August 4, 2006
Peer-To-Peer Lending
I first wrote about Zopa.com last December and predicted an American version would be entering the market shortly. Prosper.com was launched early this year and it is beginning to get publicity:
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.
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.
There is widespread disagreement about the role of housing wealth in explaining consumption. Much of the empirical literature is marred by poor controls for the common drivers both of house prices and consumption, including income, income growth expectations, interest rates, credit supply conditions, other assets and indicators of income uncertainty (such as changes in the unemployment rate). For instance, while the easing of credit supply conditions is usually followed by a house price boom, failure to control for the direct effect of credit liberalization on consumption can over-estimate the effect of housing wealth or collateral on consumption.
