If you've watched The Big Short, you’ll be able to call to mind a securitisation cheat sheet: big financial institutions – investment banks, quasi-government agencies – bundle together hundreds of loans, then issue bonds to investors, using those assets as backing.
In the alternative lending industry, securitisation is an exciting word for some, and a dirty one for others. So, as more institutional money flows into it, how is this growing sector dealing with securitisation?
I caught up with Perry Rahbar, formerly of Bear Sterns and JP Morgan and founder and chief executive of Dv01, which offers investors real-time information into the loans of the US's largest online lenders, to find out.
There are concerns that, in the event of a downturn, a lot of platforms will collapse because of a lack of liquidity. Is securitisation necessary to keep the industry afloat?
For sure, it’ll definitely play a huge role, especially for the larger platforms. You have to keep in mind that these platforms are still growing at an extremely fast rate. Between Lending Club, Prosper, SoFi and Avant you’ll probably have over $30bn in loan originations this year, the capital markets, and securitisation, is an essential part of funding that growth. It’ll become even more important as some of the larger whole loan buyers scale back their purchases.
What do lenders need to do to improve their securitisation offerings?
Personally, I think they need to be focused on making these deals as investor friendly as possible. For us, data transparency is a huge part of that.
These platforms offer a wealth of data to their whole loan investors but a lot of that doesn’t make it into securitisations because it’s not necessarily something that’s required, but I think it would go a long way towards making these deals different and better than the status quo of the securitised markets.
I don’t think they’re opposed to it, they’re just doing what the banks have asked but I think they should drive transparency forward as issuers of securitisations like they have with their own whole loan offerings.
What about the question of skin in the game? A lot of people criticise online lenders for not having loans on their own balance sheet and the effect that’ll have as and when the economic climate becomes tougher.
This depends how you define “skin in the game”. Of course, your incentives are in line with investors when it comes to performance if you hold loans on balance sheet.
But most platforms’ business models are levered towards performance already, since they don’t have permanent, or termed, capital. Meaning that if you do anything poorly or your loans don’t perform, there won’t be a bid for your loans and the market has effectively taken you out.
You don’t even need to do anything bad necessarily, there’s so many lenders out there that I think some of this will happen naturally as investors will desire to own risk from the more established lenders whose loans are more liquid.