Prosper said a few months back that they were going to tackle collections and try to improve collection rates (Prosper Tackles Collections). It now appears that Prosper has been keeping their end of the bargain. Penncro collection rates have now improved across all credit grades from around 12% in August to 14% in November.

I think this is great for lenders, real props to Prosper for listening to lenders on this issue.

“Ambac Financial Group Inc. and MBIA Inc. shares fell, along with other bond insurers, as Morgan Stanley said the industry may face a “downward spiral” and Goldman Sachs removed its “buy” rating on the two companies.”

“Zerbe said a worsening of defaults on mortgage, home equity loans and credit card balances “could prove to be the proverbial straw that starts the downward spiral in the viability of the guarantors’ business model.” Bloomberg Article

Interesting read since to an extent it effects the Prosper market as well.

The stock market is barely off its highs for the year but it feels like we’re in the start of a bear market. (As of the close today the S&P is roughly 4% off its highs this year). There is going to be more pain it seems as I doubt the Fed can negate the business cycle. With the Fed’s reluctance to keep rates high, commodity prices are hitting new highs while the US Dollar is making new lows. You can now get $1.05 for every Canadian dollar while oil is approaching $100 and gold is now trading at just under $800.

Furthermore bad news is coming out of the finance sector where job cuts are being made at numerous firms (Bear, Merrill, etc.) and hiring is being slowed down for next year.

Invest with caution in times like this. On the positive side with the end of the year approaching and bonuses coming up, it will be in the interests of those managing the money to pop the market up.

It appears Prosper is planning on setting up a secondary market in the near future to allow lenders to buy/sell notes. You can find the details on the S-1 registration the company filed yesterday.

“Prior to the date of this prospectus, the Notes have been non-transferable except by assignment to a collection agency upon default. As soon as practicable after the date of this prospectus, Prosper intends to establish a secondary trading market online auction platform, or the Resale Platform, on which the Notes may be resold to other Lenders after three months following the date that a selling Lender acquired the Note from Prosper (or immediately if the selling Lender acquired the Note on the Resale Platform).”

Here’s are the most important parts:

• A lender can sell a loan they have after holding it for 3 months.
• “Selling Lenders who post resale listings will be able to specify a listing duration of three, five or seven days.”
• “Prosper intends to charge all selling Lenders a nonrefundable resale listing fee of $0.25 per Note being listed for auction sale, or $0.50 per Note being listed for auction with an automatic sale feature.”
• “Prosper also intends to charge the selling Lender a resale transaction fee equal to 1.0% of the sale price, subject to a minimum fee of $0.50, which will be deducted from the sale proceeds at the time a Note is sold to a subsequent Lender.”

At first glance this is looking like a sour deal for the seller and a great deal for the buyer of a note. A seller is going to be charged 1% + $0.25 per loan sold whereas the buyer gets charged nothing. If a savvy investor can get a good estimate of the delinquency rate and default rate as well as when they are likely to occur in the life of a loan then they can make a nice profit in this market.

Bumped into this article today. It gives a pretty good summary of the whole subprime fiasco in housing that is happening lately.

“In March, less than a year after the issue was sold, GSAMP began defaulting on its obligations. By the end of September, 18% of the loans had defaulted, according to Deutsche Bank.” Junk mortgages under the microscope

If you finished reading that and still want to learn about how securitization works, the following article posted in May does a great job at it. Scroll down to “Turning Nuclear Waste into Gold”. The US Mortgage Market - Overexposed and Overrated

The Jobs Report today was the weakest in 4 years, instead of the expected addition of jobs we actually got a small reduction. If you add up all the pieces next year is not looking good.

1) Housing Downturn
2) Credit Market problems
3) Slowdown in job growth

http://biz.yahoo.com/ap/070907/wall_street.html?.v=25

Mmm thought this was interesting. I think the last time we had anywhere near a 10% correction was 4 years ago? I’m sure some stat guy will come along and give the exact number of days.

If you look at the latest COT report, the little guys (retail investors) have been bullish this whole ride down..

Recently there has been a lot of news out lately about the sub-prime market. For those that don’t know what’s happening, loans made out to sub-prime borrowers in the last few years are starting to go delinquent at a high rate compared to what the rating agencies such as Moody’s and S&P were projecting. This has caused a number of funds who invested in sub-prime to close up shop. Suddenly lenders became unwilling to lend money at the former rates causing leveraged buyout deals to go sour, banks to take on significantly more risk because they are stuck with bridge loans, etc.

Sound familiar? Well Prosper seems to be a nice microcosm of what is happening in sub-prime now. Invest with care, sometimes a small crack can cause the whole dam to break.