Terra Incognito...

Pioneering sub-sub prime unsecured lending via Prosper.com:

Consider, if you will, the historic development of new-issue junk bonds:

Until the 1980's, the only junk bonds were fallen angels -- once investment grade debt that fell into junk status. Due to institutional issues, no investment bank issued debt as junk bonds from the very start. Similarly today, banks may not lend unsecured to currently HR individuals, but there are definitely seasoned loans taken on by borrowers who are HR in a given year, and borrowed money when they were originally higher rated.

Obviously, there is a difference between seasoned and unseasoned junk/HR debt, but there does exist a fair amount of such modellable data as described above.

One might argue that if all HR data comes from people who were once creditworthy, and collapses into HR status typically have momentum (moving towards bankruptcy, say), new-issue HR debt might have lower default %'s.

Of course, one might also argue that people who were once AA and now HR are more likely to have fundamentally better financial sense (their HR status due to a sudden catastrophe, say)/a desire to return to prime status and long-term HR borrowers might be unlikely to ever improve their financial practices. (Yes, I realize that most people who are HR today were probably technically NC, B, then C,D,E,HR, but nonetheless...)

Fortunately, the microstructure of the prosper market makes lenders less likely to want to bid on big loans until the last minute, and the lack of "watching listings' a la ebay makes it less likely that such loans will get funded at the last minute.

Personally, I'd also note that I'm willing to invest in super-risky loans, but I'm loath to bid on people asking for more than a few thousand w/o appropriate further return adjustment for risk, better assurance of identity/planning ahead, and something that gets me personally (to select randomly, chocolate and people w/medical issues that made them take time off from college both do). Furthermore, I expect default rates that are much higher than those quoted to us.