As an up-and-coming asset class for securitization, marketplace lending is attracting as much skepticism as it is hype.
Panelists and attendees over the course of three days at the ABS Vegas 2016 conference conveyed varying levels of doubt about at the prospects for securities backed by consumer and small-business loans originated through online lending platforms like Lending Club, Prosper and Funding Circle. Some dismissed the diminutive size of the market, which is a small fraction of the overall consumer credit market, as well as the underlying risk of investing in the nascent ABS market of bundling unsecured consumer loans.
Amanda Magliaro, a managing director at Citi, aired what is on the top of mind for many market observers as a paneslist Tuesday on the “next big thing” discussion in ABS: where will all the money come from to feed a market where the two largest players – Lending Club and Prosper – have issued only $15 billion and $6 billion, respectively, in their nearly decade-long history of operations.
“As I talk to accounts, there’s less of a focus on collateral differentiation and more focus on servicing and management – and more importantly in this market, access to capital,” said Magliaro.
Unique to the online lending platforms of Lending Club and Prosper, much of the cash for the personal loans are supported by equity funds. (Lending Club vice president Jeff Bogan reminded attendees at Tuesday’s panel as well as an overcrowded Monday panel held at the Aria Hotel and Resort that Lending Club does not originate loans, but serves as a matchmaker between borrowers and investors. Loans are underwritten by the partner bank of both Lending Club and Prosper, WebBank).
At the first marketplace lending panel on Sunday, 60% of registrants in a live poll predicted that the annual growth levels of more than 50% would subside largely because investors would not continue to enter the market at their previous rates.
The annual conference, which concludes Wednesday with discussions on Asia-Pacific, European and emerging market ABS, is sponsored by the Information Management Network and the securitization trade association, Structured Finance Industry Group.
Another proof of concept that observers believe the marketplace lending market must stake out is the ability to show it can weather investor turmoil and sell-offs as other debt markets do. “I think investors would like to see this collateral make it through a downturn," said Magliaro, "and I think at least some of the issuers who believe their collateral choice and their servicing is better probably also want to see the collateral go through a downturn.”
One of the first securitizations in marketplace lending has gone through some tumult on its own. Last February, Moody’s rated its first marketplace lending securitization package of consumer loans through the Consumer Credit Origination Loan Trust 2015-1 with $327 million in Class A and B notes. The Class A notes totaling $281.3 million were originally issued a lower investment-grade rating of ‘Baa3’, while the $45.3 million in Class B notes were first rated with speculative-grade ratings of ‘Ba3’. Last month Moody’s expanded the expected losses from the underlying loans would grow to 8% to 12% -- but returned to upgrade the notes to ‘Baa1’ and ‘Ba2’prompted by a quick buildup in credit enhancement (to 43% for Class A, 23% for Class B) from higher-than-expected prepayment rates.
Bogan, in a panel discussion on Monday, emphasized that Lending Club has assets that investors will target for securitization, but other investors who intend to hold and service the loans because of the low cost in obtaining marketplace loans.
“There are capital efficiencies we can take advantage of,” he said. “The beauty of the marketplace lending model is at the top end. We can plug in a $100 billion bank that wants to take very little risk ...[and] we can plug in asset managers in Wall Street that are happy to invest and are willing to take a higher return. When you package that, you can say ‘yes’ to more people.”
The anticipation of growing securitizations in the marketplace lending arena has prompted SFIG to create working groups studying methods to adopt for best practices to follow for investors and practitioners in the space.