According to Deloitte, only four of the top 10 residential real estate lenders are traditional lenders, and the top three of them account for just 21% of mortgage originations. Those same three institutions accounted for 50% of mortgage originations in 2011. That makes me wonder if banks have conceded the mortgage origination market to marketplace lenders.
Signs of a Maturing Marketplace Lending Sector
In their white paper titled “Marketplace Lending 2.0,” published in 2017, Deloitte discusses four specific signs that the marketplace lending market is maturing. The first of these is that big firms in marketplace lending have raised their rates to coincide with the Federal Funds rate while tightening spreads. The second sign of a maturing market is marketplace lenders are operating on business models that maximize retention and lower risk. Thirdly, an increase in conservative investors who specialize in marketplace lending loans appears to be developing on the investor side of the business model. The fourth sign is a preference for passive investment opportunities as opposed to active investing opportunities by investors.
I agree these are great signs of a maturing marketplace lending sector. We see these signs on both sides of the fence – the investor side as well as the lending sign. What undergirds this kind of confidence in marketplace lending is a maturing of the underwriting process and underwriting best practices. Those lenders that are willing to perform the proper due diligence and assess risk intelligently will attract the best investors and the best investments. Things have never looked better for the future of marketplace lending.
How Marketplace Lending Puts Pressure on Traditional Banks
A full decade old now, marketplace lending has come into its own. Some of the larger marketplace lenders are beginning to offer bank-like products without having to go through the arduous process and expense of getting a banking license. That is huge.
But that’s a late development. The marketplace lending model is leaner than the traditional banking model. Banks have legacy processes in place that take a long time to change and that add major costs to their lending products. These costs must be passed on to the loan customer in order for the bank to return a profit. When the last great recession hit, banks pulled back from the lending market in general and the residential real estate market in particular. There was just too much risk for them at that time.
Now that the residential real estate market is picking up speed in various places around the country, home buyers looking for an affordable mortgage will have to go to where those mortgages are being offered at the prices they are willing to pay. Leaner business processes, technology that streamlines the timeline from application to origination while lowering the cost of doing business, and a convenient application process allow marketplace lenders the ability to compete where banks once had a corner on the market.
Real Estate Marketplace Lending Is Turning Big Returns for Investors
It’s not unheard of for investors in marketplace lending to experience double-digit returns. In fact, at Sharestates, investors have seen net annualized returns of 8% to 12%.
Whether investing in equity or debt investments, marketplace lending investors should expect to do some due diligence on the platform before jumping in. Reputable marketplace lending platforms will perform critical due diligence on each property sponsor as well as each property. On top of that, underwriting procedures should reflect a mature outlook on real estate investing in general and marketplace lending in particular. With the right business model and the right investment opportunities, the marketplace lender you trust should be the one that can prove it vets its opportunities with sound underwriting and a solid investment philosophy based on experience. If you choose the right platform, you can expect above average returns and less risk.
