Bank says no? Ditch the bank – borrow from the crowd

[dreamdancer 0]

interesting...

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IN JANUARY of 2008, Pamela Slea decided to buy a home. The process initially looked straightforward - a bank had already pre-approved her mortgage, which would require a down payment that was the exact sum of her life savings. She did notice one odd clause in the contract: if no bank would approve her loan, she would lose her down payment entirely. But Slea wasn't worried, she had a six-figure salary and an impeccable credit history. She signed.

Then the recession hit and the rules changed. Her broker told her that unless she doubled the down payment, no bank would approve her. Slea's life savings were on the line. She had no choice: she signed up for credit cards with shockingly high interest rates and took the maximum cash advance, larding even more fees onto the already exorbitant rates. She borrowed money from a friend. None of it was quite enough, so after Slea left work every night, she babysat to squeeze out those extra few dollars.

She managed to get the mortgage, but at a steep price. Her credit rating had been tarnished. When Slea tried to consolidate her huge debts into a better loan, she found out quickly that to banks, she was now radioactive.

Stories like Slea's are fuelling the fires of the Occupy Wall Street movement. Banks - supposedly dependable matchmakers that connect people with money to spend to people who need to borrow it - have stopped holding up their end of the bargain. Bankers rode high on the financial bubble until its collapse sank us all. Now, despite being bailed out by taxpayers, banks are at it again, eating up our savings accounts with fees and pitiful interest rates. And if you need a loan, forget it.

When other institutions tested the goodwill of their customers, technology-based alternatives emerged to provide a better option. Napster, for example, forced the music industry to redraw its entire model to adapt to the new realities of the digital world. Blogs, YouTube and Twitter are forcing newspapers to evolve to keep up with the seismic shifts in the way we communicate with each other.

What you might not know is that there are technology solutions for banking every bit as powerful as social media such as Facebook that can step into the gap, making it possible, this very minute, for you to borrow or lend money safely online, completely independent of an actual bank. They're called peer-to-peer (P2P) lending services, and they have been around for years. This kind of "citizen banking" should be reshaping the business of borrowing and lending, and shaking the foundations of the financial industry in a way no amount of Occupy Wall Street protesting could accomplish.

http://www.newscientist.com/article/mg21228421.300-bank-says-no-ditch-the-bank--borrow-from-the-crowd.html

stay away from moving propellers - they bite
blue skies from thai sky adventures
good solid response-provoking keyboarding

[mnealtx 0]

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She did notice one odd clause in the contract: if no bank would approve her loan, she would lose her down payment entirely.

Then stupidity hit and she signed a contract with that sort of clause in it.

Mike
I love you, Shannon and Jim.
POPS 9708 , SCR 14706

[Belgian_Draft 0]

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Quote

She did notice one odd clause in the contract: if no bank would approve her loan, she would lose her down payment entirely.

Then stupidity hit and she signed a contract with that sort of clause in it.

That is exactly what my first thoughts were.
Second thought was that she was obviously limiting herself to a price range she could not afford.

HAMMER:
Originally employed as a weapon of war, the hammer nowadays is used as a
kind of divining rod to locate the most expensive parts adjacent the
object we are trying to hit.

[muff528 3]

What happens if she finds herself unable to repay "the crowd"? Doe's she get a visit from Fat Tony and get her kneecaps busted?

[dreamdancer 0]

she was swimming on a beach the lifeguards had assured her was safe - that was when the sharks got her...

(meanwhile the usual ghouls laud the chunks the sharks have taken out of her)

stay away from moving propellers - they bite
blue skies from thai sky adventures
good solid response-provoking keyboarding

[DougH 270]

Quote

interesting...

Quote

IN JANUARY of 2008, Pamela Slea decided to buy a home. The process initially looked straightforward - a bank had already pre-approved her mortgage, which would require a down payment that was the exact sum of her life savings. She did notice one odd clause in the contract: if no bank would approve her loan, she would lose her down payment entirely. But Slea wasn't worried, she had a six-figure salary and an impeccable credit history. She signed.

