A friend who recently started his own business couldn’t obtain a mortgage from three banks. I suggested he try marketplace lending platforms like SoFi to take advantage of the ongoing innovation in fintech. However, SoFi turned him down, as well, because it abides by the same underwriting rules as traditional banks. Like the banks, SoFi sells their mortgage loans to Fannie Mae.
On the surface this is counterintuitive to the firm’s “Don’t bank, SoFi” slogan; but in reality, there is already a bank behind every online lending platform. The ability to secure broad funding sources for mortgages originated on these platforms is brilliant and, in fact, essential. I have had tremendous respect for Mike Cagney since we were back at Stanford Business School, and I am not surprised to see that SoFi continues to stay ahead of the curve on this matter.
With recent news from OnDeck and Lending Club, the media naturally starts to question if marketplace lending is approaching its end. Such a conclusion might be premature for a space that has, according to Morgan Stanley doubled every year since 2010 and is expected to grow to $1 trillion by 2025, as indicated by Foundation Capital.
The online originators that can cross the chasm to attract mainstream lenders will be able to participate in the predicted growth. By mainstream, I mean the broad distribution of loans to the $20 trillion wealth management market, where Totum has begun to provide differentiated risk analytics and digital engagement.
For example, Fannie Mae is a mainstream distribution channel. If you hold a total return core fixed income fund in your 401(k), you likely have some exposure to Fannie Mae mortgage-backed securities. Yes, you might be investing in a fraction of your own and your neighbors’ mortgages!