Live long, Prosper...and crunch those numbers

This episode of Recovery is brought to you -- literally -- by the free Wi-Fi at the Sacramento Amtrak station. Isn't it funny how the train station can offer it but most airports don't. Funny. Ha.

I spent some time this week bopping around Prosper, the peer-to-peer lending site. I'd signed up with them several years back, intending to test the system for a write-up at Another Publication. I liked what I saw so much so that I stuck with it until economic events last year caused the service to go temporarily dormant. They're back now and I thought I'd see how my people were doing.

"My people" are the two-dozen-plus Prosper borrowers to whose loans I have contributed. The idea behind Prosper was and is that the service can match potential borrowers with relatively small loan needs with lenders willing to fund some or all of their loan based on whatever criteria made sense to the individual with the money -- a good cause, a good rate of return, or a good story.

I was strictly a Prosper lender (technically a loan buyer; the actual loans are three-year fixed items offered by regular lending institutions), treating the loan process as both a fun educational tool and a way to invest without touching the stock market, which I regarded then and now as dangerous id-driven hoodoo. (And that's why I write all those earnings reports for Betanews, kids.)

I put in $1,000 and spent several hours each month on the site reading loan applications and throwing in $50 here, $75 there. Not all the loans to which I contributed received full funding, which meant I could pick another loan and try again. The service has proven popular, with just under $180 million in loans made between over 840,000 members in the first three years.

Until the middle of last year, my little stake was doing all right. Then came the housing collapse. Then came the everything collapse. Then a nervous SEC started wondering if Prosper and similar peer-to-peer loan services weren't actually selling securities, and the site began a nearly nine-month quiet period and registration process. I could look at my current loans (for which borrowers were still on the hook, of course) or withdraw my money but not make new bids; I chose to wait until the service had squared away its regulatory situation for Washington State lenders.

The new Prosper's actually a better beast in certain ways. In particular, there's a new Trading Platform, which lets me buy (or sell) notes -- chunks of loans another Prosper investor already funded but now needs to cash out of for whatever reason. There's also a hard bid floor for lenders, closing up a quirky little gap in the Reverse Dutch Auction process whereby a return rate could slide to weirdly low levels -- especially for pretty girls. (Nice for the pretty girls, maybe, but tricky for my own risk management.)

The service has lowered the minimum bid on any loan from $50 to $25, which is nice if you like to spread your money around. (The largest loan I ever made was $200, on which more anon.) And -- clarifying things for novices such as myself -- it's now clearer that one is bidding on yield, not the interest itself. (One pays a 1% servicing fee on interest earned, which answers your inevitable question, "From this they make money?")

It's all swell, but there was one change I wasn't thrilled to see: There's now a minimum 640 credit score for new borrowers. Prosper relies on a fine-tuned risk rating that takes into account performance on similar prosper loans, but the usual credit rating is a big part of that score, and the new rule stood apart from any other criterion.

The Irish operate at an intrinsic handicap when presented with a good story, and like a true daughter of the hibernian horde I have been inclined to overlook -- or even in certain moods seek out -- deserving folk whose numbers seemed more reflective of hard luck than of bad money-management skills. My tendenciers could have been worse; an early study showed that as I mentioned a number of Prosper lenders were more inclined to, as Slate's Ray Fisman put it, issue cheap loans for pretty women, and expensive loans for black folk.

My Prosper portfolio, therefore, balanced some very conservative A- and AA-level loans (I'm also of Scottish heritage; I dare you to make a joke here) with a few that were by any standard high-risk.

According to Prosper, they "believe it is easier to accurately price these higher quality listings resulting in healthier lender returns" -- in other words, part of the risk in this situation can be related to unpredictability. So I looked in on my loans -- to see if the high-risk folk were less reliable than others, to see if default rates were stratospheric under the current circumstances, and to see if My People were all right.

So what can I tell you about my people, my people? First, yes, I lost some money, though not as much as I'd feared. Twelve of my loans are current and active; three are paid off, and the rest are in various states of collections, debt purchase, or bankruptcy. And I'm down right now by about $150 -- wince-inducing, but nothing compared to the smoking ruin I see when I look at my 401-K.

Second, to heck with credit grades. Two of my A-grade loans were charged off, one through bankruptcy. My largest loan -- that $200, to a servicewoman -- went to collections as well. Two of the business owners in my roster have declared bankruptcy, one with (again) an A rating previously and one, sadly, just a couple of years before retirement and handing off the business to his kids.

On the other hand, my B-, C- and D-rated folks are for the most part still plugging away. Even more significant to me, the only three of my loans to be fully paid off so far are two D-grade loans and an E. Every last one of my B-rated loans is current, compared with just 50% of my A-rated loans.

So is this a win for throwing away all Prosper's cautious new metrics and just going with one's shamrock spidey sense? Not so fast, my loaning leprechauns. My AA-rated loans, all both of them, are doing just fine, thanks. And though I may miss the give-a-guy-a-chance aspect of Prosper Version One, the service is a monument to applying openness to financial statistics -- Prosper made the API available early on, and thanks to a healthy developer community you can slice and dice Prosper statistics 'til even the most non-Irish among us feels good about his picks. That just might have something to do with the service's returns still beating the S&P.

And the single best indicator of payback among "my people?" It appears to be an engineering degree. Sure, those tech-support folk can be a little shifty, but it looks from here like giving money to needy nerds is a lot smarter than giving it to just gifted storytellers.

Let your geek flag fly and have a good weekend.