Then the recession hit and the rules changed. Her broker told her that unless she doubled the down payment, no bank would approve her. Slea's life savings were on the line. She had no choice: she signed up for credit cards with shockingly high interest rates and took the maximum cash advance, larding even more fees onto the already exorbitant rates. She borrowed money from a friend. None of it was quite enough, so after Slea left work every night, she babysat to squeeze out those extra few dollars.

She managed to get the mortgage, but at a steep price. Her credit rating had been tarnished. When Slea tried to consolidate her huge debts into a better loan, she found out quickly that to banks, she was now radioactive.

Stories like Slea's are fuelling the fires of the Occupy Wall Street movement. Banks - supposedly dependable matchmakers that connect people with money to spend to people who need to borrow it - have stopped holding up their end of the bargain. Bankers rode high on the financial bubble until its collapse sank us all. Now, despite being bailed out by taxpayers, banks are at it again, eating up our savings accounts with fees and pitiful interest rates. And if you need a loan, forget it.

When other institutions tested the goodwill of their customers, technology-based alternatives emerged to provide a better option. Napster, for example, forced the music industry to redraw its entire model to adapt to the new realities of the digital world. Blogs, YouTube and Twitter are forcing newspapers to evolve to keep up with the seismic shifts in the way we communicate with each other.

What you might not know is that there are technology solutions for banking every bit as powerful as social media such as Facebook that can step into the gap, making it possible, this very minute, for you to borrow or lend money safely online, completely independent of an actual bank. They're called peer-to-peer (P2P) lending services, and they have been around for years. This kind of "citizen banking" should be reshaping the business of borrowing and lending, and shaking the foundations of the financial industry in a way no amount of Occupy Wall Street protesting could accomplish.

http://www.newscientist.com/article/mg21228421.300-bank-says-no-ditch-the-bank--borrow-from-the-crowd.html

P2P lending and micro lending have some great characteristics. I think they are great for improving conditions in poor countries.

That being said the premise of your post, and the structure of the op ed piece you posted are whack!

They could have made it a positive story about p2p lending, instead of a slam piece about banking.

First the story about that women is bullshit. It makes no sense.

1. The down payment is non refundable? That is almost unheard of in real estate. More likely the deposit is non refundable. That is common in most real estate transactions. When you make an offer it takes a property off the market until you close, and the seller should get the deposit if you can't do so to compensate them for other possible sales that they missed out on. My assumption is that she was trying to use a subprime mortgage product, you know the type that led to our current mess required almost no money down, and she is bemoaning the loss of her small deposit. If such a contract really did exist then I want to know how she tricked some one into giving her a six figure salary, because she is an idiot!!!

2. She had 6 figure income, but then the downturn caused her not to qualify. Also bullshit. More likely she over extended herself in the boom, took on way to much debt, and she shouldn't get a mortgage because she is a credit risk. People with six figure incomes do not become credit risks over night unless they were playing it loose and fast with their money. Tough shit. People who had solid income and good credit history did not have trouble getting mortgages in that time frame. Sure they had to give way more documentation, and it took some work, but they got mortgages, and at great rates.

3. She didn't get qualified for a mortgage through p2p lending. They were nice enough to get her a consolidation loan to start rebuilding, but it is misleading to give the sob story about some one not getting a mortgage, who shouldn't get a mortgage, when p2p lending wouldn't give her a mortgage either. Ohhhhhhhh those evil social lenders.

So let get on to the commentary on p2p lending.

I love the misleading chart where they compared the trillions of bank lending on the same scale as the p2p lending.

Second I don't know why you chose not to quote the parts of the article where they mention that p2p lenders are also restrictive on who they lend to. The idea of p2p lending is not credit for all, investors need to get paid back for it to work.

