Prosper and Sub-Prime Mortgages – Connection? August 17, 2007Posted by pf in Expenses and Savings.
Some time ago, I had posted some commentary about the investor sinkhole called Prosper. Mostly, this has been an infrequent back and forth between Lazy Man and myself ( “Prosper Winners and Losers”) and general commentary (My Comments about Prosper on Lazy Man and Money).
As I have been reading about this sub-prime mortgage mess, I started to think about the poor souls who have signed up for these “exotic mortgages” and are to soon find themselves (if not already) in a very bad way as their mortgages reset and they can not afford their homes.
I also began wondering if these same people would be similar to those who find their way to lending institutions like Prosper? My general impression of Prosper borrowers are those who are unable to get a decent loan from traditional sources. Similarly, I suspect many of them may have also be attracted to these exotic mortgages and the features they provide (low payment or interest only, etc). If so, this is likely to create big problem for our Prosper lenders. To get some insight about how big this sub-prime mortgage issue is, read the excerpt from CNN Money below who asked some experts such as Wilbur Ross, Chairman and CEO of WL Ross & Co to share their reactions to the sub-prime meltdown:
“The present $200 billion of delinquencies will grow to $400 billion or $500 billion next year because $570 billion more low, teaser-rate mortgages will reset to market and consume more than 50% of the borrowers’ income. Therefore most of the loans will be foreclosed or restructured. Probably 1.5 million to two million families will lose their homes. ”
The full text is located in the link below:
Of course, this is one person’s opinion…but I do think it reflects the conventional wisdom. If you are thinking about becoming a Prosper lender, I would suggest that think about what you’re getting yourself into. If you’ve already started…then…you should think about it too (but hopefully not too long).
Somewhat related, I wonder if Prosper bundles their loans and then repackages and resells them? I bet they would make a killing…just like those mortgage backed securities we’ve been hearing about.