Finance

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

Rani Molla is a Bloomberg Gadfly columnist using data visualizations to cover corporations and markets. She previously worked for the Wall Street Journal.

Investors have been enthusiastic about the potential of online marketplace lenders in recent years, but the industry has hit some significant roadblocks. LendingClub's stock has fallen almost 60 percent this year. Prosper Marketplace cut about 28 percent of its staff  in May. Regulators are starting to circle.

Falling Fortune
LendingClub shares have fallen as investors question its potential to grow
Source: Bloomberg

The question now is whether these technology-based firms will continue to lose investor support or whether they can shake off the dark clouds. 

online-deals-pitchbook

Enter the securitization market, which has been demonized in the wake of the worst financial crisis since the Great Depression and has failed to fully recover.

A large part of these lenders' success hinges on their ability to tap this market. They need to sell bonds backed by the loans they underwrite to keep expanding. This year, these lenders are on track to issue a record amount of such deals, with about $4.3 billion of such transactions in the U.S. so far, according to data compiled by PeerIQ.

Going Up
Online-loan securitization issuance has hit $4.3 billion already this year
Source: PeerIQ

That's probably less than the amount it would have been if LendingClub hadn't run into trouble earlier this year. In May, its founder and chief executive resigned after an internal review of two incidents, one of which called into question the integrity of some of its debt. Jefferies and Goldman Sachs were among firms that temporarily halted their purchases of LendingClub loans that they planned to bundle into new securities.

It appears investors are pretty forgiving, however, because Jefferies revived a $105 million securitization backed by LendingClub loans last week. 

Peer-to-peer loans are typically shorter term than, say, mortgages, with time horizons of three to five years. They're used to pay off credit card debt, reduce student loans and finance weddings, among other things. They are originated through online marketplaces that don't use deposits to finance the loans.

Issuance of bonds backed by online loans is about half the total volume of nonagency mortgage-backed securities so far this year, according to data from PeerIQ and Asset Backed Alert. There will probably be more to come, especially because a good number of potential investors in these deals are former mortgage-backed securities traders who are looking for new assets to buy.

rmbs-cmbs-online-loans

Still, online-loan deals pale in comparison with the amount of nonagency mortgage debt sold leading up to the financial crisis.

Meanwhile, online lenders are struggling to find a balance between attracting creditworthy borrowers and charging high enough interest rates to be more profitable. In addition, as these marketplaces come under more scrutiny, banks such as Goldman are increasingly looking to compete with them.

Theoretically, this is a perfect time for new lenders to evolve. Benchmark borrowing costs are low, making it cheaper for consumers to borrow and more difficult for debt investors to earn additional income. The top-most classes of bonds backed by online loans pay around 3 or 4 percent on average, while the equity portions pay about 20 percent, according to PeerIQ's Wilfred Daye, a managing director at the analytics firm.

But this is a different time than the go-go days that led up to the financial crisis, when mortgage-debt bankers could operate with little regulatory scrutiny. Online marketplaces will most likely continue to expand, but they face headwinds that limit their potential growth.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net
Rani Molla in New York at rmolla2@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net