Prosper enters a cocoon. What will emerge?
October 18th, 2008 | by mbhunter |
Prosper.com is currently in a quiet period during which it will not accept new lenders or new loan commitments from existing lenders. They state that they are registering promissory notes with the appropriate regulatory agencies, which may be offered and sold to lenders.
The primary market — as is was before the quiet period — consisted of lenders competing for a slice of a borrower’s loan by bidding down the rate that they’ll accept. Each lender that “wins” can view a promissory note within their members’ section that states the terms of the loan. This forms the legal ownership of the loan, and allows collection and recovery to occur should the loan go into default.
This secondary market, as I understand it, would possibly allow me to sell that promissory note to another lender. As it stands now, all I can do is sit on the note and wait for it to get paid off or go into default. The secondary market would make those notes more liquid, and it would seem to help everybody (or at least not hurt anybody). Lenders could cash out of their existing loans if they wanted to. Lenders would have more choices for loans to buy. Prosper could collect fees on the transactions. And borrowers wouldn’t know the difference.
The short notice of this quiet period has generated discussion as to whether Prosper is running afoul of regulatory agencies. (Why shut things down so suddenly?) I had suspected that Prosper was more in compliance than some other peer-to-peer lending companies, but maybe not. I just don’t know.
I currently have over 30 loans out in Prosper. More than 20% are not current, ranging from a few days late to “bankruptcy filed.” I stopped putting new money into Prosper quite a while ago, and have only bought new loans using the principal/interest payments received from the existing loans, and the initial money invested wasn’t going to kill me even if I lost it all.
Selling off my loans would be tempting, even if it means taking a small loss, because the economy is going sour. Better to have money back in a bank account than to watch those delinquencies pile up. But whether I take a loss to the principal value or not ultimately depends on whatever market is set up by Prosper.
One thing is certain though: those of us that lend at Prosper will just have to sit tight and wait.
6 Responses to “Prosper enters a cocoon. What will emerge?”
By Mr. ToughMoneyLove on Oct 18, 2008 | Reply
From what I have been reading about Prosper lately, it appears that the only folks who will “prosper” are those who own equity when it goes public. I haven’t read about any Prosper lender who is making enough money (or any money) to justify the risk.
By jim on Oct 18, 2008 | Reply
Funny that they went into a silent period when LendingClub just came out…
TML: I’ve heard the same thing.
By stocks on Oct 18, 2008 | Reply
I have heard that as well, especially with the amount of certainty going on, I’d be surprised if the current holders manage to make anything significant. (we went public, and ended up losing a fortune, heeh)
By Jared on Oct 19, 2008 | Reply
The liquidity issue raised in this post is a real concern for lenders. Most people don’t want to be caught up in a loan for 2-3 years. I think that Prosper, Lending Club and others will be successful, but it will take some time. After all they are the first movers in the world of peer-to-peer lending.
By Patrick on Oct 20, 2008 | Reply
So far this appears to be the same thing that Lending club did. I only made a few loans via Lending Club and Prosper, and so far they are all current.
The added liquidity of a secondary market is attractive, however, in the case of LC, it only applies to loans made after the secondary market was established – so it could be the same way for Prosper.
I don’t think P2P lending is at the stage where it is a more viable investment than more established investments such as REITs, bonds, or cash, but it does offer variety. I jut wouldn’t put anything other than play money in there at this point.
By Monevator on Dec 3, 2008 | Reply
I use Zopa as a peer-to-peer lending here in the UK. I noticed that the US version of Zopa closed down around the same time as this post – surely not a coincidence. But I doubt it’s market pressures… it’s probably some sort of regulatory framework tightening, or a withdrawal of liquidity or similar that’s affected these similar companies?