I recently wrote a diary about person to person lending as a way to ease the credit crunch. The cause of the credit crunch is not lack of capital, it is because the banks are hoarding their money rather than lending it out. The $700 billion bailout was supposed to give banks money to lend and to make credit available again. Well, we can all see how well that worked out. One of the reasons I place so much hope in Barack Obama is that I think realizes that these huge economic problems that we face must be solved not from the top down but from the bottom up. I heard Obama say that he is willing to listen to anyone with an idea. There is a website change.org which is now conducting a vote on ideas to present to Obama. The top 10 rated ideas from the final round will be presented to the Obama administration on January 16th at an event at the National Press Club in Washington, DC. One of these ideas is peer to peer lending. It has made it through the first round of voting and is now in the final round.
I had been making person to person loans through Prosper until it was shut down by the SEC so I swithched to Lending Club. Peer to peer lending works not by funding the whole loan, although you can do that if you want, but by funding a small part of the loan with promissory notes. Although Lending Club had been shut down along with Prosper, it is back up and running. The reason the SEC shut them down is because they said that these promissory notes are securities that must be registered with the SEC. Lending Club has finished doing this, Prosper is much bigger and has many more notes to register so they are still working on it. They say they will be back in bussiness as soon as this is done. Lending Club allows these notes to be bought and sold, so you can liquidate your holdings if needed. On Prosper the minimum investment is $50 but on Lending Club it is only $25. I make the mimimun investment so as to spread out the risk of default as much as possible. And make no mistake, these are risky investments. On the other hand my average rate of return on Prosper is 16.99% and on Lending Club is 10.93%. Like any investment you have to weigh risk vs return. I have yet to have one of my loans default, but I am not so naive to think that will never happen. These lending sites provide copies of the borrower's credit report in the loan listing along with the borrower's written account of what the loan is for. Although I have only been on the lending side, people can apply for loans too. Prosper allows anyone to apply for a loan where as Lending Club requires a credit score of at least 660. All are 3 year loans of from $1,000 to $25,000.
I got on the Google and did some research and number crunching. There are about $30 billion worth of home mortgages issued in the United States per year. There are about 150 million working Americans. That works out to about $200 per year per working American. I don't see any reason why this idea of peer to peer lending couldn't be expanded to mortgages too. After all, it's the money in our savings accounts that the banks use to lend to homebuyers. Why can't we just cut the banks out of the loop? How could we possibly do any worse than they did? I have no confidence that the idiots on Wall Street who got us into this mess to begin with are the ones who can fix things. We must take matters into our own hands. We must become citizen bankers. We must handle our own investments, not trust the Bernie Madoffs of the world to do it for us. Let us invest in each other. As for the Wall Street bankers? Let them eat cake.
UPDATE: To vote for this idea go here:
http://www.change.org/...