Pennsylvania loans or what were early Prosper lenders thinking?
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Browsing some Prosper lending statistics at LendingStats.com, I noticed that Pennsylvania loans are exceptionally late. 23% of the loans by dollar volume have already defaulted — despite the low rate cap of 6%. The low rate cap presumably should keep higher risk borrowers from receiving a loan. See Pennsylvania Loans Sorted By Origination Date. Other lower end rate cap states like Hawaii and Arkansas also have low loan volume and a default rate much lower than Pennsylvania. The state of Delaware’s return was saved by a repurchase — excluding that case of fraud (since Prosper repurchased the loan) its default rate is also much lower.
Before looking at the Pennsylvania detail, I thought that one loan must be skewing the numbers because of the small volume of loans — only $48K. At that volume, a single $25K loan in default would case over a 50% default rate. The sample size is small, but it is the details behind the defaults that is most amazing.
What were these early Prosper lenders thinking?
There are six loans in default for an average dollar amount of $2,100. Every loan in default was graded as HR. The most amazing part if that the average interest rate charged for these six HR loans, was only 2.87%. These were all originated 2006.
Here are the details behind some of the defaulted loans in PA:
- Loan 58577 — Interest rate of 1%. BorrowersGL loaned out the full $1,000
- Loan 58756 - -Interest rate of 1%. BorowerGL loaned out all but $50 of the $1,000.
- Loan 54897 — Interest rate of 5%. MuleShoes loaned $2,950 of $3K.
- Loan 53022 — Interest rate of 5%. MuleShoes loaned all $2K.
- Loan 47411 — Interest rate of 0.21% (Yes, less than 1% interest). Again MuleShoes for the whole $2,600.
- Loan 45007 — Interest rate of 5% on $3,000 by MuleShoes.
What were these lenders thinking? Interest rates of 1% and less when Prosper also takes a percentage point of the interest paid. 47411 was a money loser automatically — even before default. These loans do not make any logical sense. So, I must check… How are BorowersGL and MuleShoes doing on their rate of return on Prosper peer-to-peer loans:
Update: Be sure to read the comments below because there were several interesting items posted.
BorrowersGL extended $65K in loans. 41% of the loans are in default. The estimated ROI for GL is negative 17%, but Eric’s CC estimates the ROI at negative 23%.
MuleShoes loaned out nearly $400,000 putting Mule in the top ten Prosper lenders. The rate of return is negative 18%, but the Eric’s ROI estimate is negative 31%. 45% of the loans are late or in default. Check out the graph of bid history — MuleShoes jumped in head first without checking the water depth.
I am shaking my head, wondering what to comment further on this. I think I’ll just let the biding pattern and loan performance speak for themselves.
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MuleShoes and his motivation wwere itself an interesting story. Do a search of the old forums and you will find out
Wiseclerk
If you’re interested in reading the old forums at prosperreport.com, do a search for ‘Fairplay’ or ‘HotTout22′ to read what MuleShoes was saying.
Also, the “other bidder” on 58756 is actually BorrowersGL’s wife who once had a group as well. Do a search for TwoMillionaires to read up on that group leader.
Honestly, I’m surprised there aren’t any loans from Pennsylvania made by reguyncali too. He was one of those early lenders who thought bidding on HR borrowers was going to make him a lot of money and help them at the same time. He was warned repeatedly on the old forums but he eventually figured it out.
Muleshoes belived in doing good and thought if people were just given a chance they would be able to fix there financial problems… He was lending for the social rewards not return.
I believe that BorrowersGL (formerly TwoMillionaires) funded those two loans as a “loss leader.” It was a way to grab attention for his group and give prospective members the impression that he could get anyone funded. He expected that, once he attracted enough members, the profits from group leader fees would justify this sort of flamboyant marketing effort.
Unfortunately for him, his losses due to defaults plus the cost of making community payments to artificially inflate his group rating were higher than anticipated, and have probably wiped out most of his group leader fee income.
As Wiseclerk notes, Muleshoes is a whole different story.
Thanks to everyone for the information. That is an interesting idea to fund some loans as a loss leader (when group leaders still received a percentage), but it did not seem to work out so well for him. I understand the concept of a loss leader, but why loan out the money at 1% when 6% is allowed? Also, if you loan out several loans where you lose the principal, it will quickly eat up many loans’ group leader fees. Not so smart, but we do have the benefit of hindsight.
Mule was a piece of work… Here is a choice quote that I found from MuleShoes/HotTout22 in the old forums:
“Wondering if anybody has any information on how to prevent the collection agencies from pursuing delinquent borrowers. I have not had problems yet, but would like help strategizing about skirting such situations. This is geared towards forgiveness rather than any form of vigilanteism.”
