Marketplace Lending's Impact on CRE

Gentry: “Right now, we think of CMBS and banks as the primary lending sources, and then there’s everyone else, but marketplace lending will become more mainstream as regulations continue to impact the market.”

IRVINE, CA—Some global estimates are seeing gains at between 40% and 60% for marketplace lenders, thanks in part to increased regulations on traditional lenders, Money360 ‘s CEO Evan Gentry and president Gary Bechtel tell GlobeSt.com. The firm recently surpassed the $100-million mark in closed commercial real estate loans with the completion of $15.25 million in recent deals that reflect the escalating growth of the marketplace lender’s portfolio, and Gentry attributes much of the company’s recent growth to a contraction of the CMBS market. The company has recently seen more than a 100% increase in applications from borrowers turned down by traditional lenders. We spoke exclusively with Gentry and Bechtel about marketplace lending, fintech platforms—defined as an economic industry composed of companies that use technology to make financial services more efficient—and how marketplace lending is changing the public’s access to capital and investment opportunities. GlobeSt.com: How is growth in the industry is affecting your business? Gentry: Marketplace lending is growing very quickly—and appropriately so, since other lending sources are pulling back, particularly in our industry, creating a void in the marketplace and allowing us to fill that void. Both Gary and I have been involved in various lending businesses, and we have been through this before. It’s really in the last year that we have grown this business. It’s been very positive and exciting for us, and we’re barely scratching the surface of what we can do going forward. Bechtel: If you take a page out of the marketplace crowdfunding companies, which were the early adapters in this space, they grew from a standing start from 2010 to 2013 and ramped up that business dramatically to tens of billions of dollars a year. They have retrenched a bit, given issues in consumer and unsecured space, but quite honestly, a lot of the groups were buyers of lending-club paper, unsecured consumer debt and very-low-credit borrowers. Investors buying that paper— hedge funds, opportunity funds , etc.—began migrating away from that to more-secure investments (i.e., the CRE space), so there’s a lot of growth to take place within the CRE space. We have just scratched the surface. The consumer marketplace is a trillion-dollar business, and CRE is $3 trillion plus, so clearly there’s a lot more runway in our business. We’re lending on a secured versus unsecured basis and with much higher-quality borrowers than on the consumer side. All arrows point to this side of the business being poised for tremendous growth over next few years.

Bechtel: “All arrows point to this side of the business being poised for tremendous growth over next few years.”

GlobeSt.com:   What is it about fintech platforms that’s so appealing to borrowers and investors today? Gentry: Fintech platforms are bringing greater efficiency to the process. Borrowers care about the rate in the terms of their loan and speed, which is the biggest thing fintech platforms bring to the table. They allow lenders to underwrite loans efficiently and to get the data they need to make transactions. The borrower is just looking for money at the best rate they can get, and speed is important. From an investor standpoint, the CMBS market has been the primary lenders, but now the marketplace is open to much broader categories of investors including high-net-worth individuals and family offices that didn’t have a forum to invest in the past. There’s a broadening circle of who can participate. Also, through technology , lenders can interface with those investors in a more streamlined way. Bechtel: Even the traditional sources—banks (community or regional), credit unions and some lenders that have historically been players in their own platforms on the consumer side are looking at platforms like Money360 as a more efficient way to deploy that money. They don’t want to have all those back-office expenses, and they can go on a platform like ours and in a very transparent manner look at loans and documentation and say, “I’ll take that whole loan or a portion of that loan.” One person in organization can do that in a very efficient way versus a whole staff as has been done in the past. GlobeSt.com: What sets Money360 apart from other online lending platforms? Gentry: Generally speaking, all platforms are leveraging technology and driving to improve efficiency. What’s unique with our team is the level of experience we have in CRE lending. A number of our peers come from a technological background, and we have numerous executives with 25 to 30 years’ experience or more in CRE lending, including our technology officer. So, the biggest factor for us is our experience. Borrowers say it’s a breath of fresh air to talk to someone in this space with our level of experience. Bechtel: While we’re a financial technology company, the people we employ all have very deep experience in the business. At our core, we are a finance company that utilizes technology to make business more efficient, but you need to understand CRE to do this well—you can’t write an algorithm without that because every transaction is different. GlobeSt.com: How do you see marketplace-lending platforms, which are revolutionizing the public’s access to capital and investment opportunities, evolving over the next five years, and how will that impact the future of commercial real estate? Gentry: I think we will continue to see not only the same level of growth we’ve seen, but I believe that growth will accelerate. This sector is new and evolving now, but it will become much more mainstream over the next five years. Right now, we think of CMBS and banks as primary lending sources, and then there’s everyone else, but will become more mainstream as regulations continue to impact the market. When you compare what we’re doing to other investments with 2% to 3% returns, the move into an 8% to 10% return here is much more attractive, and risk isn’t much greater than a 2% to 3% return. Marketplace lending will become a major avenue of funding for the CRE sector. Bechtel: The more-traditional lending markets like CMBS, life companies, banks and credit unions are under increasing regulatory pressure, which has impacted their ability to lend in certain loan types. Impending risk-retention regulation will impact their ability to generate the volume everyone anticipated they would be able to generate. The GSEs are limited to what they can lend, and they only deal with multifamily. Banks are being constrained by the Dodd-Frank and Basel III regulations as they kick in, especially with high-volatility CRE. Banks are restricted on who they can lend to and how they can lend, which will restrict the amount of capital they can bring into the market. All of these constraints are creating a liquidity void, and we will continue to see marketplace and alternative lenders. Non-bank lenders will continue to evolve and come into the marketplace to provide all additional liquidity needed. Gentry: I spent the first decade of my career building a business that helps banks outsource the mortgage-lending business. We’re seeing the same thing happen today in the CRE lending space. A lot of banks and credit unions find it more efficient to purchase loans from outsources like us without having a full team internally. And this allows retail investors, family offices and high-net-worth individuals to participate in a new way and model. This is a broader trend that will continue.