P2P-Banking.com

Lenders at MyC4.com do not have an easy task, when trying to check which of their loans are late on the repayments. The account page does not offer a comprehensive overview page. If a lender really wanted to check in detail he has to click through to the detail page of each loan he invested into.

Officially only one loan has the status ‘defaulted’ so far. However MyC4 so far has no standard policy when a late loan is to be declared defaulted. MyC4 has stated that there will be a default policy by the end of August.

Researching the situation, there are more than 320 loans that are late (fully or partly) with at least one repayment. Of these 72 loans are 3 payments late, 64 loans are 4 payments late, 30 are 5 payments late and 22 are 6 or more payments late.

Another issue that raised some concerns are the first impacts of the changed rules regarding currency risks.

… as some of you might have noticed already the first repayments are now posted on the investors accounts from Kenian investments where we investors are now taking the risk of currency fluctuations.

Within the first period from disbursement to the first repayment the KES has devalued from 97 to 104.5 = 7.2% already. … (Source: see discussion here)

To help lenders selecting loans to invest in, a column with the information whether a loan open for bidding is issued in local currency or in Euro was added to the wiseclerk MyC4 statistic pages.

(Source: uses information from Status der … MyC4 Kredite)

Prosper.com announced yesterday that the offers received for late loans to be sold off as defaults were to low to be acceotable. Doug Fuller, Vice President of Operations says, that with offers at 1.5 cents for the dollar, Prosper believes "the prudent course of business is NOT to sell them at this time". More on the Prosper blog post.

German p2p lending service Smava.de yesterday introduced an optional insurance for borrowers. Borrowers can take out an insurance together with their loan. In the case of death, disability or unemployment (through no fault of one's own), the insurance will pay the repayments. To offer the residual debt insurance (see a definition of residual debt insurance), Smava partnered with an insurance company. The costs for the insurance paid by the borrower are:

• death hazard only: approx. 0.5% of loan amount
• death and disability: approx. 2.5% of loan amount
• all three: approx 4.7% of loan amount

It will be interesting to see how many borrowers are willing to opt in to the insurance.

Lenders profit because this lowers the default risk. Unfortunately at the moment lenders can not on a borrower's loan listing whether the borrower selected insurance or not.
11 months after launch defaults at Smava are still rare. Only 3 of 368 loans have defaulted and only 2 are currently late. A chart shows the development of the Smava interest rates since start.

2007 was a year of launch and growth for most players. What trends in peer to peer lending can be expected in 2008?

More competition and entering more national markets (probability 100%)
In many markets multiple p2p lending services will compete for the attention of lenders and borrowers, especially in the largest market: In the United States Globefunder.com and Loanio.com will launch. In other markets, where there is no national p2p lending service established yet (e.g. Canada, New Zealand, Spain), p2p lending will be introduced by the launch of a service.

Insurance against defaults (probability 75%)
Not totally new, since Boober.nl and Smava.de already offer some protection of the loan principal. Insurance can be implemented as a classical insurance product (supplied by an insurance company) or as a market mechanism, spreading the risk over multiple loans.

Secondary market (probability 25%)
One of the disadvantages for lenders currently is that on all p2p lending platforms, the invested money i locked in for the duration of the loan term. Prosper.com has allready announced that it plans a secondary market, enabling lenders to sell and buy loans any time. Depending on the market there are huge regulatory hurdles to allow trading of loans. For example German executives told P2P-Banking.com that on the German market a secondary market is unlikely for years to come.

Cross-market lending (probability <25%)
Aside form the social lending approaches (Kiva, MyC4, Microplace) so far all service are open only for lenders and borrowers that live in the same market. If lenders could lend to borrowers in markets with higher key interest rate than the market the lender lives in, the advantages could outweight the risks. In the European Union due to the Euro zone there would be no currency exchange risk. Again there are steep regulatory hurdles to be taken.

