We first noted Wall Street’s misguided plan to feed its securitization machine with peer-to-peer (P2P) loans back in May 2015 (see “What Bubble? Wall Street To Turn P2P Loans Into CDOs“). Obviously we warned then that the voracious demand for P2P loans was a direct product of central bank policies that had sent investors searching far and wide for yield leaving them so desperate they were willing to gamble on the payment streams generated by loans made on peer-to-peer platforms.
In addition to the pure lunacy of using unsecured, low/no-doc, micro-loans as collateral for a CDO, we pointed out that the very nature of P2P loans meant that borrower creditworthiness likely deteriorated as soon as loans were issued. The credit deterioration stemmed from the fact that many borrowers were simply using P2P loan proceeds to repay higher-interest credit card debt. That said, after paying off that credit card, many people simply proceeded to max it out again leaving them with twice the original amount of debt.
And, sure enough, it only took about a year before the first signs started to emerge that the P2P lending bubble was bursting. The first such sign came in May 2016 when Lending Club’s stock collapsed 25% in a single day after reporting that their write-off rates were trending at 7%-8% or roughly double the forecasted rate (we wrote about it here “P2P Bubble Bursts? LendingClub Stock Plummets 25% After CEO Resigns On Internal Loan Review“).
This post was published at Zero Hedge on Sep 26, 2016.
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