Thanks to everyone who voted the first time to land Uncruch America in the top 10 plans at change.org. There is now a second round of voting at change.org where the top ten plans are in a runoff vote. So you need to go vote for it one more time. Here is the link:

Vote to Uncrunch America

Thanks!

And I promise this will be the last post for a while on voting for P2P lending sites — unless of course Uncrunch or Kiva wins.

• Vote For P2P Lending: Crunchies and Change.Org
• Poll Results: Investing Next $500 with Lending Club
• Poll: Are you a P2P Lender?
• Where Should I Invest My Next $500? You Decide
• Second Peer to Peer Lending Carnival

There are two great ways that you can support peer to peer lending with a simple mouse click.

1) Vote for Kiva.org — the micro lending site for entrepreneurs in the developing world in the Crunchies which are a major web award. Vote at the 2008 crunchies website under the category of most likely to make the world a better place.

2) Vote for Uncrunch America at Change.org which is being sponsored by Lending Club. Uncrunch America is a newly formed NGO that has been submitted to help change America using the voting system on Change.org. It is based upon the idea that there is lots of money available but hoarded and lots of people in need of money. The top three ideas will be moved to a second round of voting for a runoff election. The the overall top 10 ideas for changing America will be presented to the new administration on Inauguration Day.

About Uncrunch America from Change.org:

Solving the credit crisis from the bottom up

The credit crunch currently crippling America’s economy is not due to a lack of available funds. It is caused by dysfunctioning credit markets and by the banks having adopted an overly conservative credit policy in the wake of the subprime meltdown. After very permissive lending practices for many years, the pendulum has now swung the other way.

But the money has not disappeared. The money is still there, with roughly $6 trillion currently sitting in deposits, CDs and savings accounts earning interest at 3% and not being lent out by the banks. This is enough money to get small businesses through the credit crisis, offer student loans to everyone who needs it and refinance half of all mortgages in America.

Our idea is simple: unlock these resources, enable the people who have the money to lend it directly to creditworthy people who need the money through a new (yet tested over the last couple of years) mechanism called social lending: people lending money to each other at fair interest rates. With this aim in mind, we have created Uncrunch America (www.uncrunch.org), to give us a chance to help each other out…

Read the rest of the pitch at Change.Org.

• Vote for Uncrunch America at Change.Org One More Time
• Rex Dixon: Social Media Director of Lending Club Blog
• Lending Club IRA – Reader Polls
• Zopa Open for P2P Lending in the USA
• Discussion with a Mortgage Fraudster: How to steal $600K

Can you steal a home

Why he started
Recently at one of these occasions, I met a man dating one of my wife’s friends who readily admitted to defaulting on over half a million dollars in mortgages to one of America’s largest banks. He explained that he had a small chain of stores that was running short of cash so he needed cash to fund the shortage. He also worked as a manager in a home construction business so he was familiar with real estate, appraisals, and mortgage financing.

.
Since the main business was short on cash, he decided to buy an undervalued house and refinance it at above market value to bring in some cash. (The properties he purchased were undervalued on paper only and not based upon actual condition.) He pulled a list of low value for sale properties in a distressed part of town. Knowing how loose appraisals were running (often only a computerized value check), he ran the list of for sale properties against a list of recently sold properties. He often found that are distressed properties selling in the $15K to $20K range surrounded by properties selling for $40 to $50K. These are not California or New York prices, but repeat multiple times and it can add up to more than a half a million dollars and the same thing must have been happening on a much larger scale in other markets.

How it worked
He would buy a property at $15K, mow the yard, plant $300 in landscaping, paint the front exterior, and add curtains to the windows. In total, he would spend less than $1,000 prepping the house for reappraisal. The initial financing came from a local millionaire who offered his money at around 12% for 60, 90, or 120 day periods. After cleaning up the property a bit — putting lipstick on a pig — he would go to the major bank and refinance so that he could pay back the original financier. The major bank would refinance for $50K based on the surrounding properties’ recent sale values and the bank would often not even require the appraiser do a drive by inspection. He knew this by the appraisal reports he would receive from the bank which only showed comparison values and not a single picture. If there was ever a picture it was only of the exterior.