Variable interest loans (probability ?)
So far all loans are for fixed terms (prepayment allowed) with fixed interest rates. Variable interest loans could add flexibility. The interest rate could rise or decline following an indicator (e.g. market prime rate). Another possibility would be a mechanism where the variable interest rate would rise or fall as a result of the level of defaults of the credit grade. This could protect lenders, if the actual default ratio is higher then the forecasted default ratio.

Third party bidding management (probability?)
Just a thought. Lenders could allow a third party to manage their portfolio. Like an investment funds the lender would invest an amount of money, while the funds manager does the actual selection of loans. This could possibly be done by a sophisticated software (would you trust this?) selecting loans by statistical analysis of performance of loans with similiar parameters or by a fonds manager. The later is unlikely because the amount of time needed for each loan is too high to be covered by fees.

I'll check at the end of 2008 to see how these trends developed.

Prosper.com noted in it's September lending market survey that the occupations with the lowest defaults on Prosper are:

    1)   Computer Programmer  0.96%
    2)   Civil Service  1.48%
    3)   Analyst  1.63%
    4)   Mechanical Engineer  1.67%
    5)   Electrical Engineer  1.85%

Lowest default rates by state are:

    1)   Minnesota  0.00%
    2)   Ohio  0.65%
    3)   New Jersey  0.99%
    4)   Colorado  1.40%
    5)   New York  1.56%

Of these only for New Jersey and New York there is a obvious explanation - the average interest rates for loans in these states are low due to the state lending limits. This means in these states more loans with good credit grades were founded - reducing the risk.

Social lending service Kiva has refined its risk assessment for participating MRIs (microfinance institutions). The changes and the mechanism are described here. Risks for Kiva lenders include Entrepreneur Risk, Fieldpartner Risk and County Risk. 

So far the default rate for Kiva has been 0.17% on a loan volume of $9.965.000 (4.4% of loans are one month late). When compared to Prosper.com default rates, that is an extremly good result. So far the MRI on Kiva with the worst performance is REDC Bulgaria, followed by an MRI that organizes loans to people in Uganda, Kenya and Tanzania.

Another interesting figure: The average time a listing is online at Kiva.org until it is fully funded is 1.24 days.

So far all my Kiva loans are repaying on schedule.

Prosper loans have meanwhile surpassed 66 million dollars loan volume. A look at wiseclerk's prosper loan aging table shows that Prosper.com succeeds in increasing originating loan volume nearly every month. Currently new loans for about 8 million US$ originate each month.

However the figures also show an alarmingly high volume for late and defaulted loans. Especially when looking at older loans (the new ones do not have aged enough to be technically able to default). For example of 2.1 million dollar loan value that originated in June last year, $177,000 loan value has defaulted and another $105,000 are 3 or more months late. The default rate for loans from June 2006 will therefore be well above 10 percent at the end of the 36 month term. And this is no execption. For March and April 2006 defaults are already higher than 10 percent of originating loan value.

British Zopa.com just published a spreadsheet with Zopa default rate figures. The weighted average of overall defaults is a tiny 0.1% ! Even more interesting all defaulted cases happened in 2005 or the first half of 2006.

Another interesting read is this case study on Zopa (published late 2006).

In his blog, John Witchel, CTO of Prosper.com, describes the current situation regarding the sale of defaulted loans. This offers an insight look at the problems and the future plannings. Check the comments, too.

Dzogchen analyses in this thread which Prosper groups have grown fast and larger. He uses own categories like 'distressed borrowers' to analyse group performance and found out that groups directed at some causes have experienced much higher defaults then others. E.g. in 'distressed borrowers' 12.1% are delinquent, while in 'entrepreneurs' it's 6.2% compared to 0.5 in 'computer users. techies'.

Following discussion included whether this allows predictions and if listings without groups are better risks. An asked for report was if borrowers that posted in the 'Review My Listing' did have a higher rate of defaults.