Tuesday, October 9, 2007

Prosper market anticipates Fed rate cut

In Prosper's second monthly lending market survey, CEO Chris Larsen says that the Prosper marketplace appears to anticipate Federal cuts in the intrest rate. Specifically he says a drop in the rates borrowers are paying on loans is close "to what was widely anticipated to be a quarter-point instead of a half-point reduction by the Fed." Here is the full text of Larsen's October announcement:

"When the Fed cuts interest rates people often expect mortgage rates to drop. However, this is rarely the case given that mortgage markets typically anticipate rather than react to moves by the Fed. On the flip side of the coin, the variable credit card and savings rate markets react sometime after the Fed moves. In fact, some variable credit cards have a 90-day window to make adjustments reflecting the rate cut. So the question is: did the Prosper marketplace anticipate or react to the Fed rate cut?

Many might assume that the Prosper marketplace would act less like the mortgage markets and more like the credit card and savings rate markets given that the latter compete with Prosper. Nevertheless, the month over month drop in average borrower rates indicates that the Prosper marketplace may have anticipated the Fed cut.

For example, in September the average borrower rates for all prime and near prime loans funded in the Prosper marketplace were 12.29% and 18.22%, respectively; down 0.37% and 0.28%, respectively, from August.

What is interesting about these percentage drops is how close they are to what was widely anticipated to be a quarter-point instead of a half-point reduction by the Fed. However, what remains to be seen is whether the market will continue to push rates down further in line with the Fed’s surprise move."

Last month Larsen said, lenders are exhibiting rational behavior and "being far more cautious about chasing higher rates offered by subprime borrowers."


Mike said...

I think Chris is reaching a bit when he suggests that the Fed rate cut was related to the decrease in Prosper loan's average interest rate. There were fewer listings in September while the number of lenders did not decrease. Simple economics suggests that the average interest rate should go down.

Tyson said...

I've read a few articles that credit card issuers might lower the rates but will raise the fees to make it up. Some are tlaking about a credit card market crisis.