By Konrad Putzier
Peer-to-peer lending — once synonymous with small consumer loans — is making forays into the real estate industry.
Virtually unregulated, the practice is a boon for cash-strapped developers and is starting to draw the attention of institutional investors.
As the first loans get securitized, peer-to-peer lending may be poised for the big stage.
“Banks are kind of in the stone ages compared to these platforms,” said Jahangier Sharifi, an attorney at Richards Kibbe & Orbe who helps funds invest in peer-to-peer loans.
Peer-to-peer lending sites match borrowers and lenders directly via the internet, using an automated algorithm to determine creditworthiness.
Thanks to miniscule transaction costs, the sites can offer investors higher returns than overhead-heavy banks.
The field was initially dominated by small retail investors spending as little as a few dollars, but that is starting to change. The attorneys at Richards, Kibbe & Orbe estimate that 80 percent of all peer-to-peer loans are now being financed by institutional investors, such as hedge funds or private equity firms drawn in by high returns.
While the major peer-to-peer platforms exclusively broker consumer loans, a small number of real estate lending sites have grown rapidly over the past year.
California-based Patch of Land claims to have raised $9 million for commercial real estate loans ranging from $120,000 to $550,000 and is lending at a rate of $2 to $3 million per month. Realty Mogul, which arranges both loans and equity financing, claims to have raised a total of $30 million.
These numbers are a drop in the ocean of real estate finance, but a recent influx of institutional money has made peer-to-peer lenders more bullish about their future.
Ten days ago, the private investment firm Direct Lending Investments committed itself to spending $73 million on Realty Mogul projects. Patch of Land has just reached in agreement with an unnamed hedge fund to invest $50 million to $75 million through the site, according to its co-founder Jason Fritton. He added that Patch of Land is in negotiations with three to four other funds.
“Institutional funds bring firepower,” Fritton said, adding that he expects them to take up a bigger role in the future. “As far as real estate peer-to-peer lending in general is concerned, I expect most volume to be bought up by institutional players. That said, there will still be lots of room for retail investors.”
Despite its rapid growth, there are doubts over whether the semi-automated underwriting of peer-to-peer platforms really has a future in real estate lending.
Peer-to-peer lending platforms use algorithms to determine creditworthiness, analyzing information such as a borrower’s credit score, type of car, education or neighborhood. Critics contend that real estate is too complex and dominated by local intricacies for a uniform algorithm. In other words: no computer can replace the judgment of a local mortgage banker.
Patch of Land’s Jason Fritton retorts that algorithms can actually be quite good at capturing the complexities of local real estate markets.
“Now, in the days of Zillow and Trulia, we have granular data on our side and can determine market trends, unemployment and crime rates all the way down to the block,” he said, adding that Patch of Land also commissions classic appraisals for all its projects.
Whether these algorithms work or not may not become clear for years, argued Scott Budlong, Jahangier Sharifi’s colleague at Richards Kibbe & Orbe. “None of this has been stress-tested in a down-cycle,” he said.
The efficacy of algorithms could take on a broader significance if peer-to-peer lending continues to make inroads into real estate finance, raising the specter of systemic risk. For now, the sector is virtually unregulated, falling through the cracks between various agencies.
“They are not regulated by banking regulators, they are not regulated as investment companies by the SEC and they are not regulated as investment advisors – even though they rate loans for a fee,” explained Jahangier Sharifi.
If peer-to-peer platforms sell notes to retail investors, they are at least required to publish a prospectus on the underlying loans, he explained.
But if they source entire loans for institutional clients, there is virtually no oversight. They are not required to retain any loans or keep an equity buffer.
This lack of regulatory oversight could become a growing concern as the first peer-to-peer loans get securitized, raising memories of the under-regulated market for credit-backed securities pre-2008.
Funds and investment banks have already started packaging peer-to-peer consumer loans into bonds, and Patch of Land’s Jason Fritton believes it is only a matter of time before they do the same with real estate loans.
Securitization allows peer-to-peer platforms to lend more, which is generally good for the real estate industry. But, as the 2008 crash shows, it also makes it harder to assess risks. Coupled with lax oversight, this could spell trouble.
Jon Kibbe of Richards Kibbe & Orbe has no doubt that peer-to-peer platforms are good for the lending market, but he also acknowledged the risks.
“The question is: are these platforms inducing people to stock up on loans in a low-interest environment?” he said. “The answer could be yes.” микрозаймы и займы онлайн без отказа
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