Competition between fintech, marketplace and traditional mortgage lenders often focuses on borrower-facing automation and other technology. What gets overlooked is how differences in their funding sources create another area of competition.
While funding from government-related entities, securitizations, warehouse lines and deposits are the best-known sources of mortgage financing, there has always been part of the market that goes directly to private investors outside the institutional market.
That's largely where marketplace lenders play.
"There is some competition for the private-money lenders that didn't use to be there" as a result of marketplace lenders entry into the market, according to Gordon Albrecht, a senior director at private-money subservicer FCI Lender Services Inc. in Anaheim, Calif.
But are the fintech marketplace lenders really giving traditional private-money mortgage lenders much of a run for their money?
"Are they really competing? Actually, not that much," said Albrecht, who numbers marketplace lenders among his customers.
Marketplace lenders with technology platforms started by trying to horn in on private-money mortgage lenders' turf as originators, but after seeing the extent to which the mortgage market is regulated, many shifted gears and decided they'd rather purchase lenders' loans, he said.
Regional private-money lenders are competitive with national lenders like banks that have "homogenized lending to the point where local nuances aren't taken into consideration," said Brett Crosby, co-founder and COO of PeerStreet in Manhattan Beach, Calif.
But some fintech and marketplace lenders are employing a national strategy aimed at competing with them.
LendingHome does this by analyzing "credit parameters down to each different city or state per the elevated or reduced risks levels in those market conditions," said CEO Matt Humphrey.
"We can control all of this and make changes daily if need be, and prefer to, rather than rely on local lenders of varying qualities that may had adverse selection bias of which loans they choose to sell," he added.
While private-money lenders may compete against each other, on the surface it seems like the chances of many marketplace lenders competing in the traditional mortgage market is slim. So why should traditional mortgage lenders care about this development in the private-money mortgage market?
One answer is that, while the market for loans funded by small private investors has been little more than a niche, it now has growth potential it didn't have before.
"These crowdfunding companies really aren't doing anything that hasn't been done before in terms of funding private mortgages, but now you have the internet, and suddenly the number of investors grows," said Rick Sharga, chief marketing officer at Ten-X in Irvine, Calif.
The private-money mortgage investor market was originally built on word-of-mouth connections, but marketplace lending platforms have made it easier to broadly disseminate information that investors can use to size up potential investments.
"The marketplace lenders have opened up the private money world," said Albrecht. "Investors can get into it that wouldn't otherwise. It used to be you have to have somebody to bring you into it. It was a networking business."
Tapping this type of funding could help traditional bank or nonbank mortgage lenders diversify their capital bases. Institutional investors can provide larger amounts of capital, but they also pose more counterparty risk because of their influence.
Lowering the cost of funds
Lenders should not only take a page from fintech and marketplace lending strategies because they can diversify funding sources, but also because they have been focusing on strategies that lower costs.
"What's going to differentiate which companies succeed in the fintech space is the cost of customer acquisition," said David Norris, chief revenue officer at loanDepot in Foothill Ranch, Calif.
Whether they use a marketplace lending model or not, fintech lenders also have to be efficient when it comes to funding costs, said Steve Abreu, founder and CEO of Newfi Lending in San Francisco. "If you can't execute a good price to the customer, your model fails," he said.
The many intermediaries in the secondary mortgage market and securitization can look very inefficient when compared to reaching out directly to investors through a marketplace lending platform, said Crosby.
So it could be worth considering whether there are efficiencies in the marketplace lending model that could be incorporated into housing financing reform.
"There are a lot of assumptions baked into what I'm saying, but the existing market is ripe for transformation," said Crosby, who works for a marketplace lender that primarily funds investors' single-family bridge loans, but would consider funding home mortgages in the future.
It would take time given the sheer size of the mortgage market, the number of influential and entrenched players and the heavy regulation, but "there is no reason that the whole industry can't go this direction," he said.
Quote"These crowdfunding companies really aren't doing anything that hasn't been done before in terms of funding private mortgages, but now you have the internet, and suddenly the number of investors grows."
— Rick Sharga, Chief Marketing Officer, Ten-X
While fintech strategies may have some potential to be transformative long-term, they aren't going to be the sole winning business model in the mortgage market. Some fintech companies have had a tough time making a go of it. And when it comes to the marketplace lending strategy, several companies have found they can't get by using that type of funding alone but rather in conjunction with traditional sources.
This suggests that what will emerge is a convergence of models.
The hybrid approach
Already there clearly are marketplace lenders that are buying loans from the traditional mortgage market and starting to diversify into traditional funding sources, and vice versa.
There also are traditional lenders aspiring to be fintech companies, and fintech companies working to be more like traditional mortgage lenders.
In addition, more and more mainstream mortgage lenders are adopting the kind of borrower self-serve technology platforms originally more commonly associated with technology startups.
Quicken Loans in Detroit has for some time been a volume leader in the mortgage market and companies like Abreu's Newfi Lending and Norris' loanDepot were founded by mortgage industry veterans but are known for their fintech-style automation, among other things. For example, loanDepot also has a fintech-like strategy in that it is a nonbank that offers multiple consumer finance products.
While a lot of nonbanks in the mortgage market are monoline companies, Norris finds carrying a full range of consumer finance products borrowers are likely to need and the volume of business it generates compelling enough that he thinks it will be the wave of the future.
"Specialists will not survive long-term," said Norris.
Nonbank companies competing in the fintech space do seem to be more frequently offering expanded product lines than mortgage lenders traditionally have in the past, but there are varying opinions on how far to take that diversification, and how fast.
"We think very few will be truly exceptional at one vertical, let alone mastering multiple," said Humphrey.