Market Commentary By Prosper Co-founder and Chief Executive Officer, Chris Larsen

In April, we saw the supply of loan listings with an attractive risk-return tradeoff hit an all time high and approximately double compared to the prior month. At the end of March, the supply of loan listings with an attractive risk-return tradeoff was approximately $5 million; and at the end of April the supply increased to approximately $11 million and has remained at that level into May.

This significant increase in the supply of loan listings with an attractive risk-return tradeoff is attributed to the fact that on April 15 we commenced our business arrangement with WebBank, a Utah-chartered industrial bank. Through our agreement, all loans originated through the Prosper marketplace resulting from listings posted on or after April 15, 2008 are made by WebBank under its bank charter. Prosper provides services to WebBank in connection with the origination of such loans and Prosper services loans made to Prosper borrowers on behalf of registered Prosper lenders who purchase such loans. In effect, this partnership opened the platform to more borrowers, who may have previously been constrained by low state rate caps.

Also in April, we saw the supply of prime borrower listings hit an all time high, accounting for nearly half of all loan listings in terms of dollars requested. Prime borrower originations also reached its record level of 43% of funded loans.

Currently, the significant increased supply of quality listings is providing more attractive bidding opportunities, which is making it easier for lenders to efficiently deploy more money onto the platform.

Mix of Funded Borrowers

Membership and Loan Volume Statistics

Estimated Annual Return on Prosper Select Index

Average Borrower Rates on Prosper Select Loans

Definitions

Attractive Risk-Return Tradeoff: For purposes of this survey release, listings are considered to have attractive returns if, based on historical loan repayment performance of Prosper borrowers with similar characteristics, they are priced sufficiently to compensate lenders for risk. Risk includes both the risk of non-payment by the borrower and other risks associated with people-to-people lending. In general, as the credit quality of the borrower declines, the range of possible returns widens, requiring a larger risk premium to compensate the additional uncertainty. The amount of risk premium required to compensate for a given level of risk is a subjective judgment. The following formula is used by Prosper to determine if a listing is priced adequately to have an attractive risk adjusted return: Maximum Borrower Rate > Risk Free Rate¹ + 3.25% + (Expected Annual Default * 1.5) + Prosper Servicing Fee. All lenders should make there own judgments with respect to what constitutes an adequately priced listing.

¹ Risk Free Rate = 2-year CD national rate on BankRate.

Since Inception: November 1, 2005 through April 30, 2008. Prosper’s by invitation only “friends and family” launch began on November 1, 2005 and Prosper launched to the general public on February 13, 2006.

2008 Year-to-Date: January 1, 2008 through April 30, 2008.

2007 Year-to-Date: January 1, 2007 through April 30, 2007.

Prosper Select Index: The Prosper Select Index return is the estimated average annual return on principal, based on actual delinquency performance to date. The Prosper Select Index includes AA - E credit grade loans for borrowers whose credit reports at the time of application indicated zero current delinquencies, three or fewer credit inquiries, and a debt-to-income ratio of 40 percent or less. The annual return period reflects loans originated in the twelve month period ending one month prior to the observation date of April 30, 2008. Prime Select includes AA and A credit grade loans (credit scores of 720+). Near Prime Select includes B, C, D credit grade loans (credit scores between 600 and 719). Sub Prime Select includes E credit grade loans (credit scores between 560 and 599).

Average Borrower Rates: Average Borrower Rates are the weighted average borrower rates on Prosper Select Index loans with loan amounts between $5,000 and $10,000. Rates shown are interest rates, not annual percentage rates.

Mix of Funded Borrowers: Prime includes all AA and A credit grade loans (credit scores of 720+). Near Prime includes all B, C, D credit grade loans (credit scores between 600 and 719). Sub Prime includes all E and HR credit grade loans (credit scores below 600).

Achieving financial freedom means having enough investment income so that you don’t have to work for a living. When your investment income exceeds your living expenses (including taxes), you no longer need a job to pay your bills. Of course, you don’t have to quit your job once you achieve financial freedom, but you have instead the choice of whether or not you continue to work.

