Securitizations are providing important liquidity to marketplace lending platforms. And that sucks for us retail investors.
Back when marketplace lending was peer to peer lending, retail investors (small investors like you and me) had the promise and the opportunity to pick from many loans. They all came from the fractional loan pool for investment. Since the beginning of the market in the US in 2009-ish, Lending Club and Prosper have ALWAYS had both:
- a whole loan pool for institutions and investment groups that want to purchase the entire loan AND
- the fractional pool for buying pieces of loans as retail investors do.
A securitization is when a pool of whole loans are packaged together, sometimes with credit enhancements, and then sold off to institutions. Some get rated by Kroll or S&P while others don't. It enables large purchases at scale as well as purchases by groups like insurance companies who are not eligible to go directly to the platform to fund loans due to industry regulations.
But back to the loans themselves, the fractional loan pool is getting smaller and smaller. Marketplace lending is becoming more of a bank lending, institution funding product that's crowding out us small investors. And it sucks. It's hard to blame them though as all financial companies, even fintech companies need a large scale to make money. Institutions have that scale of capital that platforms need. And everyone is hungry for yield in the negative interest rate world we are living in.
Today, I logged into my Lending Club account and there are a total of 48 loans available to choose from. That's it.
Deeper Liquidity Needs Across the Industry
Lending Club isn't the only place where this is happening but their example is pretty glaring. LC has done 12 securitizations that have been rated and sponsored with the most recent about a month ago in early November. The November deal is for $358 million in loans. No group of retail investors can compete with that kind of liquidity.
Upstart has done 5 securitizations for over $1.5 billion total as this piece for CFO.com explains while going into their underwriting system. Their system is a combination of conventional factors and other new variables for credit risk analysis. It's a pretty interesting read if you want to get an idea of where the industry is heading with new technologies like artificial intelligence (AI) helping with loan underwriting.
Prosper has a $5 billion forward flow deal to securitize loans to a couple of groups including Jeffries Investment bank and George Soros. That deal is about 2 years old and still in effect today.
And it's not just here in the US. The very first p2p lending platform from 2007, Zopa, in England is doing securitizations too. In September, they did a GBP 245 million securitization. It was the first marketplace lending securitization to get a AAA rating. Zopa has done GBP 5 billion in securitizations so far.
Where Do Retail Investors Go From Here?
One thing seems certain in marketplace lending for retail investors. We will have fewer choices and lower interest rates going forward. I don't see this changing and I see it only getting worse. One area where I do see an opportunity for retail investors is in Cryptocurrency.
If you haven't been watching the cryptocurrency markets recently, many firms are working on 2nd generation Bitcoin and crypto lending platforms. Those who know me here know I was a very active proponent and lender on platforms like Loanbase and Bitbond in generation 1.0. Some like Unchained Capital and BlockFi do NOT have peer lending built into their platforms but others like Compound, Maker, Dharma, Celsius, and dydx do.
With their collateral-based lending rules and lending often done in Bitcoin or stablecoins to reduce volatility, this market has some exciting prospects for the future. I am watching it closely since like you, I am searching for yield too. And marketplace lending in US Dollars seems to have run its course for us.