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