No Bank Mortgage? Try a Person!

Traditional lenders have tightened credit in order to offset losses related to the mortgage crisis. As a result, many consumers are now turning to non-traditional sources for money. Online networks of individual lenders with downloadable loans are suddenly coming into vogue.

According to a survey conducted by Braun Research and Bank of America, 65 percent of Americans now bank over the Internet. But just 10 years ago-which seems like eons in terms of our nation's tumultuous mortgage history-the Pew Research Center reported that only 10 million Americans conducted banking transactions on their computers. Nowadays, nearly that many people do banking over cell phones alone.

Future of online mortgages

While most major banks and mortgage lenders have online offices, the new lending craze is Internet-savvy individuals who are lending to each other. The future of mortgage lending may rest in the innovative hands of online social networks like Prosper.com or Zopa.com. It's already possible, in fact, to visit these fast-growing sites and others like them to borrow money or become a lender in much the same way that you'd find music downloads or connect with online friends.

Giving and taking

Here's how they work: Users register-just as they might do on sites like Amazon, FaceBook or MySpace-and then let the site managers pull their credit reports. Next, the user will post a request for a loan, explaining how much she wants to borrow and what interest rate she hopes to pay.

You can also register as a lender, which technically means that you'll buy loans or mortgage paper from the company running the site-and then you decide to whom you'll lend and how much interest you'll charge. Borrowers ask for money, and lenders offer their best mortgages by posting bids. When they find a match, the deal is done.

Bank losses are individuals' gains

These sites have enjoyed a spike in activity lately because traditional lenders have begun to restrict second mortgages and home equity lines of credit. This has caused consumers to look elsewhere. They're willing to pay slightly higher rates for hassle-free loans that are made not by bankers, but by ordinary people like themselves. Although these individual non-professional lenders assume risk, many of them are only lending small amounts of $50 or $100. Plus, before they bid to lend money, they're allowed to scrutinize credit reports, income, and other factors just like conventional bankers do. Borrowers who need larger sums might do business with one lender offering large amounts of cash, or spread their business around by borrowing small amounts from lots of different lenders.

Rates paid by borrowers tend to be higher than conventional loans, but lower than credit card borrowing. Many of the participants hope to consolidate debts or find an alternative to home equity loans and second mortgages, because so many of those products are evaporating. About half of all prospective borrowers who have excellent credit get loans, and they usually receive their check in the mail within a matter of days.