Non-bank lenders are shaking up the residential mortgage market by offering interest-only loans to borrowers who struggle to get a bank loan, and then sell those loans off to investors. Sound familiar? Well, Silicon Valley would like to have you know that this time it will all be different.
A new cohort of tech startups has started offering residential mortgages, looking to break into turf currently held by major banks and home lenders like Quicken Loans. These firms are using online technology to approve loans in a matter of minutes, which they claim drives down transaction costs and allows them to offer lower rates than traditional lenders.
San Francisco-based Social Finance, for example, claims to originate $50 million in mortgages per month. Next year, it plans to lend out a total of $3 billion. The startup bases its lending decisions on a borrower’s cash flow, rather than on debt-to-income ratio. This means heavily indebted people who would struggle to get financing elsewhere can qualify for a loan. Much of the approval process is handled electronically.
One Social Finance borrower told Bloomberg that the firm was ready to lend him “way more than we needed, way above what we would’ve felt comfortable from an income standpoint actually making payments.”
So far, lenders like Social Finance or Lenda, a two-year-old startup that has funded $60 million in loans, account for only a sliver of the mortgage market. But they are looking to grow their market share as banks, burdened by stricter capital requirements, retreat.
Terry Wakefield, a mortgage consultant, cautioned that these new players could repeat the mistakes of the early 2000s, when non-bank lenders dished out subprime loans en masse, fueling the U.S. housing bubble.
“They need to get the details right with the processing, underwriting and funding of the loans, and then get the technology right,” he said, adding that the 2008 crisis “was the perfect example of people who did not understand process causing a global problem.”
Tech startups have long been active in the commercial mortgage market. Peer-to-peer lenders like Fundrise or Patch of Land crowdfund real estate loans, while Lending Home, an institutionally backed lender, has raised more than $100 million in venture funding and is also looking to branch out into residential mortgages. [Bloomberg] — Konrad Putzier