.
So a $15K house would give the owner $50K in cash (less refinance fees and some “lipstick”) netting him about $32K in cash to fund a new house to refinance or to keep the main business above water. Considering that most of the mortgages were in the $50K range and that he defaulted on $600K in loans, he was able to do this twelve times before the scheme caught up with him. He said that he believes that the mortgage mess occurred because the banks did not care if he paid back the loans because the mortgages were immediately resold to other investors after the bank pocketed fees on both sides of the transaction.

.
As I mentioned before in relation to Prosper loans, you want the loan originator’s interests to be in line with the investor. Otherwise, you are asking for trouble just like the above example.

Does he feel guilty?
I asked the man who defaulted on the mortgages if he feels at all responsible for the current economic mess, and he did admit feeling a bit guilty about defaulting on the homes but he said that banks were enabling partners in the fraud because they wanted to resell the loans so badly that they did not even care about fraud. He also reminded me that these same banks who gave him this money based on a computerized appraisal are the same banks that congress voted to give $700 billion dollars of tax payer money. Forgive me if I have little confidence.

By the way, you can’t really do this same scheme now because banks are requiring an in-person appraisal.

• Credit Score Advice from a Mortgage Lender: Mortgage Refinancing Experience
• The Mortgage Foreclosure Crisis and your P2P Lending Strategy
• Vote For P2P Lending: Crunchies and Change.Org
• Review of My First Loans with Lending Club
• Boston Globe Writes about P2P Lending

I planned to blog in commiseration with Tom about being denied for a loan. Tom was denied for a Zopa loan and I was rejected for a GE Money Bank credit card through Amazon. GE Money Bank took 10 days to tell me that they could not verify my identity despite the promise on Amazon.com of a 30 second approval process. I have a 800 credit score and provided all information including a phone number and they could not verify my identity. They did not bother calling to verify and customer service told me the process is computer automated. Ten days for a computer program to return results? I doubt it…

Sorry /Rant Off
I’ll skip the remainder of my planned rant about Amazon’s relationship with GE Money Bank and their horrible off-shore service and move on to saying good bye to quasi p2p lender Zopa. Zopa has closed its lending in the United States due to the credit crunch. Since the loans were actually funded by credit unions, this should make you question the stability of the credit unions backing the Zopa operations. I have friends on the board of my credit union and they have been mentioning the lack of loan opportunities for lending out depositors’ money. My credit union is flush was cash, and these CUs can’t make a few small dollar P2P loans.

The credit crisis should be creating a BONANZA for P2P lending — horrible stock market returns combined with people needing credit.

Another P2P Bank Bites the Dust
The P2P lending space seems to be taking casualties quickly. Lending Club is still not taking loans allowing lender bidding on loans despite the not-so-recent SEC filing due to the SEC imposed quiet period. One shop never even got off the ground and turned to blogs to sell itself likely for cheap. Prosper is raising fees like it is bailing water and Loanio opened very late to little fan fair.

Blogging Proof of a P2P Downturn
It is obvious that the P2P lending space is losing steam as fast as a broken particle collider when Kevin @ Rate Ladder only has five posts from September 2nd to October 4th. Once upon a time, long ago in the P2P lending space — a year ago — he posted daily.

When I hosted the 10th peer lending carnival, Lazy Man and Money and I traded a few emails including one where he lamented the downturn and lack of excitement for the industry. And as I think about returns long-term, despite the recent great performance of P2P loans versus my stock portfolio, now is likely a much better time to buy stocks.

Good Bye Zopa
So good bye Zopa. I know you offered potentially holy grail negative interest loans to borrowers, but it looks like you could not hack a market down turn. I am glad I never signed up for Zopa and do not plan on signing up for any new P2P lending services for a while even if they are paying great referral bonuses.

What is next?
In the near term, I plan to plow my extra cash into a doubling up my emergency fund, doubling down my long-term bet on the US stock market, and buying extra camera lenses. And I plan to spend my time working hard and enjoying my family (and my camera) — not checking the gloomy news or my already-tanked portfolio.

So what do you think about Zopa closing and the state of P2P lending?

• Lending Club IRA: Why it is good for your retirement
• Where Should I Invest My Next $500? You Decide
• Advice for Potential a New Peer-to-Peer Lender
• Zopa Open for P2P Lending in the USA
• Carnival of Peer-to-Peer Lending #10

For some time now, I have been warning about the mortgage crisis and its impact on P2P loans. The fact that Ed Mcmahon, Johnny Carson’s former sidekick, is in default on his home mortgage shows just how screwed up some Americans were in their thinking about debt, the housing market, and personal finances. Ed Mcmahon went on Larry King live to describe his debt problems.

