Banks that are worried about competitors may want to consider the client walking through their doors not as a borrower—but as a potential competitor.
That’s because increasingly peer-to-peer lending, deals in which there is no lender involved in mortgage transactions, is attracting some early adapters. Investors are beginning to see the profitability in transactions that eliminate the middleman—banks or another institution from mortgage transactions.
I’ve been thinking about this because of a new platform in the U.K., LendInvest, designed primarily for institutional, hedge fund and family offices that have an appetite for loans secured against residential and commercial property.
While these wealthy, sophisticated investors may not be the average bank client, new investments sometimes begin with them before they are repackaged for retail investors. The minimum investment size of around $77,000 on LendInvest is larger than on other peer-to-peer sites.
While the majority of transactions on peer-to-peer sites are significantly smaller than mortgage transactions completed through traditional mortgage lenders—there has been a growing interest among hedge funds in the sector. That’s important because often they identify and commit to trends before other investors.
Just what the peer-to-peer market will look like, the product mix it will offer, or how it will function, will likely experience several iterations before taking shape. But some organizations have already identified niches and have pursued them: National Family Mortgage assists families in structuring and managing real estate loans among relatives.
Like it or not, peer-to-peer mortgage investing and origination is coming to Main Street USA, where it will disrupt the often cozy confines of the mortgage industry.
No doubt some will consider it hyperbole to contend that peer-to-peer lending can threaten the lenders’ hold on originating mortgages. It’s a business that they have been involved in for decades—and are considered vital to maintaining a dynamic mortgage marketplace.
But putting sentimentality and loyalty aside, the history of American economics and entrepreneurial ingenuity is simple to recognize and an excruciating challenge to execute: Build a better solution and consumers will recognize it and buy it.
Our economy is littered with entire industries and businesses that were once considered irreplaceable, and yet they succumbed to cheaper products or technological improvements that made their products obsolete.
Sometimes their managements did not take the threats seriously, other times they misread the warning signs, or they may have been surprised by a new development—and paid the price. Among them is Kodak film, the U.S. steel industry, slide rules, and IBM mainframes to name a few.
If the returns are there, peer-to-peer sites will bring buyers and sellers together to transact business—and pick away at the lenders’ market share.
Over time, therefore, sites like LendInvest and others that will undoubtedly launch in the future will begin to capture a meaningful percentage of the mortgage business.
These sites can become a force with some good management, a solid business plan, and the will to execute it. They are the reflections of creative minds that sought to solve a problem—removing lenders from the lending process.
They’ve acted to attain that goal in an elegant, transparent manner through a blend of market knowledge and technology. Strange as it feels to write—and I’m sure to read—peer-to-peer sites will give lenders a run for their money.
Matt Strickberger is the managing partner of OnPoint PR and Consulting LLC, a public relations firm that represents lenders, servicers, technology companies and others. He was editor of Mortgage Technology magazine from 1997-2000. If you have comments or suggestions for future columns, email him at mstrickberger@onpoint-pr.com.
