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Possible industry disrupter poised to help benefit both
The growing marketplace lending sector wants to disrupt traditional financial services with online platforms that connect institutional investors with borrowers. In real estate, marketplace lenders are also known as alternative or peer-to-peer lenders and they have focused on bringing loans to underserved niches within the larger residential and commercial markets. Marketplace lenders do not seek to replace the traditional mortgage market, but to co-exist with it.
In PEMCO Limited’s article, “Disrupting the Mortgage Industry”, it sums up the marketplace lending ethos best, “The big difference between traditional lenders and disrupters such as marketplace or crowdfunding lenders is that the disrupters view lending as an event which has been improved by their services and technology, with improved documentation, communications, usability, decision-making capabilities, making the mortgage loan’s approval an efficient, low-cost, transparent and completely online process. Traditional lenders have always seen mortgage lending as a complex and difficult process for all parties involved.”
“Banks in the beginning really didn’t know how to view peer-to-peer lending. Like, ‘Is it going to hurt us? Is it competitive to us?’ But I think banks have come to recognize that it can actually be very complementary to their businesses,” said David Manshoory, CEO of marketplace lender AssetAvenue in Los Angeles.
AssetAvenue sees real estate lending in the private commercial real estate loan and single-family investment property lending areas as more lucrative than owner-occupied loan financing.
“We cater to real estate investors. It’s not a family or a homeowner borrowing on a home that they live in,” said Manshoory.
In the future, there may be opportunities for marketplace lenders to fund “fix-and-flip” properties and luxury single-family home purchases. Marketplace lenders, unlike traditional mortgage lenders, have an opportunity to leverage origination automation by scaling their operations to increase volume and do it more efficiently.
“Our goal is really to become the most efficient at sourcing a lot of loan opportunities and then becoming a smarter underwriter of debt by leveraging a lot of data,” Manshoory said. “We’re building an online lending platform where borrowers or their mortgage brokers can self-serve.”
Mortgage banks and depositories may benefit from working with marketplace lenders by referring customers seeking loans they don’t want to make. Third parties from the traditional nonbank mortgage market are already working with marketplace lenders and servicers.
“I think there’s an interest on the part of a number of banks to invest in companies like AssetAvenue,” Manshoory said.
Smaller private-money mortgage lenders may have the most to worry about when it comes to competing with marketplace lending, particularly in the commercial realm. This is because many marketplace lenders have institutional investors with the financial might to fund larger loans that smaller private-money lenders often don’t, but marketplace lenders can work well with private lenders and mutually benefit.
“We’ve served as a secondary market where a capital-constrained private money lender can sell a loan off their balance sheet to AssetAvenue’s marketplace of investors,” Manshoory said, citing one example.
“Many of the local private money lenders are typically funding $200,000, $300,000, or $400,000 loans. They don’t have the financial capacity or the balance sheet to go out and fund $5 million loans, but we do,” Manshoory said.
In addition to financial resources, marketplace lending platforms address another big challenge for traditional home loan providers.
“I’d say one of the biggest pain points is speed. It takes anywhere from four to sometimes up to 12 weeks to get a loan financed through a bank and it’s a very slow process,” Manshoory said.
One of the reasons that AssetAvenue has stayed out of the owner-occupied loan part of the market is because of the long turn-times, mostly a result of strict bank and lending regulations.
“Marketplace lenders are subject to all the origination and servicing regulations,” noted Gordon Albrecht, senior director at servicer FCI Lender Services Inc.
Although marketplace lenders and traditional lenders are subject to origination and servicing regulations, marketplace lenders use automation for maximum efficiency. While traditional mortgage lenders can’t avoid extra regulation if they want to continue funding owner-occupied loans, they can look at how marketplace lenders scale their technology to improve their operational efficiencies.
“The only way you can deal with all this compliance is with technology,” Albrecht said.
While the mortgage lending industry has lagged behind other industries when it comes to automation, loanDepot has been aggressive in automating and being in the personal lending space more typically targeted by marketplace lenders. This blending of investor funding of loans on a platform with traditional mortgage lending has been attempted before. Virgin Money, came into the U.S. in 2007 with a peer-to-peer home loan platform, then later added a wholesale lending division. They eventually sold both units separately, possibly because of their market entry timing, coming into the market as the housing crisis was gaining traction.
Regulation may be the deciding factor whether marketplace lenders will have a long-term place in mortgage lending. If marketplace lenders move too far down the credit curve and make themselves more susceptible to liquidity risks, this could attract regulatory scrutiny. Manshoory and other marketplace lenders note that they have avoided the kind of credit and liquidity concerns that tanked mortgage lenders during the housing crisis by avoiding high loan-to-value ratios on single-family loans. Often, the LTVs are lower than those of traditional mortgage lenders. Manshoory said if borrowers can provide reliable alternative credit information when they lack traditional credit histories and scores, AssetAvenue might provide a mortgage loan, but they have avoided those with subprime credit.
Resources:
Origination News. Is Marketplace Lending a Friend or Foe to Mortgage Firms?
PEMCO Limited. Disrupting the Mortgage Industry