Fame helps because Donald Trump in a reported act of kindness is saving Ed Mcmahon from his mortgage problems. It is kind of Donald to save Mcmahon’s house, but Ed should have never let himself arrive to this situation in the first place.

Ed Mcmahon is in default on his $4.8 million in mortgage loan with Countrywide on his 7,000 square-foot, six-bedroom Beverly Hills, California home. He bought the house in 1990, so he should have significant equity in the home by now. I can only suppose that he took out a second mortgage against the property.

But why can’t Ed Mcmahon pay his mortgage debt?

McMahon, 85, … has not worked for about 18 months because of a neck injury.

Ed Mcmahon made the major mistake of counting on both his income and health to hold out until well into his 80s. He did not have enough of a passive income to even cover his shelter! Mcmahon showed terrible judgment by not considering anything but the most optimistic combination of scenarios for real estate, income, and health. I know other Americans did the same, but Mcmahon should have advisers who could have better directed him.

I hope to have my house paid off long before retirement let alone age 85. It is simply smart to have a rent free place to live through the end of your days on earth.

Also, I am not so certain that Donald Trump is acting out of compassion. It is quite possible that he is waiting on the aging Mcmahon to kick the bucket and the real estate market to rebound.

Technorati Tags: Donald Trump, Ed Mcmahon, default, mortgage, home, bailout, personal finance

• The Mortgage Foreclosure Crisis and your P2P Lending Strategy
• Homeowners Resorting to Arson due to Foreclosure
• Discussion with a Mortgage Fraudster: How to steal $600K
• Lending Club IRA: Why it is good for your retirement
• Congress Examining Credit Card Practices

This is part one of a series of what I learned by talking to a mortgage broker last week.

I stopped by my credit union to check into refinancing my mortgage last week. The rates were low and with the likelihood that the fed was going to drop rates again, I decided this might be a good time to refinance from a 30 year fixed to a 15 year fixed interest rate mortgage.

I asked the mortgage broker many questions about the current mortgage market. She passed along some interesting information including the details about a new mortgage delivery fee. I have no plans to cash out, but I continued to ask questions around all options to learn more information. The mortgage broker showed me a large binder with a new set of guidelines from Freddie Mac that determine the interest rates that she can offer. There will be even tighter restrictions coming out on June 1st, 2008, so rates will likely rise even further for higher risk borrowers soon.

In the past, the loan officer told me that she could nearly always quote one rate and it was applicable to nearly everyone who walked in the door. That to me indicates another problem with the mortgage market — too many borrowers were treated as equal credit risks when they were not.

This information applies to Freddie Mac (FRE) mortgage loans which the credit union uses to back their loans. If you credit score (FICO) is above 680, there is no delivery fee on non-cash-out refinancing. I have a FICO score above 680, so there is no issue with the delivery fee for me. The rates start to rise about the published rate as the credit score drops below 680.

Cash-Out Mortgage Delivery Fees
There are additional mortgage delivery fees based upon the LTV (loan to value) ratio. To simplify somewhat, if the loan is a 70% – 80% LTV ratio, the delivery fee is 0.5%. On a $100,000 loan, that would be a fee of $500. If the LTV ratio is 80 – 90%, the fee is 3/4 of a point or $750 per $100K borrowed. That is a very expensive fee for a borrower needing to cash out $10K to pay off some credit card debt. Of course, most P2P loans have an origination fee, but on a $10K loan, you could expect to pay 0.5% to 2% or $50 to $200 in origination fees. The origination fee savings will be offset because you will likely pay a higher interest rate on a P2P loan and the interest paid is not deductible from your federal income tax. Therefore, the equation is complex for me to give specific recommendations, but all these fees may make P2P loans more attractive to borrowers with good credit scores.

I asked about also applying for a HELOC
I asked about applying for HELOC in addition to refinancing the first mortgage. The broker advised applying for the HELOC after refinancing the mortgage, but within 120 days because they would not need to pull an additional credit report within 120 days. That would save a hard-pull on my credit report which would impact my credit score. These additional fees are going to make P2P lending options such as Prosper.com and Lending Club, more attractive to borrowers who would have traditionally applied for cash out refinancing — even if the borrower has good credit.

