How ironic. Peer-to-peer lending, technological platforms that match lenders and borrowers directly, was born as a way to democratise credit and disintermediate banks and Wall Street. By eliminating the costs associated with the middleman, they have offered lower borrowing rates, but higher returns. Banks and institutional investors have caught on, though, and begun to lend through P2P platforms. Now (gasp) loans are being bundled and sold as securities to large investors, opening P2P lending to an even broader potential pool of capital.
Securitisation serves the interests of various groups involved well. Eaglewood Capital recently securitised loans it made through Lending Club into a $53m deal. The hedge fund leveraged its assets at fixed rates, while investors like insurers that cannot lend directly through P2P platforms obtained access to the loans. SoFi, a P2P lender that primarily refinances student loans for working professionals, has a deal in the works that would enable the company to reduce the cost of financing by 1 per cent. That translates into lower interest rates for borrowers. The transaction will be rated and more broadly sold.
Persistently low rates have sent institutional investors scouring the world for ways to boost yield. There is also a perennial search for unmined alternative assets (frontier markets, unlisted Reits, etc) that bring hopes of outperformance and diversification. The more offbeat, the better. Micro loans may fit that description. The danger comes if demand begins to drive lending. And volumes eventually have nowhere to come from but deteriorating underwriting standards just in time for competition to squeeze lending margins – lest we forget the extreme example of the US subprime mortgage disaster. Over to the P2P lenders to prove they really are superior.
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