The burgeoning marketplace lending sector seeks to disrupt traditional financial services with online platforms that connect borrowers to 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 both the residential and commercial sectors. It’s an approach that, at least for now, seeks to co-exist 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?’ 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.
Marketplace lenders such as AssetAvenue see their best prospects for real estate lending in private 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, private CRE loans accounted for approximately $150 billion of $500 billion in total commercial mortgage activity, while single-family investment 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 see much profit, an opportunity exists for marketplace lenders to leverage automation to originate these loans more efficiently and scale 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.”
Depositories and mortgage banks could actually benefit from cooperating with marketplace lenders by referring customers seeking loans they don’t want to make. Plus, those firms with venture capital affiliates could make equity investments in marketplace lenders, Manshoory said.
“I think there’s an interest on the part of a number of banks to invest in companies like AssetAvenue,” Manshoory said.
Already, marketplace lenders are working with third parties from the traditional nonbank mortgage market, including private money lenders and servicers.
Smaller private-money 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 private lenders to their mutual 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,” he said, citing one example.
AssetAvenue has institutional investors with the resources to fund larger loans that other private market lenders often don’t.
“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 solve for key challenges established home loan providers face.
“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 are largely responsible for the long turn-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,” noted Gordon Albrecht, senior director at servicer FCI Lender Services Inc.
Traditional mortgage firms can’t 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.
Marketplace lenders like AssetAvenue have focused exclusively on real estate finance sectors, but others focus more heavily on other types of loans instead, or in addition to lending on properties.
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 been contending in 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 because they target underserved and less regulated niches and may be easily 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 traditional private lenders, marketplace lenders like AssetAvenue claim to avoid high loan-to-value ratios on single-family loans and in fact, insist on lower LTVs.
Marketplace lenders like Manshoory’s company might lend to borrowers who lack traditional credit histories or scores if they can provide a reliable alternative. But they have been avoiding those with “subprime” credit, he said.