I finally downloaded and tried out Greasemonkey for Firefox extension the other day. I had heard of it before, but never installed it until recently. Greasemonkey is a Firefox extension that allows you to manipulate any web page you visit in Firefox. It uses JavaScript code that runs as if it were embedded into the website. It also provides some additional functions that let you do magical things such as cross-site scripting (which can also be dangerous if you install a malicious script). I actually had written a few JavaScript “bookmarks” to do some quick stuff for me on the Prosper website, but Greasemonkey provides a much better interface. It allows me to do what my bookmarks were doing and even more. Here are the features I’ve put into the script so far:

• Auto-login

This is disabled by default. In order to enable it, right-click on the monkey, and click “Disable Automatic Login” under the User Script Commands. When the prompt appears asking if you want to disable the auto-login, click Cancel and it will enable the automatic login. I realize this probably isn’t the most intuitive thing in the world, but I was too lazy to develop my own dialog and I just used the window.confirm() JavaScript method. Your username and password is stored locally within your browser and is not transmitted anywhere other than to the Prosper website.

I assure you that that the auto-login feature does nothing evil. I have it disabled by default in case you don’t believe me. Your username and password will be stored as configuration values within Firefox. If you navigate to about:config in the browser, you’ll see them under greasemonkey.scriptvals. Please note that the password is not encrypted. If you’re using a public machine or someone else’s computer, you may want to think twice about using the auto-login feature.

• Total Revolving Credit and Total Available Credit

If there is more than 0% utilization, then the calculated total revolving credit and total available credit is displayed. If utilization is 0%, it is displayed as Indeterminate.

• Estimations on Listing and Search pages

The estimated loss, adjustments, fees, and estimated return will be displayed on listing pages. On search pages, I display just the estimated return and estimated loss (to take up a bit less space than displaying all 4 numbers). You will need to be logged in for this feature to work.

If you’d like to try it out, first install Greasemonkey on Firefox. Then click the button below to install:

If you have any suggestions for new features to add, please feel free to let me know and I’ll be glad to see what I can do to accomodate.

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Update: I’ve added a user script command called “Set Investment Preferences.” It allows you to specify a minimum desired return, bid amount, and maximum loss amount. When you run searches, as the estimates are loaded in, listings will be removed if they are below the minimum desired return or if they have an estimated loss higher than the max loss.

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As I was writing my Rule of 72 on Prosper article for the official Prosper Blog, I began to think about developing my own ROI calculation based on what I had written. I had attempted creating an ROI calculation once before that was based on actual payments received, but I became frustrated with the lack of the detail payment data in the LoanPerformance table of the private export. I took another crack at developing an ROI calculation based on actual payments, and think I’ve come up with something that’s reasonable. If you’re interested in the actual implementation, you may want to check out the technical details and link to the SQL code here:

http://wealthboy.com/wbsroi-technical-details/

Once I’ve constructed the tables necessary to calculate the payments that a lender has received, I have all of the information necessary to calculate the WealthBoy Strict ROI. The WBSROI performs two return calculations: TotalROI and AnnualizedROI. The TotalROI calculation is calculated by dividing the total profit (interest less servicing fees) by the total amount invested (which excludes reinvested loans). The calculation does not take into account the declining balances, hence the “strict” designation. If you have been lending successfully for a long time, it is certainly possible to have a TotalROI more than 100%. Here is the formula in a nutshell:

TotalROI = (Total Interest Received - Fees - Losses on Defaults) / (Total Loan Originations - Reinvested Loans)

The AnnualizedROI is calculated by dividing the TotalROI by the weighted average loan age and multiplying by 12. The weight for each bid is the amount lent as a percentage of the total originations. This may not be the best way to perform the AnnualizedROI calculation, but it was the best I could come up with. I believe the TotalROI is relatively indisputable, barring the errors in the payment calculations. The AnnualizedROI could probably use some enhancements.

I like the idea of having a strict ROI calculation that doesn’t account for the declining balances. Many lenders on Prosper may not even be aware of what a declining balance is. Others may know about declining balances, but they just want to know what kind of return they’ve received on the total amount they’ve invested. That is what the WealthBoy Strict ROI attempts to do, and I believe it does it reasonably well. If you are reinvesting loans, your strict ROI should be reasonably close to your average interest rate less fees and your default rate.

So what about late loans? Why aren’t they part of the calculation? Well, one of the nice things about of my calculation is that it really doesn’t take much more effort to account for the probability of late loans eventually defaulting. With the information provided in the calculation, you know the total investment and you know the total profit. All you need to do to account for late loans is to incorporate the loss estimation into the profit and presto! You have your new ROI including the probability of late loans defaulting.

I decided to exclude any default projections from the initial announcement of my ROI calculation. Although it probably wouldn’t take much more effort to incorporate it, I think there is something to be said for an ROI calculation that doesn’t make any kind of suppositions. The WealthBoy Strict ROI calculates how much went in and how much came out. It makes no assumptions about the future value of loans. I have left it to others to make whatever assumptions they wish to make about estimating defaults.

