Mortgage News Home

Saturday July 19, 2008

Home Page   26,235 Active Members   Register Welcome, Guest    Sign In  

Home

Latest Headlines

Popular Stories

Bookmark Us

Reader Comments

SUBSCRIBE

SEARCH OUR SITE

RSS News

Mortgage Rates
  30 Yr Fix 6.37% 0.02%
  15 Yr Fix 5.91% -0.01%
  1 Yr ARM 5.17% 0.00%
  5/1 ARM 5.82% 0.04%
  30 Yr Tres 4.47% -0.05%
  Fed Prime 5.00% -0.25%
MND Features

- Wiki
- Video News
- Mortgage License Information
- Real Estate License Information
- Mortgage Content Syndication
- Mortgage Fraud
- Housing Bubble
News Archives

Submit A News Tip
or Story Idea
 

Free Subscription To News Alerts
Stay up to date on breaking news with our free News Alert Service.


Peer-To-Peer Lending: A Prototype For The Future Of Mortgage Lending

33137 Views - Printer Friendly - Email This Story To A Friend
 
RSS COMMENTS(10) LINK HERE ADD NEWS TO YOUR WEBSITE

Newsweek Magazine's Tip Sheet section last week featured two Web sites that have nothing to do with real estate or mortgage financing but may illustrate the future of the mortgage lending game.

Prosper.com is based in San Francisco and Zopa.com is British based. They operate on the principal that people needing to borrow money and those wanting to lend it are better off dealing directly (a relative term) with each other rather than using banks or other middle-men. Each, for a fee of course, are trying to facilitate this person-to-person lending while providing safeguards and services to both sides of the transaction. Each site, however, approaches the task in a slightly different way.


Zopa.com, is not yet available, or at least widely available in the U.S. They have received substantial venture capitol to start up in California "within the year," but that announcement was undated. It is the more straightforward of the two sites but the business plans don't deviate all that much.

Borrowers in need of money post their specs - $3,000 to consolidate credit card debt or $9,000 for a piece of equipment to expand a small company - and lenders bid for the business. It is all done anonymously and borrowers are not inundated with emails and telephone calls as are borrowers registering with traditional on-line lending companies. Loans are limited to three years and $25,000 on Prosper.com and up to 60 months on Zopa although we saw no ceiling loan amount. Both companies vet potential borrowers by checking credit and identity and both provide collection services.

Lenders through Prosper can choose to bid on financing an entire loan request or to take a piece of the debt thus spreading the risk of an individual loan among a number of lenders. The lowest rate offered wins but one would assume that a borrower could end up with a blended rate with one lender offering to take half of a $2000 loan at 7 percent with the remainder spread among ten lenders each offering to finance $100 at 8 percent. Zopa.com spreads all of its loans across lenders so that a number of investors own a piece of each loan. A $500 investment would be spread across a minimum of 50 loans.

The two services appear very different on line but both share an attribute of being limited in the information they provide; Zopa because it has a small site and Prosper because its site drowns the visitor in details. After a lot of searching it seems that an investor can transfer as little as $25 or as much as $100,000 into its lending account and that the minimum one can lend on Zopa is £10 but I remain confused about how the two major embellishments by Prosper actually work.

Prosper encourages its borrowers to join borrowing groups. The theory is that people will be more likely to repay their obligations if the reputation of their group is at stake. Anyone (who qualifies with a verifiable name, bank account and Social Security number) can start a group or join an existing group that matches their interests or philosophy. If group members display a high degree of responsibility managing their individual debts then the group will qualify for more advantageous rates in the future. The group leader also becomes a first line enforcer in the collections process. In addition, the group leader receives cash rewards for every loan that is funded and for every timely payment. The leader can choose to keep the rewards or to share them on a sliding scale from 25 percent to 100 percent with group members in the form of lower loan payments. The kicker, of course, is that groups where the rewards are shared are going to attract more members.

Groups are categorized as "arts and cultural," "religious and spiritual," "hobbies and clubs," "military" and a dozen other designations. A total of 2,461 groups are listed across the various categories but there is a good deal of overlap with some groups listing themselves several different ways and a few appearing in every category. Membership in the various groups such as "Foolish Loans" made up of subscribers to the Motley Fool investment site, Christian Stewards, Homeschoolers, Government employers, and so forth, ranged from one person (the lonely group organizer) up to nearly two thousand.

At the group level was where Prosper got very confusing. It appears that many of the borrowers groups are also lenders. Every one we looked at had money available for lending but a number of groups had exactly the same amount available - to the penny. We visited every link (and there are dozens) trying to get an explanation of this without success. Reading between the lines it would appear that many of the groups were formed by traditional lending/finance companies. Before deciding to borrow or lend it would be good to get this relationship examined.

The interest rates are nothing to write home about either. Prosper lists historical interest rates for AA credit borrowers at 7.73 percent to 12.61 percent depending on loan amount. Different borrowers groups quote different rates but at least one advises that, for planning purposes the borrower should add an additional 3 to 4 percent to the estimate.

If, in spite of their warts, these websites work for relatively small, unsecured, and primarily personal loans it is easy to see other entrepreneurs entering the market and eventually starting up services for homeowners to finance purchases or refinances. Such sites could ultimately supplant Fannie Mae or Freddie Mac or perhaps the two corporations will be quick enough on their feet to start such a service themselves, opening up particularly the lending end of the mortgage business to small investors who could profit from the relative safety of a type of secured investing which is usually not available to them. The format offers both an opportunity and a real threat for mortgage companies which currently qualify and package loans.

