It’s been a little over two months since CEO, Steve Vermut and Head of Global Institutional Sales, Ron Suber, joined Prosper’s management team, and this week, I am excited to be joining them full time as President. I wanted to let our community know that we intend to use this blog as a method of communication to continuously inform both our borrowers and lenders of what we are working on here at Prosper, and of what new and exciting things are coming in the near future. It’s important to all of us that our customers understand we are striving to make Prosper a leader in customer service and technology. With valuable feedback from our customers, we are able to deliver products and solutions that will enhance the user experience across the platform.
I want to give everyone an idea of all the exciting things the Prosper team has been working on since bringing on the new management team. In February, we focused on building and launching tools and improvements vital to the platform’s performance. Our new API gives lenders the tools they need to customize their Prosper experience in ways never before possible, and Prosper Funding LLC provides increased security and protection for our lenders. We also extended our customer service hours to provide more one-on-one support for more hours of the day.
As we come to the end of March, we’re excited to report $15.1 million in loan originations, a 60% growth over February and our best month since October. We also project $25 million in new loan listings on the platform this month. In fact, at the time of this post, there are 200 new loans now available to lenders.
We have also been looking at various ways to improve our service and product offerings for our retail and institutional lenders, as well as for our borrowers. Here are some of the priority items that we’re focusing on over the next few months (in no particular order):
• New Prosper Logo/Identity: Along with the technology enhancements to our product, on April 2nd we are launching a rebranded web experience including a new logo and identity. We have been working on this for a while and are excited about the changes. Let us know what you think.
• Improved collections: Over the past several months, we have focused on improving collections by increasing call intensity, and working with our delinquent borrowers to be the payment of choice during tax refund season. As a result of these changes, we have had 3 consecutive record months of collections. Moving forward, we will be adding a new collections agency and will send delinquent accounts to collections at 16 days past due rather than 31 days past due. This will enable us to expand our call coverage and skip tracing capabilities, which will provide better results for our lenders.
• Washington State (and more): We are currently engaged in communication with the Security Division of Washington’s Department of Finance and hope to reopen the platform to Washington lenders very soon. We apologize for the inconvenience to our Washington customers – the blackout is a result of the implementation of Prosper Funding LLC’s New Note Offering. With this implementation, we have also added West Virginia and Michigan, and plan to have several additional states join the platform in the near future.
• Whole Loans: In April we are launching a whole loan product in beta for our institutional lenders, which will be separate from our traditional pool of fractional loans. The beta version of this product is in test mode and we will communicate more details as they develop.
• Additional Improvements: Some of the many other things we are working on are a new IRA trading option on Foliofn, an increase in the loan cap on the platform to $35,000, enhancements to our Automated Quick Invest tool (AQI), and expansion to both our customer support and technology teams.
Steve, Ron and I are committed to creating a transparent relationship with our borrower and lender communities. This asset class and market place are changing rapidly. We will continue to make ourselves available to answer any questions. Please check back here regularly as I publish new posts with updates as well as gather questions and feedback from our community at large. We welcome any comments and/or questions below.
Over the past several months, Prosper has been working with the SEC on implementing an important new protection to offer enhanced safety and soundness for all lenders on the Prosper platform. We’re very happy to share that we are the first peer-to-peer lending platform to provide all of our lenders further security of assets. This industry-leading protection, along with our recent fundraising efforts and additions to the management team, represent important milestones for our customers.
First, some details on how this works. A new legal entity called Prosper Funding LLC has been established, which is a wholly owned subsidiary of Prosper Marketplace, Inc. Prosper Funding LLC is now the owner of all loans and the issuer of all Notes on the Prosper Marketplace. As a result, all Notes (both new and previously issued) are now fully protected in the unlikely event of a Prosper bankruptcy.
In order to purchase Notes from Prosper Funding LLC, lenders simply need to agree to the new registration agreement. If you have not done so already, you will be alerted to accept this agreement next time you sign into your account. New lenders are automatically registered with Prosper Funding LLC. In addition, you can review a “Risk Factors” section in the Prospectus for information regarding the risks and benefits of this new offering.
Thank you for your continued participation on the platform. This new protection demonstrates our ongoing commitment to bringing best-in-class tools and services to our lenders.
OCTOBER MEDIA BRINGS INVESTORS LOOKING FOR POSITIVE RETURNS
Buoyed by press appearances on CNBC and NPR, in October Prosper posted $27m in new loan requests from potential borrowers and signed on more than 750 new investors. Loan and risk performance also continued to be strong, as the platform delivered its 38th consecutive month of positive returns to investors. In aggregate, Prosper has now returned more than $37m in interest payments to investors since its registration with the SEC in 2009, a figure that grows more rapidly with each passing month.
Election results changed investors’ focus from who will run the country to how Washington will handle the impending fiscal cliff. In many economists’ opinions, an impasse over the fiscal cliff could result in a recession as the combination of increased taxes and reduced government spending suppresses economic growth. Obviously, such a scenario would cause concern regarding how an investor would allocate capital to different investments, including Prosper loans. Do recent asset market trends support the fear of many economists? What potential strategies can a Prosper investor enact if the underlying health of the economy were to deteriorate?
Below we attempt to answer these questions.
