Author Topic: Whole Loan Program - Fair or Not?  (Read 12392 times)

ee1x

  • Full Member
  • ***
  • Posts: 124
    • View Profile
    • Email
Whole Loan Program - Fair or Not?
« on: April 05, 2013, 04:02:36 PM »
I've been pondering the fairness of Prosper's new "whole loan" program, where a handful of loans are randomly selected and offered to institutional investors prior to public release. In this "pre-release" stage, investors can purchase the entire loan instead of being capped at a certain percentage. Here's what I understand so far:

  • Borrowers make initial loan requests.
  • For each batch of requests, RANDOMLY reserve a subset (now known as "W" or whole status) for institutional investors.
  • Release the remainder to all investors ("F" or fractional status, where each investor is capped at purchasing 75% of the loan).
  • Institutional investors are allowed to purchase whole "W" loans IF they choose to do so.
  • After x minutes/hours, release all remaining unpurchased "W" loans to the general pool of investors.

At a glance, the methodology appears to be fair. Selection is done randomly, so all participants have a fair shot at obtaining loans at every tier of quality.  But one is inclined to believe that institutional investors with large sums of money to invest will generally have some above-average level of skill in selecting these loans. If this assumption is true, then from a statistical standpoint, one should assume that the remainder after step 4 will consist of loans that are expected to have a below-market rate of return as the large investors will "cherry-pick" from the pool in an effort to beat the market. Releasing this remainder to the general pool in step 5 dilutes the quality level available to the wider pool of investors, resulting in some amount of statistical disadvantage (however small it may be) to smaller investors.

I don't have any hard numbers on this yet but I can't see how this new methodology would not result in some measurable degree of quality dilution over time.

Do you agree?
Investing since March 2012

Peter

  • Administrator
  • Hero Member
  • *****
  • Posts: 759
    • View Profile
    • Lend Academy
    • Email
Re: Whole Loan Program - Fair or Not?
« Reply #1 on: April 06, 2013, 07:42:13 AM »
This has been discussed many times since Lending Club introduced a similar program last year:
http://www.lendacademy.com/several-changes-today-for-investors-at-lending-club/

Logically one would expect that sophisticated investors would be able to do better than average investors and that may well be true. But if you look at the performance of Worth-blanket2 over the last 2 years you will see there are many retail investors doing far better than them taking into account the same average interest rate.

Having said that I believe the average return of loans on the retail platform will be slightly below those of the institutional-led whole loans overall. But I think nimble and astute retail investors will continue to outperform these large investors.
Publisher of the Lend Academy blog

See my returns here: http://www.lendacademy.com/returns

Ronald

  • Newbie
  • *
  • Posts: 13
    • View Profile
Re: Whole Loan Program - Fair or Not?
« Reply #2 on: April 06, 2013, 01:38:18 PM »
Thanks Peter.

I do have a few questions as I am not familiar with LC.  (I am more interested in Prosper's implementation though)

Can we tell which loans are not taken by institution from the web UI? (W vs F)
Will the unwanted loans be released at a diff time or be mixed in so we cant tell they were not wanted?
Are the whole loans take it or leave it or can institutions invest partial on those?
Can we participate in the whole loans?  We being retailers.

Thanks.

Dennis

  • Full Member
  • ***
  • Posts: 141
    • View Profile
Re: Whole Loan Program - Fair or Not?
« Reply #3 on: April 06, 2013, 03:10:29 PM »

  • Release the remainder to all investors ("F" or fractional status, where each investor is capped at purchasing 75% of the loan).

After one large investor takes 75% of a loan, is the next investor allowed only 75% of that remaining 25%, or is it still possible for only two large investors to swallow 100% of a loan, presumably in seconds after that note hits the platform?  If that's true, then the 75% cap isn't much improvement beyond that it prevents a single investor from dominating the platform.  So two investors (or one investor with two accounts) working in tandem would still be able to dominate selective notes.

investforfreedom

  • Full Member
  • ***
  • Posts: 156
    • View Profile
Re: Whole Loan Program - Fair or Not?
« Reply #4 on: April 06, 2013, 05:32:08 PM »

  • Release the remainder to all investors ("F" or fractional status, where each investor is capped at purchasing 75% of the loan).

After one large investor takes 75% of a loan, is the next investor allowed only 75% of that remaining 25%, or is it still possible for only two large investors to swallow 100% of a loan, presumably in seconds after that note hits the platform?  If that's true, then the 75% cap isn't much improvement beyond that it prevents a single investor from dominating the platform.  So two investors (or one investor with two accounts) working in tandem would still be able to dominate selective notes.

