does, however, allow us to compare the different credit grades.

The graph above shows the number of loans that are at least 75% funded compared to the number of open loans for that credit grade. Last week Matt explained why it makes good financial sense for some people to borrow from Prosper. Those with good credit and no home to borrow against can usually get a better rate through Prosper on an unsecure personal loan than they can through a traditional bank. It appears, however, that this demographic may be a very small minority on Prosper. Many of those seeking Prosper loans may be borrowers that can not obtain financing through other means. Many months ago, lenders on Prosper may have funded these loans but high default rates have caused changes to investing/lending habits.

It's also interesting to note the size of loans being funded to high risk borrowers. Of the 87 open listings that are at least 75% funded only 4 of them are over $20,000 - all to AA and A borrowers. The largest funded loan to a HR borrower is $10,000 (which one lender put up the full amount despite never bidding on anything but B or better in 58 previous loans - very odd.) Bottom line, if you want to be funded on Prosper today and especially if you want to borrow more than a couple thousand dollars, your chances are pretty slim if you are a high credit risk. It appears lenders have changed their investment patterns in accordance with good risk management tactics.

I realize that more complete statistical analysis can be done on closed loans and perhaps I will do that in a future post. It will be interesting to look at which credit grades have been favored by lenders over time.


Kevin said...

Personally I am no where near the HR or E credit grades... I occationally dable in ultra clean D. My IRR is 5.75% as of this morning...

Tom said...

Kevin - what is the average age of your loans?

Kevin said...

Oldest Loan 328 Days.
Average Age: 123.7

thisguy said...

I posted some statistics about a month ago here

The marketplace is moving away from lower grade risk

My focus was more on "how usesful is Prosper for borrowers" as my guesswork was vast majority of listings were failing (90%) which beared out in the numbers, I liked at 4 consecutive days....


thisguy said...

re: High Risk funding, also have a post here

Here are the stats for the first half of 2007

For the first half of the year Jan 1 - June 30, 2007

There were 1033 successful HR loans created

Here is the breakdown by size of the loan

# of successful loans, first 6 months of the year

$20,000-$25,000: 1
$15,000-$19,999: 1
$10,000-$14,999: 7
$7500-$9999: 12

So out of 1033 successful HR loans this year thus far, (6 months), 21 have been for $7500 or more

The good news is lenders are being more selective as time passes

The bad news is many lenders with good hearts paid the price trying to lend to HRs who turned into quick deadbeats, despite the 2nd chance Prosper and its lenders allowed them - now genuine good candidates in the HR category have a hard time getting loans due to past behaviors of that borrower class.

Matt said...

I think borrowers, lenders, and Prosper the company was hurt quite a bit by the early funding that a lot of HR loans got early on. Some HRs were being funded at Proper that would never get funded by a financial institution, and when the defaults started it hurt everyone. If the more selective funding of HRs results in some better statistics for that group I think you might find more lenders that are willing to help some of the better HRs out with small loans.

Tom said...

Thisguy - thanks for your comments and links to helpful information. I think that it is going to get harder and harder to get HR loans on Prosper.

By the way, I just checked out your group. It looks like you have been very successful - all 18 borrowers who attempted listings with you were funded. I see that you don't accept HR borrowers except by invite. What would cause you to accept a HR borrower?

thisguy said...

tom, I have my first HR listing

I will accept my HR when his credit looks like this

he is only HR due to lack of revolving credit (which we now addressed, he now has a shiny new $3500 14.99, no annual fee card in which he will make 1 small purchase 1x every few months and pay off completely to build revolving debt history)

If he had a credit card, he's probably be a D - hence to me, this is an inefficient credit grade, hence the HR designation is bunk

thisguy said...

link was too long for your blog comments width

he is listing # 155507

Matt said...

That is one of the better HR loans in terms of the credit data. It looks like the two things that are putting him in the HR category is a debt to income of greater than 20% and a very short credit history - only 2 open credit lines. He is only a couple years past being in the No Credit category. I see you won your bid on that loan. Best of luck, and keep us updated on how it turns out.