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I mentioned previously that the subprime mortgage crisis should impact your personal loan strategy because of the number of desperate people needing just a little quick cash to prolong a slow fall into bankruptcy and foreclosure on their homes. CnnMoney confers with their article on the number of people taking out Payday loans to pay the mortgage payment. In a small sample, 66% of the people in foreclosure counseling admitted to taking out payday loans to pay their mortgage payment. After fees and other payments, payday loans can reach interest rates of nearly 400% per year.

If anyone is considering lending money to a a home owner Prosper.com or Lending Club, I would ask any borrower who is a homeowner if s/he has an adjustable rate mortgage, and if so, when it will reset and what the new payment will be. There may be someone people who realize that they sitting under a time bomb of a mortgage and are trying to buy more fuse to the foreclosure bomb. The pending bailout is all the more likely to make people try desperate measures to fend off foreclosure since they are now waiting on the federal plan to save them.

Quote from the article on payday loans being used to payoff mortgages in Cleveland, Ohio:

“If you want to see what an unregulated market economy looks like,” said Rokakis, “come to Ohio.” There are now more payday lending shops in the state than McDonalds, Burger Kings and Wendy’s restaurants combined, he noted.

Lenders only require borrowers show pay stubs, checking accounts and references. They don’t credit-check, except to make sure borrowers haven’t defaulted on previous payday loans.

The lenders ask borrowers for post-dated checks for the amount borrowed, plus fees, which average $15 per $100 loan. If the loan goes un-repaid, lenders deposit the checks.

The term is usually two weeks, “Most people believe they’re just going to borrow the one time,” said Faith. Instead, when the two weeks goes by, they often go back to the shop and roll it over for another two weeks. To do that, they pay another $45 in fees…

When the CRL took the average payday loan principal as reported by state regulators and multiplied it by the average number of loan rollovers per year, it found that typical borrowers pay back $793 for a $325 loan.

At those rates, a person with a pending foreclosure has little to risk by lying a little on a P2P lending site to borrow some cash to save their home. It just might work, so lenders must be on the lookout out for the scammers like Jessica. Unfortunately, with the old Prosper Forums being censored (i.e. deleted), there is not a great place to try to out scammers like Jessica anymore. Many of the old Prosper community members who used to participate at Prosper.com, such as TokyoJoe, who discovered the link between the Prosper loan autofunding option and default rates, now reside at Prospers.org Forums. (Most of the forum is hidden unless your register.)

After reading a bit at Prospers.org, if you still have the stomach for risk, here is a heat map of the subprime mortgage crisis to give you an idea where this may be a bigger problem for borrowers. My post on the foreclosure crisis also listed hard hit markets where people may be in quick search of cash.

Stanley Bing wrote about who is to blame for the mortgage crisis — All the bankers, hedge funds, and CEOs point to the people who took out the adjustable rate mortgage. It is a humorous account of of a very sad situation.

Comment below on the article “Risky Business: Using Payday Loans to Pay the Subprime Mortgage”