In the last decade, peer-to-peer lenders—online platforms that connect credit-seeking consumers directly to potential lenders—have helped customers borrow to refinance student loans, pay off credit card debt and build their small businesses.
Now, one lender wants to disrupt the market for mortgage originations, long dominated by big banks.
San Francisco-based lender SoFi (short for "Social Finance") has been quietly testing the waters to underwrite new mortgages for existing customers living in states like California, New Jersey, North Carolina and Texas. After beta testing more than 100 mortgages, SoFi is opening the platform more broadly.
"It's a multibillion-dollar opportunity," SoFi CEO Mike Cagney told CNBC.
The program boasts loans up to $3 million, with as little as 10 percent down, and a 21-day application turnaround—but is limited to six states.
When SoFi launched in 2011, it focused squarely on the burgeoning student loan market—a market that, unlike housing, had no viable option to refinance both federal and private student loans from higher interest-rate eras. Since then, SoFi has provided more than $1 billion in funding for students from select universities (read: schools with promising income capacity) to consolidate or refi college or grad school debt.
That high-income market ( "doctors, lawyers, finance folks, technology folks") is, according to Cagney, a "beachhead" into housing: "The next life cycle for someone after you've paid off a student loan or paying down a student loan is home acquisition."
Cagney experienced the difficulty of getting a mortgage firsthand when he made the leap from Wells Fargo's proprietary trading desk to SoFi, then a fledgling start-up that came with a large pay cut. Mortgage bankers "were modeling that my income would be negative in a few years," Cagney said. "I feel for Ben Bernanke."
Carving a niche
SoFi is clearly trying to benefit from the fact that the burden of student debt has made home ownership a distant reality for many millennials. The company, more important, is also trying to carve out a niche in an increasingly crowded landscape of companies seeking to disintermediate Wall Street banks from consumer finance.
Lending Club, the industry's largest, targets a range of credit profiles for smaller loans (on average, about $14,000 per borrower) that are used to refinance credit card debt and will be a test for the market when it goes public later this year.
Prosper, the oldest and second-largest peer-to-peer lender, does much the same, but has tended to target even riskier borrowers, says industry investor and blogger Peter Renton of Lend Academy.
Renton said SoFi's venture into mortgages shouldn't cause alarm, because the company is targeting borrowers with little credit history that would otherwise be considered "super-prime."
"We're talking, 780 FICO scores, $180,000 in income," Renton said of SoFi's customer base. "You couldn't find a better group of borrowers on the planet."
Peer-to-peer lenders originally sought to attract retail investors to its loan marketplace, but the lack of high-returning assets elsewhere in the market has made these platforms increasingly attractive to major asset managers and hedge funds.
So attractive that the company has completed two rounds of securitizing its student loans into bundles that investment banks can sell to institutional investors. A $251 million round was completed in July and earned an "A" rating from Standard & Poor's.
"The last securitization that we did it was 15 times oversubscribed on the institutional side," Cagney told CNBC. "I anticipate that we can generate strong demand as we bring mortgage to market."
While securitizing loans helps SoFi find other parties to shoulder some of the loan risk and share the cost of interest, it does call to mind the role that such bundles—albeit less creditworthy, and on a much larger scale—were one of the biggest culprits of the financial crisis.
SoFi executives are quick to point out that in its eight years, with nearly 14,000 borrowers, not a single loan that has been underwritten has gone into default.
"There's always systemic risk with any kind of credit," Cagney said. "But what we've seen historically is that these folks tend to respond very well to crisis."
CORRECTION: A earlier version gave the wrong year for SoFi's founding and misspelled Peter Renton's last name.