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July, 2012 Investor Monthly Update

THREE YEARS OF CONSISTENT PERFORMANCE

July 2012 marks Prosper 2.0’s third birthday. Consistent loan performance over the past three years demonstrates the significant improvements made since Prosper’s pioneering 1.0 model. Over the past 36 months our investors have experienced 18 months of returns greater than 1%, 35 months of returns greater than 0.80%, and not a single down month.* Prosper 2.0’s performance underscores the fundamental durability of the returns available in consumer credit, a fact that remains greatly underappreciated by the majority of investors today.

Recently, TransUnion published a report on consumer credit trends. These indicate that U.S. credit card delinquencies continue to improve.  As we review the article alongside recent Federal Reserve data, we realize that the improvement in credit delinquency trends speaks volumes to the changes in borrower behavior brought on by the calamity of the 2008 financial crisis.  Consider the graph below that charts the history of consumer credit card delinquency and charge-off rates:

The charge-off data in this chart, reported since March of 1985, shows that the current reading of 4.25% ranks in the 40th percentile of this entire data range.  In other words, 60% of the time, charge-off rates have been higher. Good, but certainly not extraordinary. Now, consider the shorter delinquency data series in grey. Beginning in March 1991, the delinquency reading was almost 6%. The current reading of 3.07% is the lowest on record.

The implications of this conclusion are profound. Delinquency rates are traditionally an excellent precursor for future charge-off rates. Low and falling delinquency rates suggest that future aggregate credit charge-off rates for consumer credit will continue to improve. However, more startling is that these improvements are occurring in the weakest economic recovery on record since World War II.  This seems counterintuitive. One would expect to see improved credit performance during periods of economic growth like the boom of the mid-90s, for instance. Or the post-bubble period last decade. Instead, we see higher economic growth, lower unemployment and better income statistics, which should lead to improving credit performance. So what gives?

In our May Update, we discussed at some length the dramatic declines in net income and net worth experienced by American families since 2000.  We think that the answer to the above question lies in the combination of this data and scars of the 2008 Financial Crisis.  Very few experts dispute that throughout the remainder of this decade, we are likely to witness a massive deleveraging of the Western World’s balance sheet.  A consequence of this will be sub-par economic growth, an environment that Bill Gross, the CIO of PIMCO, has dubbed the “new normal”.

So what would responsible credit worthy borrowers do in an environment of little future income growth and uncertain job stability?  They would tend carefully to their debt – lowering interest costs where possible and insuring pay down of outstanding debt.  And perhaps above all, they would preserve access to credit by staying current on their bills. Seen through this prism, improvements in consumer credit behavior make perfect sense as a rational adaptation to the brave new world of deleveraging. The upside? As an investor in P2P you can take advantage of this secular trend, helping creditworthy borrowers to achieve their logical goals and benefiting from consistent returns.

More information on July’s monthly performance update can be found here. For further explanation of this commentary or with any other questions or comments, please contact our investor marketing team at investorteam@prosper.com or 1-877-611-8797.

Joseph L. Toms
Chief Investment Officer


*Platform Monthly Return on Principal for All Vintages (Seasoned & Unseasoned) is the dollar-weighted average return of all the discrete loan vintage returns for a given calendar month based on outstanding principal at the beginning of the month. For a loan vintage to be considered in the calendar return, it must fall between July 2009 and the month prior to the reporting month (e.g. the December 2010 calendar return would be the average return of loan vintages from July 2009 through November 2010). The periodic return for calendar month and respective loan vintages is calculated by taking the net payments received on borrower loans (which are net of principal repayment, credit losses, and servicing costs for such loans) as a percentage of the principal outstanding at the beginning of the period.

**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:


Notes offered by Prospectus.

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.

08/21/2012 by in Featured, Lenders, Personal Finance Education

June, 2012 Investor Monthly Update

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.

07/26/2012 by in Featured, Lenders, Personal Finance Education

Credit scores on the rise in the U.S.

