Peer-to-peer lending is growing up, and Wall Street is looking for a bigger piece of the action.
The burgeoning business, also known as marketplace lending, involves private loans between lenders and borrowers, usually arranged through web sites such as Prosper, Lending Tree and SoFi, along with a growing array of other entrants to the field. Investors like the loans for the yield they provide, and individuals and business people enjoy the ease of going to a site and being able to procure funding relatively quickly.
But as the industry is growing, so are its funding needs. That’s where big Wall Street banks are stepping in.
P2P platforms increasingly are bundling loans together and selling them off to institutional investors as “asset-backed securities.”
If that term is familiar, it’s because the practice was at the center of the financial crisis, where Wall Street combined loans — often mortgages — into exotic packages and then shipped them off to yield-hungry investors. They became an ugly symbol of the worst economic downturn since the Great Depression, but asset-backed securities (ABS) never went away, and the instrument, part of an industry practice known as securitization, is now proving valuable for the P2P industry.
Total ABS issuance for 2016 in peer lending came to $7.62 billion, according to S&P Global Market Intelligence analyst Eric Turner. In the grand scheme of things, the figure doesn’t sound like much for a banking industry that has $16 trillion in total assets.
However, the practice of ABS issuance in the marketplace lending arena began only around 2013, when the total was a meager $257.1 million. That means issuance is more than 30 times what it was just four years ago. The 2016 total also represented a 72.4 percent increase over the previous year.
As the industry expands, so will loan securitization.
“As the market has proven resilient in the face of headwinds, the use of securitization is unlikely to slow down, and 2017 stands to be another record year for deals in the space,” Turner said in a research note. “The continued need for capital at (traditional) lenders, coupled with the entry of new lenders in the space, will help fuel increased offerings for the year.”
There’s certainly plenty of demand.
Bond guru Jeffrey Gundlach at DoubleLine Capital is just one deep-pocketed investor who has been buying up marketplace lending ABS, particularly those comprised of personal and student loans, Turner said. Gundlach did not respond to a CNBC request for comment.
Other big investors include Zurich Insurance Group and property and casualty insurer Chubb.
For those wondering whether the P2P industry is going down the same perilous road as some of the now-dead companies that helped pave the way for the financial crisis, Turner believes the presence of high-profile names is a sign that the ABS offerings are more secure.
“We view this as a positive indicator for future growth, since these investors have likely conducted a significant amount of due diligence on the platforms and their offerings, making them more likely to purchase new securities in the future,” he said.
However, he does note that either an economic downturn, “a large default affecting a seasoned ABS issuance,” or a ratings downgrade could have adverse consequences. Turner also warned that investors could get greedy and demand higher yields, putting more pressure on the industry.
Likewise, Fitch Ratings views structured finance — the umbrella under which securitization falls — to be “predominantly stable” in 2017.
Of course, the ratings agencies themselves came under fire for failing to see the financial crisis brewing, as they gave sterling ratings to securities that eventually capsized.
Interestingly, the first P2P securitization came from a former Lehman Brothers trader who packaged Lending Club loans in 2013. Lehman’s collapse on Sept. 15, 2008 accelerated the crisis.
Among platforms, SoFi leads the way in ABS offerings, with the firm accounting for 58.4 percent of the 2016 total. Avant and Earnest were other big issuers during the year, while Lending Club was fourth.
SoFi already has made a splash in 2017, issuing $564 million and making its intentions known that it will be a big player in the mortgage-backed securities market.
The sites themselves do not act as lenders, only as facilitators between interested parties.
There’s every indication that even as regulations for big banks are likely to ease in the years ahead, peer lending is likely only to get bigger.
PwC has projected that the industry is likely to explode to at least $150 billion by 2025. Fitch said 2015 issuance probably topped $20 billion.