BankRate confirms what the mortgage broker was telling me. The article also mentions “Risk-based pricing has arrived.” Interestingly, the new new risk tables (see Freddie Mac’s) remind me of the Lending Club rate tables. Freddie Mac has posted some long PDF files (1, 2) that explain the details of the delivery fee calculations.

Technorati Tags: p2p lending, p2p loans, mortgage, mortgage crisis, Freddie Mac, FRE, refinancing, mortgage broker, delivery fee, HELOC

• Credit Score Advice from a Mortgage Lender: Mortgage Refinancing Experience
• Risky Business: Using Payday Loans to Pay the Subprime Mortgage
• Loan Money on Prosper to “The Penny Saved”?
• Prosper Fee Updates: Separating alignment from lenders
• WSJ writes about P2P Lending

I heard last year about SUV owners who were upside down in their car loans resorting to arson due to high gasoline prices. Out of desperation, car owners torch (or pay $300 to a professional arsonist for the service) to collect the insurance money. There is a great quote from the article:

At the root of the problem: People pay too much for a vehicle they really can’t afford…

Jennifer Mieth, manager of fire data and public education at the Massachusetts State Fire Marshall’s Office, said car fires are “cyclical.” She added, “When times are good, fires are down. When they are bad they go up.”

…Rowe is not the only one who has seen an increase in SUV fires. Arson investigators in San Diego County saw vehicle arson go up 34 percent between 1998 and 2002, prompting analysts to surmise that more people facing economic hardship may be setting fires to their cars to escape high payments.

The sub prime mortgage crisis has similar roots. I recently posted that you should watch out for homeowners in your P2P loans due to the desperate means home owners may use to pay the mortgage in order to save the house.

It seems that some home owners are willing to resort to arson to extract themselves from their mortgage:

A recent report by the industry-funded Coalition Against Insurance Fraud notes that with “untold thousands of homeowners struggling with ballooning subprime mortgage payments, fraud fighters are watching closely for a spike in arsons by desperate homeowners who can no longer afford their home payments.”

History indicates such a spike is coming. “When the economy is down, we see an increase in fraud,” says Dennis Schulkins, a claim consultant in State Farm’s Special Investigative Unit.

Allstate spokesman Mike Siemienas says his company has seen an increase nationally in arsons among homes in foreclosure. In California, the state’s insurance division reports that the number of questionable residential fires in 2007 increased 76 percent over 2006.

National arson statistics for 2007 aren’t yet available, but Federal Bureau of Investigation crime data shows there was a significant uptick – 4 percent – in suburban arson in 2006, when the real estate downturn began to take hold.

If some homeowners are willing to resorting to arson to save their finances, I imagine that they would not be afraid to take our a P2P loan that they cannot afford, so as I select my Prosper loans I will be looking for renters.

• Risky Business: Using Payday Loans to Pay the Subprime Mortgage
• The Mortgage Foreclosure Crisis and your P2P Lending Strategy
• Lending Club’s SEC S-1 Risks
• P2P Lending to Students with DUCK9: Heard of it?
• My First Lending Club Payments All on Time

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”

• Stanley Bing: Who is to Blame for the Subprime Credit Crisis?
• My Mortgage Refinancing Experience: Post Mortgage Crisis Delivery Fees
• The Mortgage Foreclosure Crisis and your P2P Lending Strategy
• First Two Months Blogging P2P Lending
• Homeowners Resorting to Arson due to Foreclosure

Stanley Bing at CNN Money blogged about the subprime lending crisis and the falling dollar in his article “Who’s to blame for the credit crisis, the housing slump, the weak dollar, and the fear of recession? It’s a guy named Leonard.”

Yes, Bing, you have me interested. Who the heck is Leonard and why is he responsible? Of course, I am expecting a tongue in check answer from you, but let’s find out… Who is this guy Leonard?

It’s clear this whole subprime mess is much worse than anybody anticipated. Things are crashing. Stuff is burning. The best and brightest minds are at work on how to solve this crisis before it sinks the global economy into a hopeless morass that will plague us all for decades. No, wait. They’re the ones who caused it… I believe it is our duty… to pinpoint blame.

Bing goes on to “interview” the former head of a bank, an investment bank board member and a quant who all send him on the search for Leonard Flanken. Bing happens by Flanken who is the janitor:

“Two years ago I took out an adjustable-rate mortgage from this big bank, because they sent me so many solicitations in the mail I could no longer ignore them! Then they sold my paper to another place and then another, and then one day last spring I got a call from somebody I never did any business with before, and all of a sudden I’m supposed to pay $1,500 a month instead of $1,250! I just didn’t have it!”

