Thursday, March 27, 2008

Why I will not be endorsing Islandmele's listing

Islandmele, one of the nicest forum posters on prospers.org and the now-defunct prosper.com forums, as well as the group leader of what can be described as the best group on Prosper.com - Malama Ohana, has asked me to endorse her upcoming listing.

Regretfully, I declined.

My reasons were many and complex, and I was under the gun to compose a response in the 20-minute timeout window that Prosper impose on such activities, so I'm not sure I fully explained my motivation for doing so. Hopefully she'll read this for more insight.

Foremost on my mind is that endorsements are the only possible way that Prosper.com can implement the now-failed group model, by forming ad-hoc groups of people endorsing borrowers. For this to work, we have to stay away from the one thing that broke the group model early on, the notion that a bunch of strangers on the Internet is a "group." As demonstrated by Malama Ohana, a good group is one where the group members know one another and are willing to place substantial bids between themselves. Similarly, "good" endorsers are those who really know the person they endorse, and are willing to bid on the person they endorse. Perhaps even to bid substantially more than a token $50.

We were all too eager early on to bid on loans in "good groups," where we hardly knew the group leader and the group leader hardly knew the borrowers. Often we have observed the disappointment, disbelief, and in cases even anger emanating from the lenders and even the group leader when groups built on this model failed to live up to expectations and when borrowers in these groups defaulted.

Even in the case of Malama Ohana, when one borrower ran into trouble, the results of belonging to a strong group did not result in a different outcome to lenders. The loan is in bankruptcy and thre will be no recourse for lenders. There has been no visible effort by the borrower to exempt the loan from bankruptcy proceedings or any other method by which group affinity proves to make a difference. Granted, there may be nothing left to salvage and one instance of default is too small a number to generalize, but for all intents and purposes, group affinity even in this group makes no difference.

What does this have to do with endorsements? Only that I believe the only credible endorsement of a listing is by a number of close friends and associates of the borrower, all of whom are willing to bid substantial amounts on the listing. Not simply random endorsements of people with whom we have built up a passing acquaintanceship on the Internet, in email and in forum communications. And especially not if those people will not be bidding. As matters stand right now, it would take a miracle and an act of Congress before I place another bid on Prosper. (see my previous blog post.)

Since I would not bid on an endorsement like the one I am able to give, I thus feel unable to endorse the listing and perhaps entice other, newer lenders into a sense of security regarding this loan that many endorsements may give it. No doubt Islandmele will get many endorsements and bids from still-active lenders and those endorsements will carry weight and add value. My endorsement will be a mere empty gesture, signifying nothing.

Note that those who will bid on the strength of endorsements should still exercise due diligence. Any listing that one considers bidding on must first and foremost pass the numbers test (Islandmele's numbers are squeaky clean and very strong). Then the listing description must make sense (I have not yet seen Islandmele's listing description, so I cannot give an opinion). Finally, as with all Prosper bids, one must consider that there are no certainties, only probabilities when lending on Prosper. Borrowers can run into insurmountable obstacles, the economy can collapse, many things can happen that may make it impossible for even the very best borrower to repay the loan or to keep it current to the extent that Propser will not sell it off to a JDB and thus remove all possibility of the borrower making good on the loan eventually. For this reason alone, it behooves us to bear in mind that the rate on a listing should be commensurate with the perceived risk of the listing and with alternative means of secured investments.

Finally, ask yourself if, why I and many other lenders like myself are not lending anymore. It's not because of the defaults, but fundamental problems with Prosper that stopped us lending. The latest of these is the disturbing fact I mentioned in my previous blog post that Prosper apparently is not currently going after non-paying borrowers in "Texas and other states." Well, then perhaps lenders shouldn't be lending in "Texas and other states" if that is the case.

2 comments:

bamalucky said...

If you left org because of me,you should go back because i doubt i return.I feel like i cheated you out of something you cared about way more than i ever would.It's crappie season here & i plan to drag my lazy ass AFK a lot more too.

Good story.Plus this loan will go off at 5% probably.Risk far outweighs any reward here.For some reason,people think this & employee loans are failsafe.

Anonymous said...

Am I in Bizarroland? Have bama and HO switched personas? Were they one and the same, all along?

TJ