Wednesday, August 29, 2007

309 late loans sold in Prosper debt sale

Over the past week Prosper conducted their third debt sale. Prosper's policy is to default loans and sell them once they are more than 3 months late. However, in order to conduct a debt sale they need to pool a significant number of loans together to attract the needed buyers. This results in infrequent consolidated debt sales of loans that are anywhere from four to ten months late on payments.

The first debt sale was in Dec 2006 with 51 loans sold.
  • 27 - 30%: Homeowners with any credit grade
  • 15 - 18%: Non-homeowners with a credit grade of D and above
  • 3.0 - 3.7%: Non-homeowners with a credit grade of E and HR
The second debt sale was in May 2007 with 294 loans sold.
  • 16 - 19%: Homeowners
  • 2.4 - 3.3%: Non-homeowner
This debt sale was the largest yet with 309 loans sold. Possibly due to the recent downturn in the housing market, homeownership was not a factor that was considered in the latest debt sale.
Here are the details from this third sale:
  • Eligible loans were 122 days past due as of July 26, 2007, provided the loan was not part of any bankruptcy filing
  • 309 loans were sold
  • Price range: 1.8% - 26% as a percent of principal balance
Pricing on the loans is determined solely by the debt buyer and can vary from sale to sale. Several factors were used to determine pricing in this sale, with credit grade being a primary reason instead of homeownership. Here's the weighted average prices by credit grade for this debt sale:
  • AA-A = 23%
  • B-D = 13.3%
  • E, HR, NC = 8.1%
Prosper anticipates the next debt sale will occur in December of 2007.

In the second Loan sale it seems the primary determining factor was homeownership, and some lenders had changed their bidding strategy to factor that in. One lender who goes by the name of PrintAns commented in the Prosper forums, "I hadn't viewed homeownership as good or bad when picking the listings until the last bad loan sale. When they sold bad loans more was given for loans where the borrower was a home owner. I now use home ownership part of my criteria."

In a way it seems unfair for Prosper to be changing the rules of the game, but in reality it is the debt buyers that change their criteria and the amount they are willing to pay for different types of loans based on the changing economic conditions in the marketplace. It probably doesn't help that liquidity for all types of debt purchasing has been drying up throughout the economy.

John Witchel, Prosper's CTO, commented about the debt sale process on his blog several months ago. He specifically mentions two challenges they face in these debt sales. The first is that Prosper is a new and different asset class, and the debt sales are typically geared more toward established asset classes like credit card debt. The second challenge is volume. It takes a certain volume to attract debt buyers, which is the primary reason for the infrequent timing of the debt sales.


Lazy Man and Money said...

I agree with PrintAns. I had been favoring home ownership as well. It seemed like a good hedge in a worst case scenario.

It would be nice if they packaged the loans that didn't weren't home owners as long as there was premium - saving the home ownership for a future round when it matters.

Tom said...

I'm not sure exactly how the debt sale process works but I'm guessing that they package the loans and then sell them to the highest bidder. They probably didn't know that the buyer wouldn't place a premium on homeownership.

Also, just as Prosper lenders are learning about the Prosper marketplace debt buyers may be getting smarter too. Maybe this debt buyer is the same one who bought loans before and realizes that they are not having any better success with homeowners than non-homeowners. Matt's earlier article about homeowners vs non-homeowners actually showed that for most credit grades homeowners were MORE likely to default.

As far as lending money, I think that it's best to aggressively search for the loans that won't default. If you are assuming the loans will default and are trying to get the most in a debt sale this is going to be a losing investment.

By the way lazyman - thanks for stopping by. I'm a big fan of your blog.