With the recession, Americans have seen some of the most astonishing and drastic shifts in our money markets. The nation’s individual credit scores have been no exception. According to Lisa Gerstner from Kiplinger Personal Finance Magazine, this change has not only evened out, but is on a slow, positive rise. Lisa Gerstner writes, “As we pulled out of the recession, the middle started to grow again. Now, about 18% of scores are in the highest range: 800 to 850”. Gerstner goes on to confirm that this is the highest we have seen since October, 2008, which was about 15%. You can find Gerstner’s complete article here.

Gerstner predicts that this is more than likely due to the fact that the recession forced people to focus on their finances more closely. As a result, they were able to build their credit scores, and increase their chances of receiving better rates down the line. Borrowers with a higher credit score are more likely to receive lower interest rates on personal loans, such as those provided through Prosper.com.

Increasing your credit score isn’t always the most straight forward process. Gerstner advises that borrowers stay current on bills, keep credit balances low relative to credit limits, and only take credit when they need it. But what else can borrowers do? Jessica Anderson, associate editor of Kiplinger Magazine demonstrates 6 things that borrowers should bear in mind in order to raise their credit scores and consequently lower their rates. Anderson covers these steps in her article, “6 Things to Know About Credit Scores

07/17/2012 by in Borrowers, Featured, Personal Finance Education

How it works: Debt consolidation with Prosper.com

“Debt consolidation” can sound complicated and downright confusing. But it’s really just about reducing your debt to a single monthly payment and then making a commitment to getting rid of it forever. Here’s an example:

With Prosper.com, it’s simple.

  1. Apply online, at your convenience and from the comfort of your home or office.
  2. Pay off your credit cards or other loans with the proceeds of the loan.
  3. Make your monthly payment on your Prosper.com loan and eliminate your debt forever.

If you’re carrying credit card balances but have been afraid to take the next step, then make today the day.

* Minimum payment requirements vary by card issuer (for another example, see this Federal Reserve Credit Card Calculator explanation). We have used a conservative assumption here, taking the greater of $25 or 2% of the outstanding balance plus finance charges accrued in the period. This example assumes that the loan proceeds, net of a $495 closing fee, are used to pay off the credit cards immediately, rather than a scenario with continued monthly minimum payments.

** If you have a Prosper Rating of B and no previous loans and take out a loan for $10,495 for five years, your interest rate will be 20.85% (23.32% APR), you will have 60 monthly payments, and your scheduled monthly payment will be $283.04. Eligibility for a loan is not assured and requires that a sufficient number of investors commit to invest in your loan. Refer to the Borrower Registration Agreement for all terms and conditions. All loans made by WebBank, an FDIC-insured Utah-chartered Industrial Bank.

06/08/2012 by in Borrowers, Featured, Personal Finance Education

Using Prosper Ratings to Diversify Your Portfolio for More Consistent Returns

In this 15-minute video, Prosper.com executives Jim Catlin, EVP of Risk, and Joseph Toms, Chief Investment Officer cover:

  • Analytical insights on the performance of loans based on risk ratings (Prosper Ratings AA to HR)
  • What to consider beyond the estimated return of a P2P investment
  • How to use Prosper Ratings to diversify your portfolio for more consistent returns

Webinar: Using Prosper Ratings to Create a Diversified Portfolio for More Consistent Returns.wmv

Suggested next steps:

  • Review your current allocation by Prosper Rating. See where your portfolio needs adjusting, based on your investing style and risk tolerance. Sign in to your account.

Diversification is an important, time-tested component of an investment strategy. Stay tuned for more content for Prosper investors that highlight the benefits of diversifying your Prosper investment.

As always, we appreciate your comments and questions. Please post a comment below.

Notes offered by Prospectus.

Prosper Marketplace, Inc. is not registered as an investment adviser with any federal or state regulatory agency. The information contained in this webinar is for informational purposes, and should not be construed as individually tailored investment advice or as a recommendation with respect to any security or investment approach. This webinar has been prepared without regard to the circumstances and objectives of its participants and should not be relied upon as authoritative or taken in substitution for the exercise of judgment by any participant. Each participant should consider the appropriateness of any investment decision having regard to his or her own circumstances, the full range of information available and appropriate professional advice. Prosper Marketplace, Inc. recommends that each participant seek independent investment and financial advice concerning any services or investments discussed in this webinar.

06/01/2012 by in Featured, Lenders, Personal Finance Education, Prosper News

 

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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.