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Prosper and Sub-Prime Mortgages – Connection? August 17, 2007

Posted 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. 



1. Lazy Man - August 17, 2007

I think the misconception is in “my general impression of Prosper borrowers are those who are unable to get a decent loan from traditional sources.” There are many AA and A credit borrowers at Prosper. These are definitely not subprime loans. I believe that the borrowers use Prosper either A) can get a better rate because banks have overhead or B) are unable to deal with traditional banking hours (my wife would have to take a sick day to visit a bank). There’s surely a portion of people for whom it is a last resort, but the solution is simple – don’t lend to them. It’s pretty easy to set your preferences to only show you people with credit grades of A or above and no current delinquincies. You can do more advanced things like require that they own a home and have low credit card utilization if you choose. The beauty is that the power is in your hands. You have all the data to pick and choose the loans that are profittable and ignore the rest. And by setting your preferences it’s quick.

The funny thing is that the rest of the US is running around with their heads cut off in the stock market and my Prosper portfolio continues to chug along.

FWIW, Prosper only bundles loans after they are 3 months delinquent. They are sold and your share of the sales.

2. Mike - August 20, 2007

Even beyond what Lazy Man has posted, you’ve got to reach to some conclusions. You’ve asserted that risky people are probably attracted to Prosper and that they’re probably also attracted to adjustable-rate sub-prime loans, so watch out. What does watch out mean? How about checking out home owners more carefully – question their mortgage terms and ask questions related to their budgets. Or, even more conservatively, avoid home owners all together. What about avoiding loans in the hard hit states?

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