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.