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June, 2012 Investor Monthly Update

by Prosper on 07/26/12

June was an exciting month for peer to peer lending. The industry hit $1 billion in combined loans back in May, and June commenced maintaining that momentum. Prosper saw record highs in loan originations throughout June, which we attribute to the growing recognition by borrowers and investors of peer to peer lending as well as the increased need by consumers for access to funds, demonstrated in the paragraph below. The proof can be seen in the returns, as Notes issued by Prosper have enjoyed annualized returns of 10.02% since July 2009.*

The Federal Reserve’s June Consumer Credit report showed an increase of $17.1 billion, notably well above forecasts. This change was led by a jump of $8 billion in revolving credit (primarily credit cards) which was the largest increase since November, 2007.   The six month average consumer credit monthly change, reference the chart on the left below,  is now back to the highest levels seen since back in 2000 over a decade ago! This tells us that there are more people in need of consumer lending now than there have been since Prosper’s launch in 2006.

Many economists attribute consumer credit’s recent gains to the slow hiring and stubborn unemployment that is failing to generate enough wage growth to cover on-going consumer expenses.  The theory is that consumers are leveraging their balance sheets to compensate for wage shortfalls.

Is this the right interpretation?

We think not.  The large majority of consumers remain employed. We think that the draw on consumer credit lines instead reflects a growing comfort that, while the economy may not be booming, the worst has passed, resulting in increased spending, a positive economic sign.  Consider the fact that while hiring has remained extremely sluggish by past standards, the unemployment rate, which is currently at 8.2%, remains reasonably stagnant. In other words, the employed are not losing their jobs.

Performance remains strong with 9 out of 10 quarters, performing at or above our return projections. It is important to note that the one quarter that slightly underperformed is still generating high single digit returns to investors. Below is a graph that demonstrates the consistency in each month’s annualized returns with Prosper since July, 2009. Additionally, incoming data on our 5 year loans show them to be preforming above our performance estimates.

Let’s consider another data point.  Through the first six months of the year, the S&P 500 has returned 9.48% (including re-invested dividends), a strong start for equities and a sign that the country’s economy is not terrible.   More light is shed by examining the S&P 500 sub-industry group performance over this time frame, as shown in the chart on the right below.  Specifically, the Consumer Finance sub-industry index has returned 27.1% in the first six months of the year!
For additional context, consider that in the first six months of 2008, well before most understood the Financial Crisis was upon us, this same index significantly lagged the S&P 500, down 22.62% as compared to the S&P 500 being down 11.91%.  In short, the equity market a fantastic barometer of future economic conditions, suggests that the American consumer’s conditions are improving.  A great sign for P2P investors!
More information on June’s monthly performance update can be found here. Additional data can be obtained by contacting investorteam@prosper.com.
Joseph L. Toms
Chief Investment Officer

*Seasoned Return calculations represent historical performance data for the Borrower Payment Dependent Notes (“Notes”) issued and sold by Prosper since July 15, 2009. To be included in the calculations, Notes must be associated with a borrower loan originated more than 10 months ago; this calculation uses loans originated through August 31, 2011. Our research shows that Prosper Note returns historically have shown increased stability after they’ve reached ten months of age. For that reason, we provide “Seasoned Returns”, defined as the Return for Notes aged 10 months or more. To calculate the Return, all payments received on borrower loans, net of principal repayment, credit losses, and servicing costs for such loans, are aggregated and then divided by the average daily amount of aggregate outstanding principal. To annualize this cumulative return, it is divided by the dollar-weighted average age of the loans in days and then multiplied by 365. All calculations were made as of June 30, 2012. Seasoned Return is not necessarily indicative of the future performance on any Notes. In September 2011, an independent accountant examined and attested to Prosper Marketplace, Inc.’s calculation methodologies for measuring historical investment returns.

**To calculate the Return on Principal by monthly loan vintage, all payments received on borrower loans (which are net of principal repayment, credit losses, and servicing costs for such loans) originated during the month are aggregated and then divided by the average amount of aggregate outstanding principal. To annualize this return, it is divided by the dollar-weighted average age of the loans in months and then multiplied by 12. To be included in the Seasoned Returns calculations, Notes must be associated with a borrower loan originated at least 10 months prior; this calculation uses loans originated through August 31, 2011. Our research shows that loan portfolios that have reached 10 months of age more accurately reflect the likely long-term performance as the loans have had sufficient time to experience the impact of potential defaults. Seasoned Return is not necessarily indicative of future performance of any Notes.


IMPORTANT DISCLOSURES:


This presentation includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. You should carefully read the factors described in the “Risk Factors” section of the Prospectus for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.


All forward-looking statements speak only as of the date of this presentation and are expressly qualified in their entirety by the cautionary statements above and in the Prospectus. We undertake no obligation to update or revise forward-looking statements that may be made in this presentation to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.



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Notice: Blogs and other materials posted on or linked from this page that use the name "Prosper" generally use that name to refer to Prosper Marketplace, Inc. if published before January 31, 2013 and to refer to Prosper Funding LLC if published on or after February 1, 2013.