American Banker | Wednesday, December 8, 2010
Peer-to-peer lending's original promise was that anyone could be a lender. These days, the barriers to entry are steeper.
Consider Money360 Inc. The Ladera Ranch, Calif., startup is touting itself as a peer-to-peer lending service focused on real estate loans. But its model differs from those of companies that sprouted a few years ago proposing to match consumers seeking small, unsecured loans with other individuals willing to make an investment to help out their fellow citizens.
Money360 is focusing on connecting wealthy loan-seekers with sophisticated investors. Loan amounts range from $200,000 to $5 million. The investors are required to put in a minimum of $50,000 on any loan. Individual investors must be worth at least $1 million or make more than $200,000 a year.
Though these requirements may seem stringent for a company that casts itself as a peer-to-peer lender, even earlier entrants that targeted Main Streeters must now enforce suitability requirements determined by state regulations.
"The concept of peer-to-peer has almost lost its meaning," said Brad Strothkamp, a principal analyst at Forrester Research Inc. "It isn't Joe Schmo lending to Alice. ? The average person is not going to be investing in these."
Given that not all peers would qualify for today's version of peer-to-peer lending, "I would just call it alternative lending," he said. "It's a different spin on a bank."
For example, many investors at Lending Club Corp.'s site must attest that they either make at least $70,000 and are worth at least that much or that they have net worth of $250,000. This net worth excludes homes, home furnishings and automobiles.
To be sure, some companies adhere to the original concept behind peer-to-peer lending. Tim Burke, the former sales manager of the now-defunct Virgin Money U.S., started National Family Mortgage at the end of September to arrange formal loans between family members for the purchase or refinancing of a home.
Money360 has already lined up $30 million from investors to lend to borrowers in California, the only state where it is currently licensed to operate as a lender and mortgage broker. Money360 plans to offer its services nationally within a year.
"I have investors that are looking for good opportunities and solid returns," said Evan Gentry, the founder of Money360.
"It just makes sense to bring these borrowers and investors together to try to solve the credit crunch we're in now," he said. "There's no question the credit market was too loose, and now it swung the other way. We're trying to fill that gap of making common sense loans to borrowers. The need is absolutely huge."
Each investment is considered a private placement and is registered with the state.
A prospective borrower applies for a loan on Money360's website. Money360 processes and underwrites each loan request, then matches qualifying borrowers with lenders according to their specified preferences.
Money360 performs all the functions of a lender, providing loan approval and all documentation and facilitating the loan's closing.
Investors can specify the amount they would like to invest in any particular loan. Money360 will then group up to 10 lenders together to fund the loan. This alleviates some of the investor risk, since their investments can be spread out across several loans.
Interest rates typically range from 8% to 12%, and payments are calculated on a 30-year amortization. Borrowers pay Money360 a flat 2% fee for each loan.
Money360 also acts as the servicer for the life of the loan. Each investor pays a fee of up to 1.5% of their investment in a particular loan for the servicing.
Money360 does not have a minimum credit score requirement; its focus is more on the loan-to-value ratio. It does not expect to make loans for more than 70% of a home's purchase price.
Gentry said he anticipates that most loans made through Money360 will be jumbo mortgages, multimillion-dollar loans to borrowers who don't "fit the box," meaning "they are self-employed or have a high net worth but don't have a steady income."
"We're not going to make the loan based on the cash flow; we're going to make the loan based on the equity in the property," he said.
One loan the company recently closed was to a borrower who had poor credit and was underwater on his mortgage.
"We looked at it and made it based on the value of the real estate and gave him a [loan with a] 55% loan-to-value" ratio, Gentry said. "With his friends and family, he came up with the difference to buy the property from the bank in a short sale."
Gentry founded MoneyLine, a mortgage origination services outsourcing company, in 1996. After he sold it to Genpact in 2006, he started G8 Capital LLC, to buy up distressed mortgage portfolios.
Since 2007, G8 Capital has acquired more than 40 portfolios, with more than $250 million in principal balance or real estate value.
Gentry said G8 Capital gives Money360 "a strong launching pad."
Peer-to-peer lending has faced its share of challenges over the years. From the start, it was difficult to convince both potential borrowers and investors to participate in such an unconventional lending model, especially during a recession. And regulators have kept a close eye on the industry, requiring Prosper Marketplace Inc. and Lending Club to go through a time-consuming registration process.
Recently, Virgin Money U.S., which bought the peer-to-peer loan arranger CircleLending Inc. in 2007, closed up shop.
But Gentry said he believes Money360's focus on loans secured by real estate sets it apart from some of the other companies in the market.
"If you're making a loan at 65% loan-to-value on today's value, we feel like it's a fairly solid investment," he said. "Clearly, making real estate-based loans three or four years ago was a bad idea. We think the next couple of years are really good times to be making real estate-based loans."
Not all analysts are convinced, however.
"The way property prices are going and so on, it's a very risky proposition," said Ali Raza, an executive vice president at the Atlanta consulting firm Speer & Associates Inc. "I'm surprised to just hear that somebody is even doing that."