You will also want a margin of safety. If your living expenses are $5,000 a month and you make $5,000 of investment income a month, for example, you have little financial wiggle room if your living expenses spike or your investment income takes a hit. It’s better in such instances to have perhaps $10,000 or more of monthly investment income before submitting your resignation letter.

To achieve your Financial Freedom Day, you need to reduce your living expenses and increase your investment income until your investment income exceeds your living expenses by your desired margin of safety.

Reducing Your Living Expenses

The best way to reduce your living expenses and keep them low is to live well below your means. There are many good suggestions in the Personal Finance Education section of this blog. The idea is to maintain your quality of life while living it in a more frugal manner.

Borrowing money for consumption is considered “bad debt” because it costs you money. Bad debt takes money out of your checking account every month when you make the payments. To get rid of bad debt more quickly, consider a Prosper consolidation loan. By refinancing your debt at a lower interest rate, you will save interest expense. These savings can be used to help buy the income-producing assets you need to increase your investment income.

Increasing Your Investment Income

You investment income must come from a portfolio of income-producing assets. If you need $5,000 of investment income per month (or $60,000 a year), for example, you should work towards building a portfolio worth $1.5 million in order to be able to draw income at a 4% safe withdrawal rate.

If your investment management costs are 1% of your portfolio’s value and inflation is 3% a year, your portfolio needs to earn at least 8% (4% + 1% +3%) a year on average in order to be able to generate the same purchasing power of income on an inflation-adjusted basis.

Diversifying with non-correlated asset classes is important. Although the stock market averages 10% a year over the very long term, its returns also swing wildly on a year-to-year basis. Prosper loans, on the other hand, are correlated with the job market rather than the stock market. Hence, making loans to your fellow Americans is a way to help diversify your portfolio of income-producing assets. But since unsecured loans to people are also risky, it’s important to keep your Prosper portfolio to a small percentage (e.g., less than 5%) of your overall investment portfolio.

The only constant is change. Investment returns change. The inflation rate changes. The economy changes. You need to monitor the financial environment and make adjustments to your investment choices and living conditions as the world changes. This is an area where you need to take full responsibility for the results you get. No one else is going to do it for you.

Borrowing money to buy income-producing assets is considered “good debt” because doing so puts money into your checking account on a regular basis (so long as your investment return is greater than the interest rate on your debt). When you find the right opportunities, consider taking out a business loan on Prosper to be able to take advantage of them. With your good credit and your excellent track record of on-time Prosper loan payments, lenders will want to loan you money and you will find Prosper to be an ongoing source of inexpensive money to fund your wealth-building programs.

Making It Happen

The first decision you need to make is to decide you want to achieve financial freedom. Then commit to making it happen, whether it takes you years or decades to achieve your dream. With your decision and commitment, you will start looking for ways to increase your income, live below your means, and invest the difference. Set up a capital account and add to it the money you save by consolidating your debts with a Prosper loan (along with the many other ways you will discover to save money).

When you are tempted to buy a non-essential luxury item you just have to have, decide what you want more — the luxury item or financial freedom. Buying the luxury item will push your Financial Freedom Day further out in time; avoiding the purchase of the luxury item and putting the money into your capital account instead will pull your Financial Freedom Day in closer to the present. There is no right or wrong answer here. Rather, it’s what you decide to do with your money and your financial future.

The conceptual framework provided in this blog post will get you started on the road to financial freedom. All you have to do is reduce your living expenses and increase your investment income in a steady fashion until your investment income exceeds your living expenses by your desired margin of safety. Prosper is here to help when you need it. Enjoy your journey and may it be a profitable one.

Roger Steciak achieved early semi-retirement in 2006 and became a Prosper lender to diversify further his portfolio of income-producing assets. His book Happy About People-to-People Lending With Prosper.com, How to Lend Money to Friends You’ve Never Met was published in 2007.

I wanted to give everybody a quick update on collections. I know that many of you are anxious for an update on the debt sale. Regretfully, I have nothing to tell you yet. I expect to have another update on this subject early next week (Monday or Tuesday).

