Prosper eliminates defaults

In a site update today, Prosper eliminated all defaults - well, they renamed them. Defaults will now be known as "charge-offs". As reported on their blog:

"We are changing the way we display seriously delinquent loans on the marketplace performance page, renaming “Defaults” as “Charge-offs”, and moving the “4+ months late” loans into the “Charge-offs” category. We want to have transparency in the reporting of our marketplace’s default rate, and this change should help lenders take a more direct measure of the market’s charge-off rate. This change is the first step in a larger change we will be making in the way delinquent loans are displayed in lender portfolios."

In addition, Prosper will now allow some new lenders to make loans with PayPal and credit cards. Borrowers can invite family and friends to bid on their loan. After clicking on the link in the invitation, new lenders can place their first bid via PayPal or credit card. This is an attempt to make the site easier to use for new members.

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.