Notwithstanding recent equity market weakness, it should be noted that the S&P 500 has had a very healthy year-to-date return, up 11.8% as of November 12th. Additionally, all major world equity markets are positive this year, with the exception of Spain and China. In short, 2012 world equity performance suggests an underlying global economy strong enough to support equity prices. Corporate high yield bonds have also shown strong performance. The BA Merrill Lynch High Yield index is up 12.9% as of October 31st. Perhaps more importantly, this index’s yield has remained remarkably steady over the past three months, suggesting that fears of a weakening economy are misplaced. If economic strains were beginning to appear, high yield bond’s interest rates should be rising.
Finally, consider two-year US government swap rates. For those not familiar with swap rates, they represent the price where two parties agree to exchange interest rate cash flows. Without getting over-complicated a high and rising swap rate indicates greater investor uncertainty about the course of future interest rates such that an investor pays more for a swap rate given this uncertainty. Note that swap rates rose prior to the beginning of each of the last three recessions (1990, 2000 and 2008) and are now back to levels not witnessed since 1993. The current level of swap rates seems to imply that fixed income investors are not overtly concerned about the direction of interest rates, or a recession. This suggests a slow but steady economic growth rather than any rapid increases or recessionary shocks. In other words, asset market data appears to suggest things will be ok.
Regardless, if investors are concerned about a recession they should look to the high credit grades of Prosper loans. Consider our back test analysis that estimates the potential variance of returns by Prosper credit grades throughout an economic cycle. Assuming an economic downturn one-third of the time in our simulation, we saw that steady performance, with little chance of principal loss, defines the likely performance of high credit grade Prosper loans. Of course, there is no free lunch, and an investor will give up additional yield by adding these to their portfolio. But the benefit of more stable returns could be exactly what the doctor ordered if tougher economic times were to prevail.
More information on October’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 email@example.com or 1-877-611-8797.
Joseph L. Toms
Chief Investment Officer
1To calculate the Annualized Returns on Principal By Monthly Loan Vintage, all payments received on borrower loans originated during that month (i) minus principal payments (ii) minus servicing fees (iii) minus chargeoff’s are aggregated and then divided by the average outstanding principal balance. To annualize this return, it is divided by the dollar-weighted average age of the loans in months and then multiplied by 12. Seasoned vintages are categorized as those vintages that are at least 10 months old.
September was an eventful month at Prosper and for a number of reasons. First, we had the good fortune to have Josh Tonderys, previously Senior Director at Barclaycard US, join the Prosper team as our Chief Risk Officer. He brings a wealth of direct credit experience that will help us scale the platform while continuing to provide strong investor returns. Second, we were listed 4th on The Wall Street Journal’s list of the Top 50 Venture-Backed Start-Ups for 2012. Third, we set monthly records for originations, listings, and cash on the platform in September. All in all, a great month!
With $16 million in originations in September, Prosper continues to focus on providing a high yield, short duration alternative for investors. Which brings us to this month’s commentary from our Chief Investment Officer, Joe Toms.
LOOKING FOR YIELD: DURATION RISK VERSUS CREDIT RISK IN FIXED INCOME
I recently came across an article that quoted Paul O’Brien, head of fixed income at the Abu Dhabi Investment Authority (with estimated assets under management of $627 billion), that we felt perfectly summarized the challenges confronting fixed income investors today. He writes:
“The return for bearing duration risk is the lowest it has been in our careers. The return for credit risk, on the other hand, is probably average. If you take the history as a benchmark, then it’s fair to say that the return from fixed income is probably better served by taking credit exposure, rather than duration exposure.”
We think this quote confirms the point we have been making over the past year, that short-duration, high-yield portfolios like Prosper’s allow investors the opportunity to generate yield while taking little interest-rate risk.
Consider the historical evidence of Prosper 2.0 vintages that are at least 12 months old. The data shows not only the stability of the different vintages but that, by the end of month 12, the vintages returned to the investor 50% of their initial investment. In other words, through the combination of prepayments, straight line amortization of principal and interest, investors receive a tremendous amount of cash flow early on in the investment.
This high cash flow provides a number of clear and substantive benefits. It reduces interest rate risk while providing tremendous flexibility to either re-invest in Prosper Loans and/or allocate to other promising investments. In short, it allows investors to earn a considerable premium in yield relative to most other fixed income investments with little interest rate risk while providing significant cash flows. While admittedly biased, we think that the combination of high yields, short durations and strong cash flows make a compelling investment case.
More information on September’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 firstname.lastname@example.org or 1-877-611-8797.
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 email@example.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.
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.
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.
As of February 1, 2013, the Prosper marketplace was transferred by Prosper Marketplace, Inc. to Prosper Funding LLC, a wholly-owned subsidiary of Prosper Marketplace, Inc. From and after February 1, 2013 Prosper Funding LLC is the sole obligator of Notes offered and secured by loans made through the Prosper marketplace, including Notes originally issues by Prosper Marketplace, Inc. prior to such transfer. Prosper Marketplace Inc. contiinues to provide services to Prosper Funding LLC relating to loan and Note servicing, and may interact with borrowers and investors in relation thereto as agent of Prosper Funding, LLC. Except where otherwise noted, throughout this website "Prosper" refers to Prosper Funding LLC including acting directly or through its agents.
All personal loans are made by WebBank, a Utah-chartered Industrial Bank. All Prosper personal loans are unsecured, fully amortizing personal loans.
Notes offered by Prospectus. Notes investors receive are dependent for payment on personal loans to borrowers. Not FDIC-insured; Investments may lose value; No Prosper or bank guarantee. Prosper does not verify all information provided by borrowers in listings. Investors should review the prospectus before investing.