In the meantime, I want to give you an update on the accounts in the legal test. We have obtained service on 12 of the suits – and have sent “proof of service” back to the courts. Another 41 have been formally entered on the dockets of the court in and are currently out for service. I would believe that some number of these have been served, but we only have a “batch” interface with the process servers, so I don’t have real time date on this. Finally there are 7 suits on which we are waiting for the “file stamped” copy back from the court to send out to service.

At this point, we keep pushing for service. Once we have received proof of service, the minimum time to move for default judgment is 30 days. As a rule, the law firm will wait until 45 days after the service date to file a request for default judgment. Thus far, none of the defendants have “answered” the suit.

On other topics, I will be making my monthly trip to AmSher on 5/15 & 5/16. I will dedicate another posting to the current state of collections and AmSher after I return.

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Doug Fuller is the Vice President of Operations at Prosper.

Local cable has been running a television commercial that simply rips my heart out. A young girl around eight goes into a jewelry store with her dad and her bright pink piggy bank. The dad helps her pick out some jewelry for mom and the commercial ends with everyone smiling and happy. Even though it’s fictional, I try not to think of how long this girl would have to save up for anything of value at a jewelry store. Do you think her mom really wants her daughter to spend months worth of savings? If I’m her mom, I’m sad. I could have simply bought it myself with the savings from a few hours of work. I would much rather have a poem or a picture from my son or daughter.

The commercial would have made Anna Jarvis, the inventor of Mother’s Day, extremely angry. Though she thought that mothers should be recognized, she later regretted the idea due to the mass commercialization of it. Jarvis ended up spending the rest of her life trying to take back the holiday from the marketers.

If I were the father in the jewelry commercial, I would have given his daughter a few of these frugal Mother’s Day ideas from Better Budgeting. Additionally, there are always these arts and craft ideas from Mommy Savers. (Editor’s Note:  In addition, Prosper Blogger, Cash Money Life had published 15 Inexpensive Mother’s Day Gift Ideas.)

Lastly, please consider writing your own card. Why would you go to a store and pay $4 to have someone else tell you how you feel about your mom? Think of this exchange from Seinfeld:

Kristin: You got the card I sent?
Jerry: I did.
Kristin: So where is it?
Jerry: What?
Kristin: The card. Is this it in the trash?
Jerry: No?
Kristin: This is my card, you threw it away.
Jerry: Well–
Kristin: I put a lot of thought into this card.
Jerry: You signed your name and you addressed the envelope, it’s not like you
painted the picture and wrote the poem.

Photo Credit: 1 

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Lazy Man has been a lender at Prosper since February 2006. He is the author of the personal finance blog, Lazy Man and Money and the health and fitness blog, Lazy Man and Health.

I guess that today has been two years since I joined Prosper. They sent me a nice note telling me so. What an interesting ride it’s been so far. Euphoric when the first loan I bid on became active and depressing when I followed it to Default. There have been lots of emotion between those too.

I have to say that I’ve learned a lot about credit in the past couple years. The variety of commitment to payments has been interesting too. As above the ranges are sometimes unpredictable. I’ve had good and bad borrowers in all credit brackets. Initially I felt like I could ignore some of the data and bid to help people. Boy did that hurt!

The platform has improved so much over the past couple years. The information we have now is so much better than before. I can’t believe I bid so blindly early on, but it was all we had. Quality of loans and collections seems to have gotten a lot better too. The 3rd party applications have benefited from improved information sharing and I’m amazed at how helpful they are.

I had a business trip to San Francisco in the fall and was granted the opportunity to visit the office. What a group of nice gracious people. It’s always fun to talk to someone else knowledgeable about Prosper (my wife just rolls her eyes at me.) I live in a large company in corporate America and it was fun to see this startup doing its thing.

What am I doing now? I’m bidding on loans and playing with portfolio plans. I’m far more conservative now and the results are keeping me happy – 100% current for the past 12 months, 96ish% current for the past 18 months (just don’t go back to those early loans!)

It’s been an interesting ride. I’m looking forward to the next couple years of P2P lending.

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Mike (printans)
Support my Juvenile Diabetes Research Foundation ride in Death Valley by donating here: https://ride.jdrf.org/index.cfm?fuseaction=rideCentral.personalpage&riderID=7953