Monday, January 1, 2007

Interest Rates

Recently there has been much wailing and gnashing of teeth over on the Prosper forums about the low rates and how low "newbies" are bidding the rates.

If that were the case, then surely one should be able to see it if one graphs the interest rates for each credit grade? I've been playing with the data for a couple of days now and I cannot, for the life of me, see any significant decline in the rates. The charts are busy, and I'll only post the rates for "A" rate borrowers, but the other grades exhibit similar characteristics (banded at higher rates) and I'll make a spreadsheet of the data available if any statistically-minded person wants to take a look at the data.

Here is the detailed chart of lender rates for "A" credit grade borrowers. I've cut off one high point and arbitrarily started the graph at March 1, 2006.

Full-sized image available here.

If I graph the average rates for "A" loans on a daily basis, the chart looks as follows:

Full image available here.

The only indication I can gather from looking at the average rates chart is that the high rates for "A" borrowers declined. The bottom rates are still pretty much the same and there is little or no clustering when viewing the individual loans, but the amount of variance in the average rate seems to be declining.

It is thus my hypothesis that the low rates have always been with us, but that there were enough borrowers in each credit grade funding at "above normal" rates to create the appearance of higher-than-normal rates. Now that there is more bidding competition, those loans are being bid down closer to the norm.

Perhaps the lines on this chart will illustrate what I mean:

Full image here.

Note also that this is for funded loans only. There are still many, many loans going unfunded. Currently I have Standing Order bids on 3 or 4 listings that look as if they are not going to fund at all. And that is for clean, "triple zero" borrowers. I don't really understand how people miss such obviously good candidates for loans. Perhaps a post highlighting some of those loans sometime?


Anonymous said...

When you did your graphs, did you include all A grade loans or did you sort out the autofund ones from non-autofund? It seems that the complaints would be more applicable for non-autofund loans since autofund listings seldom get bid down.


Anonymous said...

Great work here.

I would love to see some work done on the effect of rate cap (29%) I think this is distorting the entire market and burning many lenders. C, D, E, HR lenders cannot make enough at 29% in order to compensate them for losses. This is why AA loans get bid down so far....nobody wants to fund the junk at 29% (at 50%...maybe).

I am a very larger lender on the site.