Lazy Man and Money

Lower the Interest Rate on Your Mortgage Without Refinancing?

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On my trip to Boston a couple of weeks ago, I met up with a couple of my best friends from college. One is probably more into personal finance than me – but he’s just not the blogging type. He can dazzle with Excel and Quicken and probably could tell you exactly how much money he has to the penny with a single click. The other friend is a lawyer specializing in real estate. When I closed on my condo purchase, he was the guy I went to and it was smooth sailing.

Somehow, we got onto topics of the economy. We gabbed about the sub-prime crisis. They thought that the mortgage holders were to blame because it’s their responsibility to know what they can afford and not get sucked in a mortgage lender/salesman. I took a different view and thought it was the mortgage lender, because they are expert trying to explain a topic that most people are unfamiliar with (mortgages) and pushing them into more complex vehicles with escalating interest rates. The answer is that it’s probably a combination of the the two. It’s almost like a homerun in baseball, sometimes the hitter does a tremendous job of hitting a good pitch and sometimes the pitcher does a lousy job of pitching the ball making the hitter’s job easy… and there’s a lot of homeruns that fall in between those extremes.

We also got on the topic of mortgage rates. They are historically extremely low right now. I lamented that I couldn’t take advantage of the low rates. I had lost a lot of the equity on my home and if I tried to refinance I wouldn’t have the 20% down that mortgage lenders like to see – especially in this market. I am also self-employed (with a less than impressive income) which probably doesn’t make them light up with joy. Lastly, since I moved to California and now rent the Boston condo, it’s not owner-occupied – yet another thing that banks would like to see. That’s three pretty decent strikes against me if I’m looking to lower my rate from 5.875% to some of the 4.875% rates available today.

My lawyer/real estate guru friend told me the solution was simple. He asked me if I came up as self-employed or unemployed on credit reports (I admit that I don’t know this). He said that if I showed up as unemployed, it would be very easy to get a lower rate. I could simply call up the lender and tell them that the ecomony is bad and ask if they could lower the rate – no refinance or paperwork necessary. The theory is that lenders would rather give you a lower rate than risk not getting paid and having to deal yet another foreclosure.

What do you think? I think it sounds plausible and my source is rock solid. Still something sounds almost a little too good be true. Is this possible? Has anyone out there been in a similar situation and tried it?

What Happened to Prosper on Lazy Man?

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Last week, Get Rich Slick asked the question, What Happened To All The Prosper.com Blogs? Two years ago, along with RateLadder, I probably wrote about Prosper more than most personal finance bloggers. So when RichSlick asks why the blogs have seemingly gone silent, I feel that I should stand up and answer.

Here are the 2 main reasons I think bloggers (myself included) aren’t writing about Prosper as much any more:

  • It’s Getting Old – Peer-to-peer lending was a new asset class for the average investor. I think any time a new asset class comes around, people are going to want to write about it, dissect it, and analyze it. That’s been done over and over the last two years. Is there a new angle to write about? I’m out of things to write about unless they add new features like bidding though the API (something announced at the last Prosper Days, and I’m not sure if it’s being used by anyone or not).
  • The Returns Aren’t Where I Thought They Be. When Prosper came out, I used the Experian default as my main guideline. It seems that Prosper loans default a lot more often. I don’t know if I was just not informed enough to realize that differences between the Experian data and the loans I chose to participate in. For instance, I know that the Experian data applies to debt-to-income ratios under 20%, but at the time I figured that 25% wasn’t too much different. And I didn’t look at other information like delinquencies as I didn’t know how to process it. I basically made the mistake that a lot of mortgage lenders did – I took on too much risk. Unfortunately, I wasn’t a lending professional and the government won’t bail me out.

Here are some other comments I wanted to get in, while on this topic:

  • Tricky Math – The next day after asking the question, Get Rich Slick Fishes Through LendingStats To Learn About Prosper. He takes the top 10 lenders (by money invested in loans) and calculates that the estimated ROI at 1.518%. If you look at the page he uses, the 10th person is the worst lender of all… 15% worse than any of the other 25. If he had chosen the top 9 he would have had a 3.70% return. If he does the top 25 people the return jumps to 3.36%. If you take out the best and worst lender in that top 25, you have 3.94% return. (Note, I’m using a simple averge, not a weighted average because I’m Lazy). I’m not going to say that a 3.50% is great (I think you can do better at some banks), but it defintely beat my stock returns of late.
  • People’s Rate of Returns May Look Worse Than They Are – Here’s where the data gets even trickier. Prosper is always changing and adding new features. When I made most of my bad loans, I didn’t have their tool that says, “People who made this bid on a loan like this have an estimated return of -10%.” That’s powerful stuff. It changes your lending practices. Also, people may change their lending practices as they learn. I didn’t know that delinquencies were that important when I started. A few bad loans in the beginning can really torpedo your overall returns. However, those bad loans become less “impactful” (is that a word?) over time. If you look at the top 10 lenders mentioned before, they typically were early adopters and likely victim to these bad decisions.
  • What About Other Market Conditions? – People are likely going to pay off their mortgages before a peer-to-peer loan. After all, it’s their home! Yet we see that many people aren’t able to pay back their mortgages. It’s the worst it’s been in years. Perhaps judging Prosper’s performance now is like judging the stock market in 1929. If the economy gets back to normal, one could reasonably expect that fewer people would default on Prosper loans, right?
  • Lending Club is Performing Great For Me – I have 60 loans with Lending Club. Of those 60, 6 have been fully repaid, 53 are still current, and one is 16-30 days late. (The late one has already repaid 20% of the loan, so if I eat that one it’s not bad). My weighted average interest rate on these 60 loans is 9.21%. While this is not Prosper, the concept is the same. It’s great… I love it… I’m making a lot of money… ;-).

I stand by what I’ve said over a year ago… You have to treat Prosper loans like bonds – and that’s essentially what they are, right? I don’t know anyone who invests in a diversified bond fund and says, “It’s great… I love it… I’m making a lot of money…” Instead, you are going to say, “I’m more diversified than I was. I recognize that investing isn’t about making a lot of money quickly. I love that I didn’t lose 30-40% of my money in the stock market.”