Internet Lender’s Bond Deal Starts to Sour a Year After Sale

  • Overdue payments from LoanDepot borrowers are on the rise
  • Startups draw ire of Eisman, investor who foresaw Big Short

Online consumer loans made by LoanDepot Inc. are going bad faster than underwriters expected, threatening payments to investors who bought bonds backed by those debts less than a year ago.

Lenders typically expect to write off a portion of their loans as some of the borrowers go delinquent and eventually default. But in the bond deal tied to LoanDepot loans called MPLT 2015-LD1, overdue payments are already so high that they’ve triggered a provision that diverts cash from low-ranked bondholders to protect investors with higher priority.

Cumulative losses rose to 4.97 percent in September, breaching the 4.9 percent “trigger” in the $140 million securitization that Jefferies Group assembled last November and sold to investors that now include the Catholic Order of Foresters, according to data compiled by Bloomberg. Bondholders in the riskiest portion of the deal who may see funds diverted couldn’t be identified because the offering is private.

Representatives for New York-based Jefferies and LoanDepot, based in Foothill Ranch, California, declined to comment. Officials from the Catholic Order, which provides insurance services, didn’t respond to requests for comment. The newsletter Asset-Backed Alert reported the trigger values on Friday.

New Breed

Since 2009, more than 160 startup lenders have emerged as traditional banks withdrew from making unsecured loans to risky borrowers. The online lending industry is now led by LendingClub Corp., Prosper Marketplace Inc. and Social Finance Inc., which together arranged more than $36 billion of financing in 2015, mainly for consumers, up from $11 billion the year before, according to KPMG.

LoanDepot, which for years has specialized in traditional mortgage banking, began making small consumer loans over the internet last year. LoanDepot’s investors have included Ellington Financial, which earlier this year said recent weakening in the sector has made the cost to acquire such debt more attractive.

Critics such as Steve Eisman, who gained fame in “The Big Short” book and movie for predicting the subprime mortgage crisis, have said some startups don’t have the experience to properly underwrite risky borrowers. While the fast growth initially helped catapult firms such as LendingClub to initial public offerings, price of buying such debt fell this year amid concerns about loan performance and its ability to weather an economic downturn.

Jefferies has been a lead underwriter of other securitizations backed by loans made by online startups, and at least two of its deals, for CircleBack Lending Inc. and OnDeck Capital Inc., have also breached their triggers. Those include Marketplace Loan Trust 2015-CircleBack 1 and Marketplace Loan Trust 2015-OnDeck 3.

CircleBack Lending hired Jefferies to explore a sale, people familiar said in June, as funding for online-finance companies tightened amid concern about loan performance. Avant dismissed about 40 percent of its staff the same month and slashed its target for new loans, Bloomberg reported.

LoanDepot aborted a planned initial public offering last November and turned to other sources of funds, including a $150 million term debt financing completed in August. The company says it recorded 80 percent year-over-year average annual growth from its founding in 2010 to 2015, funding more than $70 billion of loans. Second-quarter fundings reached almost $10 billion in home, personal and home equity loans, the company said.

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