Flanken is just the guy I warned potential P2P lenders about in my article on the subprime mortgage foreclosure crisis and its impact on your P2P lending strategy.

CNN had several other articles on the subprime crisis today including “Fixing foreclosure’s ground” zero” and “Foreclosure filings: No slowdown yet.” Also, there was an article on protecting your home’s value in an area hit by foreclosures.

• Risky Business: Using Payday Loans to Pay the Subprime Mortgage
• Homeowners Resorting to Arson due to Foreclosure
• The Mortgage Foreclosure Crisis and your P2P Lending Strategy
• Donald Trump Saves Ed Mcmahon’s Mansion
• Discussion with a Mortgage Fraudster: How to steal $600K

If you have been reading my recent posts at Personal Loan Portfolio, you know that I am in the process of formating a P2P lending strategy. However, lending does not seem to be a good business to be in recently. Countrywide, one of the nation’s largest mortgage lenders, is hemorrhaging jobs and money due to poor lending practices. Countrywide is not alone — see the recent financial results at Morgan Stanley , Citibank, and Merrill Lynch which have all been negatively impacted by their mortgage backed securities investments. These recent results make for a frightening lending environment.

Today, MSNBC is reporting that mortgage foreclosures rose 30% in the third quarter of 2007 over the second quarter. The level is double the third quarter 2006. That makes the overall US foreclosure rate one out of every 196 households. How does this rise in foreclosures impact your Prosper lending strategy?

First, why the increase in foreclosures? Too many borrowers bought more house than they could afford by taking out an adjustable rate mortgage (ARM). ARMs give the borrower a lower introductory mortgage rate on the assumption that the borrower will 1) sell the house before the rate adjusts upwards or not long after the rate change, 2) the borrower will earn more money in the future and thus be able to take on the additional payment or 3) refinance at a lower rate or under better terms in the future. Too often, I believe that the reason that borrowers took on ARMs was that they simply did not understand the interest change.

An upward rate adjustment of only 2% could add over $600 per month on a $500K mortgage payment[1] — but the story is even worse if the borrower had received a special introductory rate. Add to the picture rising gasoline prices, rising home owner’s insurance rates, and inflation. This makes the foreclosure rate very understandable in the markets that had high price home appreciation, especially considering that many people can no longer sell their house at a profit in the slow moving and declining market. According to BankRate.com, a borrower has a 1 in 3 chance of losing their home if they took out an ARM and had an initial interest rate of less than 4%. Unfortunately, foreclosure even impacts those who borrowed wisely according to the Center for Responsible Lending:

The center’s property value analysis was based on academic research indicating that a foreclosure lowers the price of neighboring properties by 0.9 percent on average. That impact was higher in poor neighborhoods, where prices dropped 1.4 percent on average.

So how does this effect a Prosper or other P2P lending strategy? Just like real estate, Prosper lending is not only about the overall national economic situation but also the local economic conditions. The previously mentioned MSNBC article, states the highest rates of foreclosures are in particular states:

[T]he highest concentrations were a handful of housing markets; California Arizona, Florida, Nevada, Ohio, Texas and Michigan made up more than half of the total.

To be more specific, the foreclosures are concentrated in specific cities. Another MSNBC article lists the cities with the highest foreclosure rates. For example, Stockton, California had a foreclosure rate of 1 out of every 31 households! Below are many of the top foreclosure markets with a longer list in the article. I would avoid lending in any of these top foreclosure markets because a lender could essentially truthfully tell you that his or her debt to income ratio is currently a reasonable value, but possibly the borrower knows that the rate is changing in the near future and will significantly change the equation. The borrower could be using your loan on a prayer to keep their house in the near future, but with no long term real hope of recovery. I will be avoiding loans to borrowers in any of the following metropolitan markets.

[1] The monthly payment on a $500K mortgage at 4% interest is $2,387. The monthly payment on a $50K loan at 6% interest is 2,997. A difference of $610 per month.

• Risky Business: Using Payday Loans to Pay the Subprime Mortgage
• Stanley Bing: Who is to Blame for the Subprime Credit Crisis?
• Blenders Borrowing-to-Lend: Earn money on good credit?
• WSJ writes about P2P Lending
• My Mortgage Refinancing Experience: Post Mortgage Crisis Delivery Fees