Not every corner of the financial services industry has been negatively impacted by the current state of affairs. Peer-to-peer lending (also known as P2P) has seen its cred grow substantially over the past year. Once considered a fringe element, it has quickly become a source of funding for borrowers who have not been able to secure loans due to the ongoing credit crunch.
Peer-to-peer lending is an Internet-exclusive concept where borrowers seek funding from individual investors. In some cases, the borrower and lendersknow each other – family members and/or friends lending to one another – and the peer-to-peer site serves as a facilitator for the lending process. In other cases, the borrower posts a solicitation for funds and seeks out bids from interested and sympathetic investors.
The research firm Online Banking Report estimates $100 million in loan transactions occurred in the peer-to-peer channels in 2007. However, Online Banking Report also predicts loan volume could increase to $1 billion by 2010 and $9 billion by 2017.
The level of competition is already growing. Once dominated by a pair of sites – Virgin Money US, founded in 2001, and Prosper.com, founded in 2006 – the peer-to-peer market also includes Community Lend, GlobeFunder.com, Lending Club (a subsidiary of the Facebook social networking site), Loanio and US.Zopa.com (a subsidiary of the British Zopa.com).
Alone among the peer-to-peer sites, Virgin Money US (originally CircleLending before receiving a majority stake investment by Sir Richard Branson's capital group in 2007) is directly and actively engaged in the residential mortgage market.
‘Intra-family home loans represent about 33% of our peer-to-peer loan volume and represent the majority – over 75% – of our peer-to-peer mortgage business,’ says Asheesh Advani, CEO. ‘The remainder of the peer-to-peer mortgage business is comprised of managing seller-financed transactions and retirement mortgages – a small but rapidly growing segment.’
While the brick-and-mortar lenders are suffering in mortgage-related pain, Advani notes his operation is blossoming. ‘Our mortgage loan volume has grown by over 75% in the last nine months,’ he says. ‘The reason the credit crunch is positive for our business is that piggyback seconds are less available in the marketplace, except via Virgin Money's flexible family mortgage offering, and the'arbitrage opportunity for families has increased from approximately 200 basis points to 500 basis points.’
Advani sees his company enjoying a greater presence in the mortgage market. ‘In June, we completed an asset acquisition of Lendia, a mortgage company that provides outsource processing services as well as funds loans for sale to typical secondary market investors,’ he continues. ‘We are now in the process of short-listing a set of investors and U.S. banks to work creatively with Virgin Money. We believe this is a unique time for a Virgin-branded offering that targets creditworthy clients from mass
affluent families whereby the family members can participate in a portion of the mortgage loan.’
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Outside of Virgin Money US, first mortgage origination is not a current focus with other peer-to-peer sites.
‘There's not a lot going on in peer-to-peer lending in support of first mortgages,’ says Bobbie Britting, research director in the consumer lending practice at TowerGroup, headquartered in Needham, Mass.
Yet Britting notes the troubles triggered by the collapse of the subprime market have forced many people to turn to peer-to-peer sites. TowerGroup's recently released report ‘Will Unbanked Outnumber Banked Consumers?’ estimates there are currently 30 million adults with thin credit files, and 20 million with no record at traditional credit bureaus. Lacking access to traditional lending sources, many people are finding the peer-to-peer channels more receptive.
Britting adds that it is not just the unbanked or those with poor credit histories who are seeking out this alternative – a fact she knows from her own experiences.
‘I've personally recommended these sites to some friends that have no equity in their homes anymore,’ she reports. ‘With the tightening of credit, borrowers find themselves turning to different avenues.’
The evaporation of the home equity market has been a significant factor in the growth of Prosper.com, according to CEO Chris Larson. ‘People who once had options for home equity loans are coming to the site for better deals,’ he reports.
On the surface, Prosper.com runs a fairly conservative operation: Larsen reports the residential-related lending comes with a $25,000, three-year cap. However, he adds, the current state of the mortgage market is driving people to the site to seek money that would plug holes in their financial gaps.
‘Many people are coming to us because their first mortgage is resetting and they lack the ability to refinance on their own,’ he says. ‘They would use a Prosper.com loan to pay down their refinancing.’
Furthermore, the borrowers coming to Prosper.com are not subprime mortgage holders. ‘In July, 47% of our lending went to people with credit scores of 725,’ says Larsen. ‘The credit worthiness level among our borrowers is increasing – so many well-qualified people are coming to the site.’
Things to come
As the current financial crisis shows no immediate signs of abating, it would appear that the peer-to-peer sites will continue to grow.
‘Because of the credit crunch, people are going to their community to help each other out,’ says Larsen.
Perhaps ironically, Larsen cites ‘community’ as a cyber neighborhood. Britting notes that among the twentysomething demographic, the notion of lending and borrowing via the Internet is an extension of their seeming residency in cyberspace.
‘This millennial generation is used to doing things with social networking,’ she says. ‘This will be popular with younger consumers, who are much more comfortable doing things online.’
While Britting doubts the current peer-to-peer entities will pose a direct competitive threat to traditional lenders, she wondered whether the brick-and-mortar operations would benefit by diving into the cyber waters – if not as peer-to-peer sites directly, then at least as something very similar.
‘If I were a large lender, I might take a look at starting a Web site that was a one-off from my competition's site – something similar to P2P,’ she says. ‘Take a look at PNC's Virtual Wallet site. They've done a good job researching the market in how they think, talk, use money and misuse money.’
However, Larsen notes the competition is already tiptoeing into his site. ‘We have small private equity firms who are participating in lending,’ he reports. ‘We expect banks to join before too long. We always intended to operate as an open market.’
One peer-to-peer site, LendingClub.com, is already dealing with regulators. According to a July 17 report on NuWire Investor, LendingClub.com halted new lender registrations and new commitments from existing lenders while pursuing a Securities and Exchange Commission (SEC) registration that would enable it to offer $600 million in Member Payment Dependent Notes.
Prosper.com filed a similar registration in October 2007, according to NuWire Investor. Whether the SEC will classify peer-to-peer loans as securities remains to be seen.
For Advani at Virgin Money US, however, he sees himself as both an ally and a foe for mortgage bankers – depending how they wish to work with him.
‘We are a potential partner from the standpoint of correspondent investors and warehouse lenders electing to work with us,’ he says. ‘We are a competitor for retail lenders who do not work with us.’