Marketplace Lenders Are Narrow Threat in Mortgages ... for Now

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The burgeoning marketplace lending sector seeks to disrupt traditional financial services with online platforms that connect borrowers with individual and institutional investors.

But in real estate, marketplace lenders — which are also known as peer-to-peer, or alternative, lenders — have focused on facilitating loans to underserved niches within the residential and commercial sectors. It is an approach that, at least for now, seeks to coexist with, rather than supplant, the traditional mortgage market.

"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?'" said David Manshoory, the chief executive of marketplace lender AssetAvenue in Los Angeles. "But I think banks have come to recognize that it can actually be very complementary to their businesses."

Marketplace lenders such as AssetAvenue see their best prospects for real estate lending in certain commercial real estate loans and single-family investment-property lending.

"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 2014 so-called private CRE loans accounted for approximately $150 billion of $500 billion in total commercial mortgage activity, while single-family investment-property loans were just $25 billion of the $1.1 trillion residential mortgage market.

Looking ahead, there may also be opportunities for marketplace lenders to fund luxury single-family-home purchases, as well as "fix-and-flip" properties, which represented just 4.5% of homes sold during the second quarter of 2015, according to RealtyTrac.

While these segments may be too small for traditional mortgage lenders to make much profit, an opportunity exists for marketplace lenders to leverage automation to originate these loans more efficiently and expand their operations to increase volume.

"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."

Already, marketplace lenders are working with third parties from the traditional nonbank mortgage market, including money lenders and servicers.

Smaller mortgage lenders appear to be the ones that have the most to worry about on a competitive front when it comes to marketplace lending, particularly in commercial lending.

But Manshoory said companies like his can work cooperatively with them.

"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," he said, citing one example.

AssetAvenue has institutional investors with the resources to fund larger loans that certain other lenders often do not.

"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.

Marketplace lending platforms seek to play up their other strengths over established home loan providers, such as quicker transactions.

"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.

"There hasn't been much technology applied to the mortgage lending process in the commercial real estate industry," he added. "We're a technology forward company."

Intense regulation of owner-occupied loans and banks is largely responsible for the long turnaround times that traditional residential mortgage borrowers face, and a reason Manshoory said AssetAvenue has stayed out of that part of the market.

"Marketplace lenders are subject to all the origination and servicing regulations," said Gordon Albrecht, senior director at servicer FCI Lender Services Inc.

Traditional mortgage firms cannot avoid extra regulation if they want to continue to fund owner-occupied loans, but they could take a page from marketplace lending platforms by using more automation to improve efficiencies if they have the funding to invest in it.

"The only way you can deal with all this compliance is with technology," Albrecht said.

Many mortgage companies lag behind other industries when it comes to automation, but at least one that has been more aggressive in that area, LoanDepot, has entered the personal lending space more typically targeted by marketplace lenders.

There have been attempts before to blend investor funding of loans on a platform with traditional mortgage lending in the past.

Virgin Money in 2007 entered the U.S. with a peer-to-peer home loan platform. It later added a wholesale lending operation. But perhaps because of the timing of the venture in the midst of the housing downturn, it ended up selling both units separately.

Whether marketplace lenders will have a long-term place in mortgage lending may come down to regulation.

Marketplace lenders may draw regulatory scrutiny if they move too far down the credit curve and become too susceptible to liquidity risks.

But Manshoory and other marketplace lenders note they have been avoiding the kind of credit and liquidity concerns that wiped out mortgage lenders in the last downturn.

Like some traditional lenders, marketplace lenders like AssetAvenue claim to avoid high loan-to-value ratios on single-family loans.

Marketplace lenders like Manshoory's company might lend to borrowers who lack traditional credit histories or scores if they can provide

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Marketplace lending CRE Commercial lending Housing Consumer banking Nonbank Mortgages
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