That's a good question that Prosper needs to answer.  I gather that for any loan that is $5k or less, if a large investor has already gobbled up 75%, the other large investors would have no appetite for pitching in just $1250 to close the loan, since the additional work (accounting included) is probably not worth the money invested.  But for the larger loans, this is an issue.

« Last Edit: April 06, 2013, 05:35:03 PM by investforfreedom »

Prescott

  • Full Member
  • ***
  • Posts: 125
    • View Profile
Re: Whole Loan Program - Fair or Not?
« Reply #5 on: May 30, 2013, 11:30:57 PM »
Can we tell which loans are not taken by institution from the web UI? (W vs F)
Will the unwanted loans be released at a diff time or be mixed in so we cant tell they were not wanted?
Are the whole loans take it or leave it or can institutions invest partial on those?
Can we participate in the whole loans?  We being retailers.

1. The website has a signifier on the loan W or F. If it is W then it was in the whole loan pool but passed over for some reason.
2. Unwanted loans are released with the general pool - again there is a flag on them that you can see
3. I was told whole loans are all or nothing
4. I have no idea if we can invest in whole loans - if you're big enough retail, I assume you probably could, but really if you have a couple hundred thousand, you probably don't want to invest in whole loans.

Bilgefisher

  • Jr. Member
  • **
  • Posts: 61
    • View Profile
Re: Whole Loan Program - Fair or Not?
« Reply #6 on: May 31, 2013, 11:59:29 AM »
If were fair they wouldn't have had to implement it, otherwise they would have kept loans available to everyone at the same time which is obviously an equal shot.   A company does not make a change like that unless they are trying to cater to the larger investor.

core

  • Hero Member
  • *****
  • Posts: 1790
  • Your loss is my gain
    • View Profile
Re: Whole Loan Program - Fair or Not?
« Reply #7 on: May 31, 2013, 12:23:01 PM »
If were fair they wouldn't have had to implement it

Excellent point right there.

This reminds me of "flashing" orders on an exchange.  I don't know if they're still allowed to do that but it always struck me as odd that anyone thought that was kosher.

Big investors are going to follow the returns.  They are not going to take their bat&ball and go home just because they don't get special treatment. IF the returns are there.  And they are.  So WTH is the point??

rocco.g

  • Jr. Member
  • **
  • Posts: 53
    • View Profile
    • Nickel Steamroller
Re: Whole Loan Program - Fair or Not?
« Reply #8 on: May 31, 2013, 01:08:35 PM »
The way I look at it is that everything was in the whole loan program before, because large investors could come in and get 100% of any loan they wanted to almost instantly through the API and individuals had no shot at it.  This change created the fractional loan program so that some loans were set aside and the big investors were told they can't buy 100% of those loans that are set aside.

If you look at this change as Prosper setting aside loans that only large investors have access to then yea it seems unfair, but in reality that is not the case.  The large investors had access to 100% of any loan they wanted before this change, and they were starting to take advantage of it.  Without this set aside of fractional notes the pickings would probably be even worse than they are now.

I am not saying it wouldn't have been better if Prosper had put a 75% cap on all loans, but at least putting the cap on some is better than none.

Peter

  • Administrator
  • Hero Member
  • *****
  • Posts: 759
    • View Profile
    • Lend Academy
    • Email
Re: Whole Loan Program - Fair or Not?
« Reply #9 on: June 01, 2013, 08:26:51 AM »
Good comments Rocco. Here is my take on the Whole Loan program. It serves large investors - that is completely true and I am fine with that. Why? Because without large investors Lending Club and Prosper would cease to exist. We can complain about the unlevel playing field all we like but until the large investors came along both sites could not produce enough loan volume to get even close to breakeven.

So, despite the negatives, I am very glad the large investors are here. Look at Prosper's growth since February. When I talked with Prosper management about this amazing growth the last three months they said in January and February there were basically zero large investors. Now, in short order these large investors have propelled Prosper to heights never seen before.

