Marketplace lending is, in many respects, an evolution of the privately funded mortgage market, which has co-existed with mainstream lenders without posing much threat for years.
Private-money lenders make the loans that traditional mortgage lenders can't, or don't want to, make. Products like commercial mortgages and fix-and-flip single-family home financing offer higher returns than vanilla residential loans, but they require a level of hands-on underwriting and local market expertise that inhibits scale.
But marketplace lending has changed that. Technology used by marketplace lenders offers deeper insights and transparency into transactions, while more easily connecting investors and borrowers in disparate locations.
And now, some of these same lenders have their sights set on disrupting the mainstream mortgage market with tactics borrowed from fintech, marketplace lending and the traditional mortgage playbook.
Take LendingHome and its CEO, Matt Humphrey. The San Francisco firm is a single-family bridge loan specialist that funds itself both through traditional sources of financing and marketplace lending and was recently approved to sell mortgages to Fannie Mae.
LendingHome has raised $110 million in venture capital since it was founded in 2013 and is looking for more. It's done six bridge-loan securitizations totaling $183 million and has a marketplace lending vehicle where accredited investors can purchase fractional interests in loans.
Earlier this year, the company established a registered investment advisor called LH Capital Management and began setting up two investment vehicles under the name LendingHome Opportunity Fund II. The parallel funds will extend up to $200 million in total funding, according to regulatory filings.
Likewise, fintech lender SoFi was the first lender to test a recent Fannie Mae home loan product for borrowers with student debt.
This suggests that the legacy of fintech and marketplace lenders will not be defined by drawing lines between this new breed of lenders and mainstream incumbents, but rather by how those lines are blurred.
Humphrey's firm, which started by using traditional funding sources to primarily finance single-family bridge loans, has expanded into more traditional loan products and marketplace lending, but at a deliberate pace.
Originally fintech and marketplace lenders gravitated more toward other forms or consumer finance with higher risks and higher returns, like "fix and flip" and personal loans, but as they strive for scale the size of the single-family mortgage market has attracted them to it as well.
LendingHome started with traditional institutional nonbank funding sources and a focus on the kind of single-family real-estate-secured bridge loans startups tend to favor, but recently diversified into marketplace and consumer mortgage lending as well, said Humphrey.
"We created a private capital marketplace, and now we've moved over to help first-time homebuyers and a lot of those loans actually fall into a more conforming specification. They could be sold to Fannie or midmarket or mainstream banks," he said.
Traditional mortgages represent about 20% of its volume currently and are growing at a faster rate than its bridge loans did, he said. Bridge loans only represent about 2% to 4% of the mortgage market, Humphrey noted.
The size of the traditional mortgage market helped draw the company to it, he said. And the more recent diversification of its funding into marketplace lending helped it price its loans more attractively for borrowers.
"We were able to really diversify that [funding] strategy to where we weren't beholden to any one investor group," Humphrey said.
The company's top executives reflect its blend of traditional mortgage and fintech expertise.
Quote"We created a private capital marketplace, and now we've moved over to help first-time homebuyers and a lot of those loans actually fall into a more conforming specification."
– Matt Humphrey, CEO, LendingHome
While Humphrey is a millennial who has founded several startups and went to college at age 13, the company's chief financial officer, Robert Stiles, is a mortgage industry veteran who previously was the CFO of Nationstar Mortgage Holdings in Dallas.
Another company blending different old and new mortgage funding strategies is Income&.
For traditional lenders, the value of the marketplace lending strategy is that "it's a source of diversification of funding," said Brad Walker, CEO of Income&. Pronounced "Income And," the San Francisco company focuses on single-family mortgage investments.
Income&, while reaching out directly to investors, is working to serve retirees potentially more interested in accessing the mainstream mortgage market's lower-risk cash-flows than taking on more risk in order to reach for yield the way marketplace lenders' investor bases tend to.
The company structures the investments through a twist on traditional securitization.
Income&'s investment vehicle, the Prime-Rated Mortgage-backed Obligation, is backed by individual loans that investors can identify as specific through their needs through the company's platform.
But generally for marketplace and fintech lenders, traditional mortgages can be "a hard place to start" because of the higher returns their investors tend to want, said Brett Crosby, co-founder and COO of PeerStreet, a marketplace lender that primarily funds investors' single-family bridge loans but would consider funding home mortgages.
It's not always so easy to blend old and new mortgage lending models.
"The words 'innovative' and 'game changing' and 'financial services' typically don't go together," said Rick Sharga, chief marketing officer at Ten-X in Irvine, Calif.
Traditional mortgage lenders can find "plug and play" fintech-style borrower systems to purchase; but they also have to replace legacy systems. Startups don't. At fintech lender efforts to enter the traditional banking system, like SoFi's, have not always gone so smoothly.
How well each type of mortgage lender handles the challenges in this convergence of models will determine which companies survive.