The best lending platforms have a win/win or win/win/win scenario built into them from the beginning. Prosper lets borrowers consolidate credit card debt. Instead of paying 16% to these credit card issuers they pay 7 or 8% to us. Prosper wins by originating the loan. Borrower wins by saving 800 basis points interest. Us lenders win by earning the 7-8% in interest. This type of win/win/win guides the best platforms.
More platforms are coming online and more are available for retail investors to invest in than ever before.
New Regulation Makes Crowdfunding Easier
Reg A+ is big news in the crowdfunding world. This variation on SEC Regulation A allows more platforms to crowdfund with money from both accredited and unaccredited investors.
Reg A+ is part of the JOBS Act that was passed a couple years ago. It adjusts the investing rules allowing non-accredited investors (like you and me) to invest in a p2p lending platform with less onerous filing requirements for the platform itself. Platforms don’t have to go through the very long and very expensive S-1 regulatory filing system that Prosper and Lending Club had to do.
So far 16 companies have taken advantage of Reg A+ including a new innovative platform where we can do well and do good at the same time. Not all of them are investment platforms either, check out this list . There are 3 real estate related platforms on this list including Fundrise who I have discussed here previously and I’m a fan of. And our mystery platform…..
New Platform Helps Homeowners and Makes Money
When you think of a distressed debt buyer, what comes to mind? Specifically, what about buying lots of defaulted mortgages? Do you think of big hedge funds and Wall Street?
That’s what I think of.
There’s a new player on the block in crowdfunded real estate and buying defaulted mortgages with a very important new twist. Let me explain.
In a typical scenario, a bank holds a $100,000 mortgage where the homeowner is paying $800 per month. The homeowner can’t pay for some reason like job loss or death of a spouse and now the mortgage is in default.
Most states require a foreclosure go through the judicial system, which can drag it out for months or years waiting for the judge to sign off on it. In the meantime, the homeowner doesn’t pay and this bank holds the note that is not performing. No maintenance is going on in the home and the home is now worth $50,000 so the bank is under water on it.
This new platform buys this defaulted mortgage for $20,000, which the bank is happy to get for this non-performing mortgage. So far that’s no different than if a hedge fund bought blocks of non-performing mortgages right?
Like I said, there’s an important new twist….
Work With the Homeowner
Here’s the twist. This platform goes right back to the homeowner and says ‘Mr Homeowner, you have this $100,000 mortgage on your house and you couldn’t pay. Obviously something happened to make you unable to pay it since everyone needs a place to live. Now if you show us that the reason you fell behind on your payments is taken care of (like a 9 month job loss and now you’re working) we are going to let you stay in your house.’
Not only are they going to be able to stay in the house, our platform does something else. Instead of that $100,000 mortgage at $800/month, they drop the mortgage balance down to $50,000 and the payment to $500/month to make it more affordable.
Why would they do such a thing? Cause they want people to stay in their homes. In fact, the name of the platform is American Homeowner Preservation or AHP.
But this isn’t a charity. This is a business. AHP wants to make money by doing well and by doing good.
And you and I can get in on this, earn 12% and do so with a minimum investment of $100.
Now if the homeowner is unable or unwilling to stay in the house, they are offered some cash to move and AHP takes the deed to a $50,000 house that was bought for $20,000. While not the primary objective, this is a successful transaction too.
Back to the homeowners, let’s see how everyone did.
There’s a number of players in this transaction so let’s see this deal from the perspective of each one.
Borrower: They get to stay in their home. They are not foreclosed upon. Their mortgage balance was written down by $50,000 and their payment reduced by $300/month. An overwhelming win for them.
And if they can’t stay in the house, they are offered some cash to start over.
Bank: They get out from under a defaulted mortgage. They thought they were going to lose even more money but instead got $20,000. A great result for them, and they do the worst out of everyone here.
Platform lenders/investors: Per the description of How it Works at AHP, Investors earn a flat 12% interest. Then they are distributed back their invested capital. Only then are profits distributed to the company. But your (and my) money are now invested in a $50,000 mortgage that is paying that was purchased for $20,000 so there’s $30,000 of built in equity into the note our money helped to purchase. Pretty sweet, huh? That built in equity makes it much more likely we can get our 12% and our principal back.
AHP (the platform): Only after the platform lenders are paid their invested capital and interest does AHP participate in any profits. However, after the lenders are paid, AHP keeps all the profits. But that doesn’t seem so bad, does it? Especially if we get paid first.
As you can see, this is the ultimate win/win/win/win or at least win/win/win. Maybe the bank didn’t do so great but they could have done this themselves. The bank could have avoided all that but chose not to so they get what they deserve. Actually, they get better than they deserve since they lost less money, but that’s OK.
American Homeowner Preservation, known as AHP, lets us do well and do good at the same time. We can make 12% on our money and help keep homeowners in their homes while we do it. We even get to help stick it to the bank a little bit and I have to admit I like that too.
I’m strongly considering adding them to my p2p lending portfolio and adding regular coverage of them here too since anyone can invest thanks to their Reg A+ offering.
What do you think of this idea? I mean I can’t be the only one that thinks its awesome, can I?