Lower Borrower Rates, Fewer Subprime Loans Funded

11/13/07 posted by Chris Larsen

In last week’s Wall Street Journal article “Interest Rates Defy Rate Cuts,” James Bianco, president of Bianco Research LLC, a market-research firm in Chicago said, “Even though the Fed has eased three-quarters of a percentage point since September, the market has only gotten between 0.25% and 0.50% of that easing. If you look at it from a saver’s and borrower’s side, it shows you that the market is still not functioning properly.”

Although borrower rates and lender rates of return on Prosper are not formally tied to moves by the Fed, the dynamics of the broader credit markets, which have led to a string of rate cuts, clearly seem to be having an impact on the Prosper marketplace. For example, in October average borrower rates for all Prosper prime loans and Prosper Prime Select loans were 12.27% and 9.50%, respectively; down 0.39% and 0.65%, respectively, since the Fed rate cuts.

Also consistent with broader market conditions is the seizing up of Prosper lenders’ appetite for subprime borrowers. While Prosper continues to remain on a rapid growth trajectory as indicated by year-to-date funded loan volume, which is up $48 million or 233% compared to year-to-date loan volume at this time last year, the percentage of loans going to subprime borrowers continues to decline. In October a mere 7% of loans funded on Prosper went to subprime borrowers. This is in stark contrast to last October when 28% of funded loans went to subprime borrowers. The rapid decline in subprime loans is indicative of a veritable subprime credit crunch in the Prosper marketplace.

The good news is that lenders on Prosper are wisely being cautious given the widespread meltdown of subprime mortgage loans. The bad news is that some subprime borrowers, such as young members of the American military who have not had an opportunity to build up a credit history or are caught in payday loan circles, may not be receiving a worthy chance of funding. Perhaps demand for these types of subprime loans will increase as a result of raising the rate cap on Prosper from 29% to 36%.

While Prosper lenders are shying away from subprime, there is ongoing strong demand for the ever increasing number of prime and near prime borrowers coming to Prosper to consolidate their credit card debt at lower rates and to fund or expand their small business endeavors. For example, in October 37% of loans funded on Prosper went to prime borrowers, compared to 30% in September 2007 and 22% in October 2006.

Of great interest is the anecdotal evidence of prime and near prime borrowers turning to Prosper for loans that would have historically been steered toward mortgage, auto, and home equity lenders. It will be very interesting to watch whether the wake of the liquidity crisis in the broader credit markets results in a definitive trend toward Prosper becoming an alternative source for financing down-payments on homes and cars, funding home remodeling projects, and finding relief from high-interest adjustable rate mortgages (ARM’s). Equally of interest is whether Prosper lenders will desire to help their fellow Americans by funding these types of loans.

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Chris Larsen is the CEO and Co-founder of Prosper.

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3 Responses

Daryl | December 6th, 2007 at 12:21 pm

Very interesting. It seems from the numbers quoted showing an increase in the % of prime loans (and decrease in % of sub-prime loans) that the collective wisdom of Prosper lenders has improved considerably over the course of the year. I suppose this flight to quality is both a reaction to macroeconomic events such as the sub-prime credit crunch and a result of direct experience with good-performing prime and near prime loans on Prosper.

stan | December 6th, 2007 at 6:33 pm

The President is going to bail out the lenders/homeowners.

lakegirl1963 | February 3rd, 2008 at 9:23 pm

I find this article very interesting as I have noticed the decrease in subprime funding myself.I recently became a lender on prosper and have been a borrower and member since 2006. Subprime prospecteve borrowers are risky to invest in I understand that,but I am one of those subprime borrowers who has never been late on a payment ever. I have a loan 19 months running now that is 100%. During my coarse of evaluation of my financial situation reading several articles and books ex. Suzie Orman, I am now educated to where I went run in managing my finances and now have a plan in place to reverse that process. I have an active listing now and because of certain Lenders showing their faith in my ability to pay I became a lender to help another subprime borrower out in a crunch. Of coarse I understand the principle of diversity,and will lend to all credit grades. I have noticed though in reasearching listings that subprime borrowers have a lot lower DTI then a large % of the prime borrowers. That concerns me when someone of say an A credit has 68%DTI and E credit has 18% DTI. I am happy to be a lender on Prosper and excited on future ventures and investments.