Lets pull in some of the notable quotes you neglected to include:

How about the performance of prosper, a p2p start up:

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The fallout was harsh. Two years after it formed, Prosper was being ruined by defaulters: up to 20 per cent of borrowers were walking away with no repercussions. That ratio was staggering compared with the single digits banks report, and unlike a traditional bank, Prosper had no insurance to repay jilted investors.

P2P lenders screen borrowers, how very bankly of them:

Quote

The problem, ironically, is that P2P lenders adopted a few too many tactics from banks. Despite Prosper's relaunch, laissez-faire libertarianism was out. Now, instead of simply matching borrowers and lenders and letting them sort out among themselves how to price their loans, Prosper - like Lending Club, Zopa, and banks themselves - relied on data from official sources like credit bureau.

"The restraining order says you're only allowed to touch me in freefall"
=P

[DougH 270]

Quote

What happens if she finds herself unable to repay "the crowd"? Doe's she get a visit from Fat Tony and get her kneecaps busted?

[homer]Fat Tony you gave me a favor only with the expectation of receiving a favor in return. Shame on you. Good day Sir. [/homer]



The more likely outcome is the investors get hosed and they won't participate in future lending going forward.

"The restraining order says you're only allowed to touch me in freefall"
=P

[dreamdancer 0]

p2p banking has only just begun - bit by bit it could get very big...

stay away from moving propellers - they bite
blue skies from thai sky adventures
good solid response-provoking keyboarding

[DougH 270]

It will only get big if they have low default rates. In order to have low default rates they will have to act just like the banks in evaluating borrowers.

P2P lending could have an edge over the banks if the lender and the borrower have direct contact. In most circumstances you are more commited to your debts when they come from a personal source instead of a faceless institution.

When you have a pool of P2P lenders you loose that personal connection. Past results have shown that people have much less qualms about screwing a big pool of lenders.

That means you need large investors who are willing to make large contributions. If you don't have that you lack the capacity to make loans of any meaningful size like a mortgage, or a business loan for a large capital investment. And if I was the type of individual with a large pool of cash I would be much less likely to jump into the game after being vilified for the past year by the occupy clowns.

"The restraining order says you're only allowed to touch me in freefall"
=P

[Andrewwhyte 1]

I bet she wishes she had walked away. What do you think that home is worth today as a proportion of what she borrowed?

[lawrocket 3]

Peer-to-peer lending is something I have no problem with. Such things have happened quite frequently.

However, you are in a difficult situation here. Peer-to-peer lending requires peers who have money to lend. It will not work without income inequality, so you have something that you appear to support but can only exist with wealth inequality that you vocally despise.

Another problem with peer-to-peer lending is that it has a relatively shady history of “loan sharking.” This includes such things as a history of usury and other such matters, typically based on poor credit risks.

Another problem with peer-to-peer lending goes along with the loan sharking – it’s pretty tough to regulate. Peer-to-peer lending is pure capitalism and buyer beware. Off-the-books lending happens all the time, like working under-the-table. With that, you have no truth-in-lending disclosure requirements, and all kinds of contractual issues that can occur. Did you know that such things as Glass-Stegall were created in response to peer-to-peer lending, the defaults, and the problems of liquidity? The federal government HATES transactions where it has no role.

You are adding to my confusion about you. Supporting peer-to-peer lending is 180 degrees in opposite of your usual positions on things. This is pure, free market laissez faire capitalism at its zenith.

My wife is hotter than your wife.

[kelpdiver 2]

Quote

Quote

IN JANUARY of 2008, Pamela Slea decided to buy a home. The process initially looked straightforward - a bank had already pre-approved her mortgage, which would require a down payment that was the exact sum of her life savings. She did notice one odd clause in the contract: if no bank would approve her loan, she would lose her down payment entirely. But Slea wasn't worried, she had a six-figure salary and an impeccable credit history. She signed.

As Doug writes, this is bullshit.

A bank preapproved her loan - so there's already no concern about a bank approving her loan. A preapproval is exactly that - an approved loan. The only nix here would be if the appraisal did not come within scope of the loan LTV requirements.

