It appears Prosper is planning on setting up a secondary market in the near future to allow lenders to buy/sell notes. You can find the details on the S-1 registration the company filed yesterday.

“Prior to the date of this prospectus, the Notes have been non-transferable except by assignment to a collection agency upon default. As soon as practicable after the date of this prospectus, Prosper intends to establish a secondary trading market online auction platform, or the Resale Platform, on which the Notes may be resold to other Lenders after three months following the date that a selling Lender acquired the Note from Prosper (or immediately if the selling Lender acquired the Note on the Resale Platform).”

Here’s are the most important parts:

• A lender can sell a loan they have after holding it for 3 months.
• “Selling Lenders who post resale listings will be able to specify a listing duration of three, five or seven days.”
• “Prosper intends to charge all selling Lenders a nonrefundable resale listing fee of $0.25 per Note being listed for auction sale, or $0.50 per Note being listed for auction with an automatic sale feature.”
• “Prosper also intends to charge the selling Lender a resale transaction fee equal to 1.0% of the sale price, subject to a minimum fee of $0.50, which will be deducted from the sale proceeds at the time a Note is sold to a subsequent Lender.”

At first glance this is looking like a sour deal for the seller and a great deal for the buyer of a note. A seller is going to be charged 1% + $0.25 per loan sold whereas the buyer gets charged nothing. If a savvy investor can get a good estimate of the delinquency rate and default rate as well as when they are likely to occur in the life of a loan then they can make a nice profit in this market.

Bumped into this article today. It gives a pretty good summary of the whole subprime fiasco in housing that is happening lately.

“In March, less than a year after the issue was sold, GSAMP began defaulting on its obligations. By the end of September, 18% of the loans had defaulted, according to Deutsche Bank.” Junk mortgages under the microscope

If you finished reading that and still want to learn about how securitization works, the following article posted in May does a great job at it. Scroll down to “Turning Nuclear Waste into Gold”. The US Mortgage Market - Overexposed and Overrated

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