It is not such a stretch to see a prospective homebuyer logging on to (example) Helpmebuy.com or some such with a request for the $250,000 he figures he needs to buy a home and the rate he is willing to pay and be pre-approved by a single lender or 1,000 of them in a matter of hours. This would truly be "lenders bidding for your business," and would give both borrowers and lenders more control while not upsetting the current well-established availability of home purchase funds or the mechanisms for servicing the funded loan.

Peer to peer lending, it's a brave new world.

Visit Prosper.com or Zopa.com.



Story Views: 33137 | Permalink

Story Tools



Email This Story To A Friend

Subscribe To News Alerts
 

Related Tags

Select a Tag for more information related to that Tag. (View All Tags)
 

Related Stories:
Virgin Acquires Majority Stake In Family-Centered Mortgage Company

Comments (10)

Post Comment Comments RSS


I need information about borrowing money from a lender to purchase a vehicle. How do I go about this? Is this a service that can help me? My credit score is only 600. The problem I am facing is the financing thru a dealership. I have a job that pays me in cash and also my SSDI income. The financing banks will not help me because to them it looks like I have 0 income. However, I make $1900/month.

Above Posted By: Donna | Wed, 16 Apr 2008 13:16:24 EST

Why can I find no comments from lenders or borrowers who have had a good experience with Prosper or Zopa? Any lenders who have received their money back yet much less the interest. Any borrowers who have received the money loaned and repaid it?

Above Posted By: Skeptical | Sun, 13 Apr 2008 18:32:14 EST

I keep seeing information about this new company launching called Loanio. Does anyone know about this one?

Above Posted By: Rockboy | Sat, 5 Apr 2008 00:44:28 EST

Not only in banking is this shift in paradigm happening. It's also becoming valid in terms of how people are insured, as can be seen at: http://www.peertopeerinsurance.com Obviously, the discourse is gravitating towards platform. As social media becomes more important, the solution will be defined in terms of who can provide a softer landing on simple services in a world that's becoming more and more connected.

Above Posted By: Bond | Thu, 28 Feb 2008 17:35:27 EST

The up and coming Prosper competitors are starting to slowly emerge in the US and from other countries. The two US based companies I have found have been loanio.com and fundmynotes.com There hasn't been much news aside from they are going to be launched sometime in early 2008.

Above Posted By: J Dawson | Wed, 30 Jan 2008 11:37:55 EST

I borrowed $2500 through Prosper in Dec. 2006 and just paid the loan back early in Jan. 2008. The loan application process was rather difficult, having to fax documents and then verify my phone number, address, etc., but after getting through that, the loan was quickly funded and the money put in my account. Overall it was a good experience.

Above Posted By: Kenny | Thu, 3 Jan 2008 06:43:48 EST

Lenderwoman: Prosper "lenders" are really "loan purchasers" - Prosper actually issues and services the loan, and sells the promissory note to the individual "lender". Prosper ends up servicing hundreds of small promissory notes for a single loan. Any payment the borrower makes is distributed to the individual "lenders" proportionate to the value of their note. I haven't had a loan default yet, and my portfolio is skewed toward the riskier end of the spectrum.

Above Posted By: dave | Tue, 18 Dec 2007 18:14:51 EST

I like the idea except for the group one. I do not think it is a good idea to group people to lend/borrow money. It is a creative way to cut off middle man & leverage the P2P power

Above Posted By: jack | Sat, 23 Jun 2007 22:39:19 EST

While these loans are unsecured or secured, they sound a lot like the 2nd Trust Deed businesses that were popular in the 1980's. Perhaps there are many companies inthat business. BUT - when a loan goes bad, and it has many investors, untangling who gets what (like the % ownership of a home after forclosure) can be a nightmare. So, any potential lenders should read the fine print and find out the who, what and how on a defaulting loan. For me - it's 100% ownership or none.

Above Posted By: Lenderwoman | Sat, 26 May 2007 14:06:10 EST

I think this is a great idea. Everyone wins, I have a feeling they are going to make it and be bigger than ebay or eloan. Keep up the good work.

Above Posted By: virginia | Sat, 11 Nov 2006 17:48:15 EST


Post A Comment

Please fill out the form below to submit a comment.

Name: 
(Required - Type Anonymous or Use First Name Only if Private)
Email Address: 
(Not Required So No Fake Emails Please.)
URL or Weblog:
(Leave Blank If You Don't Have One - Use http://)
Comments: 
(Please keep comments on topic. No HTML Allowed. No Advertisng.)
Please Note: Due to Comment Spam, all comments are reviewed by hand. Most comments will appear shortly after submission but it may take up to 12 hours to appear. If you would like to come back, click here to Bookmark the page.
PLEASE DO NOT USE ALL CAPS


Character Count =     (5000 Character Limit)

If you would like to leave a longer comment, please submit your comments in 5000 character increments and we will merge your comments.
Notify me via email when my comment is approved.


Note: Please don't bother spamming. All submissions are reviewed by our our editorial staff. Comment spam and irrelevant links will not be approved.

 




NEW VIDEO
Trump Talks Economy, Oil and Real Estate
New Evidence of Deceptive Practices at Countrywide


Reader Comments (More)
Why won't the Bush Administration, Senate, Congress concentrate on one thing at a time. Bernanke pointed to deceptive practices as...
Read
This is a very interesting topic with some very interesting comments. I have written on this myself and proposed a similar and eve...
Read
Throwing more laws at the problem a only a bandage for a gushing wound. I am a Florida lawyer working with more and more people ev...
Read
Home - Contact - Sitemap - Disclaimer - Privacy Statement - Advertising
All Content Copyright © 2003 - 2008 Brown House Media, Inc. All Rights Reserved.
Reproduction in whole or in part in any form without the express written permission of MortgageNewsDaily.com is prohibited.