The fact that the article left out any numbers, like the sum of the down payment or the cost of the house, implies a wish to stay away from the details. Good faith deposits, which can be as high as 10k, are made to the seller and those are forfeited in many cases. But that's not a 10 or 20% downpayment on the value of a loan that was, per the story, never made.

[DrewEckhardt 0]

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First the story about that women is bullshit. It makes no sense.

1. The down payment is non refundable? That is almost unheard of in real estate. More likely the deposit is non refundable.

The deposit is refundable when one of many contingencies isn't satisfied without being waived.

Including a loan contingency is prudent and the Realtor(TM) forms have one spelled out with blanks and check boxes. It can specify

1) Amount of the loan(s).
2) Type of the loan(s) (fixed, variable).
3) Maximum rate(s).
4) Maximum points paid to achieve that.
5) Any additional financing terms (30 years, 15 years, 5/1 ARM, etc.)

If my bank wanted more than 25% down, a fraction of a percent above the rate I'd been quoted, or more than 1 point and no one else matched those terms within 17 days after my offer was accepted I would have walked away from my last purchase contract with my deposit.

[lawrocket 3]

Also note that the deposit has ZERO to do with a bank. If a down payment is non-refundable it has ZERO to do with the bank. The only time I have ever seen anything like this is when I consulted with a person who decided he didn't need a real estate broker and wanted to purchase a house from a guy who also had no real estate broker representation.

A bank can preapprove a person for, say, a $300k loan to buy a house. But a bank will not approve the loan for a $300k house because the value of its security is not there. A bank would likely approve a $300k loan for a $360k house or even a $400k house.

I agree. This story is spun like a top.

My wife is hotter than your wife.

[DrewEckhardt 0]

Quote

interesting...
IN JANUARY of 2008, Pamela Slea decided to buy a home. The process initially looked straightforward - a bank had already pre-approved her mortgage, which would require a down payment that was the exact sum of her life savings. She did notice one odd clause in the contract: if no bank would approve her loan, she would lose her down payment entirely. But Slea wasn't worried, she had a six-figure salary and an impeccable credit history. She signed.

This should be about sleazy real-estate agents neglecting their fiduciary duty to their clients by not protecting them with the loan contingency in their fill-in-the-blank contracts, not banks (doing nothing wrong here), or peer to peer lending (just cleaning up some of the mess made by the steal-estate agent).

[lawrocket 3]

As I wrote, I highly doubt this woman was represented by a Broker.

My wife is hotter than your wife.

[dreamdancer 0]

can't believe no-one got my 'bit by bit' joke

Quote

If citizen banking takes off, it could change people's day-to-day reality in the fundamental ways that the now-global Occupy movement is clamouring for. With interest payments going directly to the masses, rather than to banker bonuses and skyscrapers, P2P lending could cause more money to circulate in the real economy. It also naturally distributes risk among many individuals in a potentially more transparent way, rather than concentrating it in large, "too big to fail" institutions.

Slea certainly agrees. in 2010, she got a loan with Lending Club which is now allowing her to rebuild her credit rating. With a growing movement protesting the old system, perhaps the "99 per cent" can start to do things themselves. "We think this is kind of a magic moment," says Larsen.

http://www.newscientist.com/article/mg21228421.300-bank-says-no-ditch-the-bank--borrow-from-the-crowd.html?full=true

stay away from moving propellers - they bite
blue skies from thai sky adventures
good solid response-provoking keyboarding

[kelpdiver 2]

there is a joke here, but it's not the story.

BTW, you're describing something called a credit union. They've been around for a long time.

[gher 0]

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there is a joke here, but it's not the story.

BTW, you're describing something called a credit union. They've been around for a long time.

No way, Man...*bonghit* too...Corporate, Man...*bonghit*

If you gotta like, *bonghit* shower, and wear a tie to do it, you're a little Eichmann, man...*bonghit*