secondary market

Zopa Italy update – growth and secondary market

wiseclerk 1 Comment

Eight months* after the launch of Zopa Italy the p2p lending service says it is the fastest growing in Europe (2.79 million Euro = approx 4.075 million US$ cumulative loan volume as of Sept. 3rd).

And Zopa Italy is the first social lending service with an active secondary market, called Rientro Rapido (fast-track withdrawal).

Rientro Rapido offers the lenders – who have a sudden need of liquidity -  the possibility of recovering their funds instantly by transferring loans made to borrowers to other active lenders in the community.
It is the Zopa market who determines the possibility to transfer a loan to other lenders: in order to withdraw money, there has to be in the market at least one offer from a different lender with compatible  rating, interest rate and duration.
“We are very proud to be the first Social Lending world-wide to launch a service such as RientroRapido, but we have not done this for the sake of establishing a record – Maurizio Sella, CEO of Zopa Italy, declares – . Since we opened our market, several lenders have asked for a tool that would allow them to withdraw rapidly the cash lent-out through Zopa. And with this new service we fulfill their desire. This is the value of Zopa: we are a community that grows, evolves and improves especially thank to the pro-active participation of its members.”

Lenders who sell their loans through Zopa to other lenders pay 0.8% of the loan value plus 15 Euro commission to Zopa. Only loans that have never been late may be sold.

Since June borrowers can select optional payment protection insurance (Rata Protetta) against unemployment, illness or injury. Zopa states that 57% of borrowers bought the insurance (69% in September). The insurance covers the total amount of the loan.

(Source: Zopa Italy management)

*counted from the public launch on January 16th, 2008, there was a 2 month period before, that was open by invitation only.

P2P lending trends to expect in 2008

wiseclerk 4 Comments

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 SEC filing – step towards secondary market

wiseclerk 1 Comment

A recent Prosper S1 SEC filing is a step towards the planned secondary market as this Prosper press release confirms. The secondary market will allow Prosper lenders to trade loans they have invested in. Excerpt from the press release:

…Following effectiveness of the registration statement, Prosper intends to establish and maintain a secondary trading market online auction platform, or Resale Platform, pursuant to which lenders may seek to transfer borrower notes to other Prosper registered lenders. …

Excerpt from the SEC filing:

If Prosper is able to establish the Resale Platform, Prosper intends to charge all selling Lenders a nonrefundable resale listing fee of $0.25 per Note being listed for auction resale, or $0.50 per Note being listed for resale with an automatic sale feature. Listing fees will be charged and collected at the time the listing is posted on the Resale Platform by deducting the resale listing fee from the selling Lender’s funding account. Prosper also intends to charge the selling Lender a resale transaction fee equal to 1.0% of the resale price, subject to a minimum fee of $0.50, which will be deducted from the resale proceeds.

Further discussion here.

Prosper secondary market

wiseclerk 1 Comment

If you invest at Prosper.com lenders should not need your money for the next 3 years. Because at the moment all loans have 36 month terms. And – apart from the chance that the borrower might select to pay back the loan early – lenders can not withdraw money still loaned early (this does not apply to interest and monthly repayments).

Lenders have called for a secondary market as early as February 2006.

What is "secondary market"?

The idea is that a lender can sell his investment in a loan to another lender who buys it. It could work similar to trading bonds.

Suppose a lender have invested $100 in a AA loan at 12% interest, it is current and has still 18 month to run. Depending on the assessment of the buyers it could sell for a premium, that means the buyer pays the lender a price above $100 e.g. $102 or it could sell at a discount below $100 e.g. $97.

A premium would occur if buyer demand is strong, assessing that the 12% (and the other loan specifics) are an above average market deal. A discount could occur if the loan is assessed by the buyers as below average (on interest rate or other loan specifics) or if the risk for default is impacting (e.g. the loan is already late).

Advantages

Aside from liquidity advantages a secondary market would offer more options for lenders. Since some loans fail first payment a lender might choose to build his portfolio by buying loans that have made their first three payments and are current. It even seems possibly that loans would be packaged (like mortages) and auctioned off. This way a lender could specialize in picking loans and then reselling them after several month – reselling risk (and living of his reputation as in delivering good picks – okay sounds a little farfetched, I admit).

Will the Prosper secondary market launch?

In a webinar in June 2007 there was the first mention by Prosper, that they are working on a secondary market. (Source: Tom)
However this could happen soon … or in x years as far as I can tell.

Zopa confirmed that a secondary market is in their decelopment plans.

The other (international) p2p lending platforms are not even close to implementing secondary market functions.