I do realize that not everyone has the expertise and/or resources to put together a Microsoft SQL Server database for analyzing Prosper data. Unfortunately, I don’t have a web application connected to my database so that people can see their WBSROI. If you would like me to provide you with your WBSROI, just post your screen name into a comment here. I’ll post the data in a responding comment. If I become overwhelmed with responses to the post, I may not be able to respond to requests any longer. If it does become a popular metric, perhaps someone with a popular stats site may be willing to add my calculations to their site. Here is what the WBSROI on my account looks like:

Screen Name:WealthBoy
Total Bid Count: 45
Total Reinvested Bids: 3
Total Originations (total amount loaned): $2,250
Total Investment (total amount loaned excluding reinvested bids): $2,100
Total Income (total principal and interest less fees): $209.22
Total Profit (total interest less fees and defaults): $60.53
Total ROI: 2.88%
Average Loan Age: 1.76 months
Annualized ROI: 19.62%

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Earlier this week I came to learn about Revolution Money Exchange. It’s a totally legitimate money transfer website, similar to PayPal but without the fees! There is a daily transfer limit of $1,000, and a monthly transaction limit of $2,500. You can also hold no more than $2,500 in the account. Be sure to check them out and if you sign up, you’ll get $25 and I get $10! You’ll also get $10 for each person that you refer between now and April 15, 2008.

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Update: The $25 offer has been extended for another month until May 15, 2008, so it’s still not too late!

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There are many lenders currently under investigation for fraud, perhaps most notably the nation’s largest mortgage lender, Countrywide Financial. Even if Countrywide is found to be guilty of fraud, one company alone (even if it is responsible for 20% of the mortgages in the U.S.) cannot be to blame for the woes of the credit and housing markets. If anything is to blame, it is the market itself.

As mortgage rates began to fall towards all-time lows early in 2004, real estate prices skyrocketed. Thus began an insatiable appetite for home ownership, and lenders began to offer all kinds of mortgage products that would allow consumers to finance as much as possible for as low a monthly payment as possible. It was a snowball effect that caused a housing bubble that eventually popped.

Unfortunately, a lot of time and money will now be spent with investigating lenders. Time and effort will also go into the development of new regulations to prevent such a calamity in the future. At this point there is little that can be done to rectify the problem, other than to simply let the markets take their course. The reality is that the banks have already paid the penalty with the increasing number of defaults they are experiencing. Most of the new regulations will probably be unnecessary, as the banks have learned their lesson and have become very restrictive with their lending practices in light of what is taking place in the real estate market and lending market.

If you still insist that someone should be to blame, you could point the finger at the Board of Governors of the Federal Reserve and former chairman Alan Greenspan. Although mortgages do not directly follow the Federal Funds Rate, they do tend to trend along with the Federal Funds Rate when it experiences rapid and drastic changes. From January of 2001 to June of 2003, the Fed Funds Rate dropped from 6.5% all the way down to 1%. They remained at 1% for a year, until the Fed began raising rates again in June of 2004. There are others that also share my view that Greenspan is partially to blame for the credit crunch.

Not only did the Fed’s monetary policy help fuel the fire for the spike in home prices, but remarks by the Fed chairman did as well:

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

I think it is outrageous for the Fed chairman to make such remarks when fixed rate mortgages are at an all-time low (that remark was made on February 23, 2004). Certainly the banks were more than glad to oblige him, and they offered all sorts of exotic products to allow borrowers the highest mortgage balance possible for the lowest monthly payment. If you combine a high mortgage balance, an interest rate that is adjusting upwards, and little (or negative) home equity, you have a high probability that a default will take place.

Not only will a homeowner have a difficult time with the higher monthly payment on an adjusting rate, but with little or negative home equity, they may not be able to refinance into a fixed rate mortgage. Even if a borrower somehow manages to pass the strict requirements that lenders now have, the new fixed rate is very likely to be higher than the rate they had previously. The new payments are likely to be higher because of the higher rate as well as the principal component, which may have not been present in their prior mortgage if they had an interest-only loan.

The Fed may have prevented a recession in 2001, but the housing and lending markets are paying for it now. Now the Fed is lowering the Fed Funds Rate again, in hopes to prevent a recession from taking place. Sound familiar? Fortunately, this time there won’t be another housing bubble since the last one is still deflating. I think this time the actions of the Fed will result in the cheapening of our currency. It has already begun to happen, and is likely to get worse. Because the U.S. economy depends so much on foreign exports, the current actions of the Fed will most likely result in inflation.

Adding insult to injury, the bursting of the housing bubble has also contributed to the decline of the dollar. Foreign investors hold trillions of dollars in mortgage-backed securities. The problems with the housing and lending markets have led to a huge sell-off in these securities, lowering the demand for the U.S. dollar. If it wasn’t for foreign monetary policy, the decline of the dollar would probably have been much worse than it has been.

I think some moderate inflation will be necessary to allow household incomes to catch up with home prices. Even with the deflation of the housing bubble, home prices are still very high relative to incomes. If one is to purchase a home today with a traditional fixed rate mortgage, either their income needs to rise, the price of real estate must fall further, mortgage rates need to come down, or some combination of the three. Rising incomes will also help to lessen the blow of the problems with foreclosures and defaults. Lower foreclosures and defaults will improve the problems with the secondary mortgage markets, which will restore some confidence with foreign investors in that market. Eventually when things settle down the U.S. dollar should stabilize as well. It will certainly be interesting to see how things play out.

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