In summary, I would argue that the whole loan program is very fair. It gives retail investors a chance with the bulk of the loans on the platform and it satisfies large investors who are making it possible for Prosper to create a sustainable business model.
Publisher of the Lend Academy blog

See my returns here: http://www.lendacademy.com/returns

Fred

  • Hero Member
  • *****
  • Posts: 1421
    • View Profile
Re: Whole Loan Program - Fair or Not?
« Reply #10 on: June 01, 2013, 10:49:16 AM »
Large investors are not invariably better than retail investors.  In the aggregate, they might be better at picking which notes to buy and sell, but they have a big operational hurdle to overcome first.

1. They do not really earn all the returns reported in their portfolio.  They are not really "investors", but more like "managers".  Usually, they only get management fees:  2% of the portfolio plus 20% of the profit. 

2. For every $1 M of asset under management (AUM), and for a 16% return, they only get about $52 K of management fee annually.

3. If they have annual expenses of $500 K (payroll, computer systems, licenses, office rents, etc.), they'd need at least $10 M of asset.  Naturally, the bigger the operation, the larger the AUM is required.

4. For the real investors (people who actually put their money with these managers), their real return  is much smaller than 16% from the managers' portfolio.  Perhaps it can be as low as 11%.  What this means is that asset managers need to produce returns that are 4% - 5% better than their investors require.

5. For those who work for these asset managers, this is simply a day-job  (i.e., not necessarily a fun or profitable thing to do)  ;).


Retail investors, on the hand, do earn all the returns from their portfolio.  In addition, since retail investors have a separate job during the day (hopefully), P2P investing can a fun and profitable exercise to do.

core

  • Hero Member
  • *****
  • Posts: 1790
  • Your loss is my gain
    • View Profile
Re: Whole Loan Program - Fair or Not?
« Reply #11 on: June 01, 2013, 11:10:54 AM »
In addition, since retail investors have a separate job during the day

Whaaat?  You mean you  people  have JOBS beyond LC trading????  Say it ain't so, Sam.

T=aking the bat, ball, and fat lady home with me.  Hrmph!

dagilbe

  • Newbie
  • *
  • Posts: 26
    • View Profile
    • Email
Re: Whole Loan Program - Fair or Not?
« Reply #12 on: June 02, 2013, 09:20:35 AM »
Do you honestly believe that institutional investors only invest in the whole program and not the fractional program?  Serious institutional investors are cherry picking notes from the whole program and investing big chunks  within minutes of the release of new notes in the fractional share program. 

While some retail investors may outperform the institutional investors on a given year, there are thousands of retail investors and only a limited number of institutional investors. 

The fact of the matter is that these institutions have access to more notes than retail investors and therefore have a leg up on the average Joe. 

One can argue that Prosper incorporated the whole program to increase profitability; however, institutional investors such as worth blanket have regularly invested in fractional notes and I would be surprised if significant new institutional funds came to Prosper just because of the whole note program.  Additionally, even if institutional investors invested more money in Prosper, I would guess that the whole notes invested in by the institutions would otherwise be fully funded by retail investors as a part of the fractional program.  While Prosper has started to cater to the institutional investors, Prosper faces a real risk of disenfranchising its retail investors. 

The recent poor selection of notes available to retail investors on Prosper IMO is due partially to the implementation of the whole note program. 



Bilgefisher

  • Jr. Member
  • **
  • Posts: 61
    • View Profile
Re: Whole Loan Program - Fair or Not?
« Reply #13 on: June 04, 2013, 09:16:48 AM »
Good comments Rocco. Here is my take on the Whole Loan program. It serves large investors - that is completely true and I am fine with that. Why? Because without large investors Lending Club and Prosper would cease to exist. We can complain about the unlevel playing field all we like but until the large investors came along both sites could not produce enough loan volume to get even close to breakeven.

I'm sorry, but this argument is bunk to me.  Without the small investors neither company would have made it off the ground either.  Those three months without large investors, guess who kept prosper from bleeding even more red ink.

Yes, I'm all for big money helping grow the business, but obviously I don't want to be squeezed out in the process.  I'm ready to see some good competition to LC and Prosper.

core

  • Hero Member
  • *****
  • Posts: 1790
  • Your loss is my gain
    • View Profile
Re: Whole Loan Program - Fair or Not?
« Reply #14 on: June 04, 2013, 09:57:06 AM »
Are they still going to call it p2p lending when it's no longer peer to peer?   There's likely a portion of borrowers who make a better effort to stay current just because they think "real people" are on the other end.  How little will they know.  If after all the "peers" are squeezed out it seems a bit dishonest to continue the deceit.  Perhaps this was their plan all along.  They could have some chatbots do some sterile free-form Q&A just for effect.