Oil closes above $100
February 20th, 2008 | Investing, ProsperSome recent events if you haven’t been keeping up:
- Light Crude closed above $100 today.
- The market is pricing in a 50 basis point rate cut by the Fed in March which will drop money market rates to around 3%.
- Widespread pessimism in the housing market and subprime mortgages.
This actually looks like a better time to invest money into Prosper then 2007. Your going to get similar rates on loans compared to last year and you get some extra wiggle room since money market yields are around 2% lower then last year. My gut is telling me delinquency rates will also improve for loans vested in 2008 vs 2007.
March 1st, 2008 at 12:34 pm
I’m thinking just the opposite. Higher oil will result in less money for loan repayment for those up against the wall. Low investment grade yield will pull more lenders into prosper, reducing the risk premium for loans.
If wages would keep pace with inflation, the situation would look a lot better.
March 2nd, 2008 at 3:45 pm
Rich_Lather: I agree with you that more and more people are struggling with bills. (I been pretty pessimistic about the economy since last year..).
The reason I think this year would be better is:
1) You are getting a higher risk premium since ’safe’ investment yields such as money market and treasuries have been dropping and looks poised to drop some more.
e.g. 5%+ money market last year vs. 3.5% this year
2) More psychological then economic. There has been widespread pessimism about anything ‘loan’ related due to subprime mortgages. Lender’s seem more rational and smarter then they were last year, I no longer see the crazy speculation in HR loans that I have seen earlier in Prosper.
3) Banks have been tightening lending standards, money is harder to borrow so there will be an increase in the ’supply’ of borrowers. Always a good thing if your a lender, just gives the better ‘loan pickers’ more choices.
March 21st, 2008 at 12:47 am
Prosper has been deferring default sales. I’ve got a few loans that are 4+ (6 months for two of ‘em) months delinquent, and prosper hasn’t defaulted them or sold them. The net effect is that I don’t take a loss for those loans, making my personal loan portfolio look better.
In my opinion this overstates the value of prosper investors portfolios and returns.
This behavior seems different in the past where they would auction loans fairly quickly — certainly before they were 6 months delinquent, for 10 cents or less on the dollar. The older a loan is the less valuable it is. take a look at lender muleshoes, here:
http://www.lendingstats.com/lenders/MuleShoes
This poor guy lost a huge amount of money and the losses are permanent — the loans have been sold.
Maybe they cannot find a buyer for this bad debt? Maybe they want returns to look better without the loss? Dunno.
If you look at the ROI of investors that have invested more than $10k for more than 6 months, you see most returns at 8% or less. right now FDIC insured bank deposits are paying 5% or better, and there is no risk of loss at all under $100k.
An signature loan with no collateral that pays 3% or less than an FDIC insurance deposit — I decided that until I can see returns more in line with the risk that I won’t put any more into prosper than I already have.
With respect to peer-to-peer lending, leasing and finance companies are this sort of lender. When a small business buys a truck or a wood chipper or whatever, the leasing/finance company retains title to the equipment, so the risk of total loss is much less — but the ROI is similar. If I wish to lend money, I may do that instead.
When a small business buys equipment through prosper, they get the truck and we don’t get the title. When someone refinances their student loans through prosper, we don’t get the protection offered to student loan lenders — that student loans cannot be bankrupted away. Prosper loans can be. So one easy tactic to dodge student loans is to refinance the whole thing through prosper & then file bankruptcy, listing the prosper signature, unsecured, loans.
Don’t judge a loan by the rate of return alone — you have to weigh the risk and compare it with all other forms of lending rates of return. Right now prosper doesn’t stand out.
March 22nd, 2008 at 2:55 pm
Looking at Muleshoes portfolio, about half of his 209 loans are HR rated, and half of them are either late or in default. And his bids on those loan are huge! His average interest rate is 18% (weighted),but his estimated ROI is -15%. What his investment stratigy is I can’t imagine. I’m sure he (she) could realize at least 5 to 7% with very low risk if he was putting that same money into AA loans. His 5 A, and AA are all either current or paid, with an average interest rate of just over 12%.
With $400,000. in loans, a 7% rate of return would be a decent payday of $28,000. Better is seems than a $60,000. loss.
March 23rd, 2008 at 6:15 pm
No question he can do better — but at 5%, return, prosper is a lot higher risk than an FDIC insured account at a bank — at least for the first $100k.
that’s my point. for the returns that people are settling for on prosper, you can get a much lower risk investment.
Muleshoes thought that 18% on his money was a good return — near as I can tell he didn’t factor in the risk of default, and chose very high risk loans.
March 25th, 2008 at 5:38 pm
Better is definitely a relative term, so clearly if spreads widen (money market rates fall and Prosper rates stay the same of even increase), then the return to investors will also increase assuming defaults don’t climb as well. Clearly the economy is getting tougher and people are going to have less cash to go around. On the other hand, credit is very tight, which will force people to make long overdue belt tightening decisions. I think this will be very healthy for the economy in the long run and I’m hoping that it will take overall consumer leverage down (which helps us all). Stay tuned!
P2P-Loans.com
March 29th, 2008 at 5:04 pm
So far it seems that wages ARE increasing (slightly) while consumer sentiment is REALLY bad, from the last time I perused CNNMoney.com
That being said, HELOCs are starting to become impossible to get now–and more PRIME borrowers are entering Prosper.com which should keep the overall deliquency percentages down even though the amount of delinquencies in 2008 vs 2007 will rise.
As far as how much return you will get–that remains a wash.
I have been looking at AA borrowers who are doing revolving debt consolidation above 15% rates. They take some time to find, but the are there. The C and B borrowers who are out there and have been paying off, I think I will continue to plow that back into the same kind of loans, but right now 15% is my lowest APR I will be happy to lend with given the long 3 year timeframe.
In a FEW cases, I have lended to HR and NC, but mostly for education purposes and not debt consolidation. One NC borrower I lend $150 bucks to and hoping the rate clears at 20% is for her flying lessons. Her credit history began in January, so she’s living with mommy and daddy, and her loan payment is about as much as her cell phone bill. That’s a high-risk investment that I don’t mind making.
March 2nd, 2009 at 11:57 pm
Dodge Truck Pricing…
Do you know if there are any other pages similar to this one?…