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Securitization Enters New Phase of Growth for “Peer-to-Peer” Lending

Traders Magazine Online News, March 15, 2018

John D'Antona Jr.

What’s old is new again.

Marketplace lending, formerly known as “peer-to-peer” loans, could be entering a new phase of growth, as fintech lenders start packaging their loans into securitized financial products that could attract major investment from institutions. 

Remember securitization? It was first seen in the early 80s and is the packaging of many small products such as prime mortgages or auto loans into a larger, and presumably more secure, attractive and higher yielding security. Securitization hit its peak in the mid 2000s when Wall Street banks packaged virtually any type of loan or product, such as aircraft leases and frames or taxi medallions, into securities. 

Among the investors participating in a new Greenwich Associates study, 30% of institutions not currently investing in marketplace loans (MPL) are watching the space or conducting research and due diligence on the asset class—a level of interest that suggests future institutional involvement is on the horizon.

“Even a small proportion of institutions allocating to MPL could have a huge impact on the industry overall—and securitization could be the key to unlocking those assets,” said Richard Johnson, Vice President of Market Structure and Technology at Greenwich Associates, and author of “Marketplace Lending Finds a Place in Institutional Portfolios.”

Johnson recalled that over the past decade, marketplace lending established itself as more than a niche industry for consumers and small businesses. These loans, he said, are facilitated by marketplace lending platforms like LendingClub, Prosper and SoFi—all of which use sophisticated technology tools to connect borrowers to a diverse array of lenders and provide advanced credit reporting and analytics. To date, this lending activity has focused mainly on the consumer, student, small business, and real estate sectors.

“This growth has attracted the attention of institutional investors who have seen the loans as a source of higher yield and diversification in an era of low interest rates,” Johnson continued. “However, several obstacles have prevented institutions from moving into the asset class. Chief among them are the sector’s lack of performance history, minimal levels of liquidity, a lack of credit ratings on some loans, and internal investment guidelines that restrict many institutions from purchasing assets that are not securities.”

Securitization can solve many of these problems, he argued. Greenwich data showed that the first marketplace loans were securitized in September 2013, and the trend has accelerated rapidly since then. Cumulative issuance now stands at $28.2 billion, with $4.4 billion issued in Q4 2017.

“Not only does securitization open up marketplace lending to a new class of investor/lender,” Johnson concluded, “but these lenders can write much bigger checks than a typical retail investor, and are a more stable source of funding for loans they originate.”

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