Monday, March 14, 2016

Peak Peer-to-Peer Lending

From ZeroHedge:

Peak Online Lending? SoFi Starts Hedge Fund Just To Buy Loans From Itself
We’ve written quite a bit about P2P or, more accurately, "marketplace" lending over the years.
Most recently, we noted that write-offs for five-year LendingClub loans were coming in at between 7% and 8% as opposed to the forecast range of between 4% and 6%. “Their business is to take data and use that to underwrite risk,” Compass Point’s Michael Tarkan told Bloomberg by phone. “If you’re an investor in the loans on the platform, this creates a concern around that underwriting model.”

Or, as we put it, “the algorithms LendingClub uses to assess credit risk aren't working. Plain and simple.”

We also recently checked in on Prosper, the P2P site that inadvertently (we hope) financed Syed Farook and Tashfeen Malik’s San Bernardino jihad with a $28,000 loan. Prosper is raising rates to an average of 14.9% from 13.5% and last month told investors in a letter that estimated losses on loans have been increasing over the last six months.

That came on the heels of a warning from Moody’s who said some Prosper-linked bonds could face downgrades as the loans backing the deals began to go sour. “Charge-offs have been coming in at a higher rate than expected, very simply,” Amy Tobey, a senior credit officer at the ratings agency remarked at the time. “It is not a two-month blip,” she added.

No, it’s not, and concerns about the health of the US economy and the true state of the labor market will likely mean that demand for marketplace-backed paper won’t exactly be what one would call “robust” going forward. Of course that’s a problem for lenders like SoFi, which pools its loans and sells them to free up space on the books for still more loans. It’s the same “originate to sell” model that was used in the lead-up to the housing crisis and that’s now a part of the subprime auto space (although Citi will tell you that it’s not endemic there).

These companies need to be able to offload the loans in order to keep the model running, and if they can't tap the securitization market, their ability to lend will suffer. But don’t worry, because SoFi - which originates billions in personal loans - has an idea. They will start a hedge fund and buy their own loans.

No, really.

“Social Finance Inc., a rapidly growing online lender, is hoping to stoke investor demand for the debt it originates by starting a hedge fund that will buy its own loans -- and potentially those of its competitors,” Bloomberg reports.

The fund, called SoFi Credit Opportunities Fund, has raised $15 million so far. “It’s seeking to attract more money from wealthy individuals, funds of hedge funds and other institutional investors that may not want to buy whole loans directly from the company or securities backed by the debt,” Bloomberg goes on to note....