I wonder if he still thinks that collection agencies are vigilantes after viewing his bleeding portfolio.
Here are some quotes from borrowers about MuleShoes and Fairplay Lending:
“a borrower’s dream”
“After looking through fellow group members pages, I am floored. He believes in us. He sees the good in us. He understands that good people sometimes hit a rough patch and just need a helping hand….Not a handout.”
Or maybe he does like to give handouts.
In September 2006, one lender referring to a Fairplay loan already said:
“Between the rate, the credit grade, and the GL, I’d rather give my $50 to a bum. At least then there is no illusion that repayment will occur, and someone will get nice and drunk.”
Here are some other great quotes my MuleShoes:
” A weeklong ban for using the word ‘pricks’? Thank you sir, may I have another. Are local egos really that fragile? I will continue to question the predatory ethic of the currently established ‘voices of reason’ on these boards. This is not a quixotic crusade. I will, and have already begun to, put my hard-won bankroll where my mouth is and do whatever possible to drive down currently extortionary interest rates. If that is considered ‘pathology,’ I plead guilty to lunacy. My group is now called Fairplay Lending, keyword ‘fair.’ My new Prosper handle is MuleShoes.”
“I have not had the pleasure of being a borrower within this system yet nor do I possess the arrogance to believe that my debt should take precedence over all other personal issues a borrower may be grappling with. This is not an issue of piety, merely one of empathy, my personal emotion du jour.”
“Of course I honor my debts, especially those among friends and people that I trust. This does not include credit agencies, large corporations, and blood sucking leeches. This does include any personal contract I have ever made, the most unsavory of which was a 5k loan to my dear friend to save his family moving company from going under. Why was it unsavory? Because it temporarily compromised our friendship, now we are back to being brothers in arms - human limbs, not weapons of any sort, flesh or otherwise. Prosper itself subverts the most distasteful parts of the lending process - legal and otherwise - and that is what makes it such an attractive tool, as I see it. My method of self-expression is opaque due to a profound violation of my physical safety that occured when I was 4 years old. Forgive the psycho-babble and the intensely personal content.”
Here is a scathing post about TwoMillionaires. No wonder they changed the name to BorrowersGL. Unfortunately, most of the links to other forums no longer work, but they could be found by searching.
“Anyone not familiar with 2Mill and his group may become so by reading through the voluminous threads below. Within them, among such other things as falsehood, puffery, sleaziness, snake-oil salesman and huckstering techniques, and much else that is unsavory, you will find the Millionaire threatening to have posters he doesn’t like thrown off Prosper, threatening to call in the FBI, and threatening to unleash his mighty team of corporate lawyers against posters to sue them.”
Here is a another interesting string of posts.
Many of us who were around during the more collegial days of the original Prosper forum dabbled in what we referred to as “social lending”, where the object was not necessarily to maximize profit, but to also consider the social utility of providing someone (who might not otherwise get it) with access to capital for purposes which individual lenders wished to support or identified with in some way.
In fact, I have a loan from that time from Pennsylvania, and it’s not only at the PA ratecap of 5.75% (which was just about the risk-free rate available at that time), it’s also to an NC (No Credit) rated borrower. If thats not astounding enough for you, then I’ll also add that the loan is CURRENT, and has never once been late in any of its 20 months so far. You can see the loan listing here:
http://www.prosper.com/lend/listing.aspx?listingID=13290
Just for background, NC’s were removed from the platform several months later due to their meager aggregate performance and the “difficulty” (read: inability) Prosper had in doing identity verification with NC borrowers.
[…] interest in state by state loan default rates prompted my article Pennsylvania Loans: What were early Prosper lenders thinking? At the same time, I noticed how state interest rate caps vary widely from state to state — […]
If you look closely at the loans BorrowersGL funded at 1%, you will see he also gets GL fees of 4% making the net rate 5% instead of the listed 1%.
I did not notice the Group Lender Fees that he was receiving. I must admit that I am a little ignorant of the GL fee technicalities, but I understand the concept of the groups and the leaders.
How does a lender receive an extra 4% when a person is only paying 1% interest? Or does the borrower pay 4% in addition to the 1% interest?
That still does not really explain why he funded the loans at 1% interest. Couldn’t he fund the loans at 5% or 6% interest rather than 1% and then make up to 10% total return off the loan? Even though they have not defaulted, 10% would have been much better risk to return ratio since those are HR loans.