As private lenders struggle to scale, technology is creating new opportunities by changing the way lenders access capital, as well as giving investors a new way to invest
Technology is, arguably, among the powerful catalysts in the mortgage industry. In today’s environment, it is leveling the playing field for private lenders to access more of the market.
Peerstreet was designed as a two-sided online marketplace that connects private lenders with institutional and retail investment capital. The platform allows accredited investors to invest in real-estate portfolios that wouldn’t normally be accessible to the general public. This is made possible by using a crowdfunding model, where investors can buy small pieces of individual mortgages from a pool curated using both advanced algorithms and a team of real estate experts. The minimum investment is $1,000 with the option to reinvest with as little as $100 on the platform.
“We have thousands of retail customers and other institutions, so they don't have to worry about the capital side of their business anymore. We also manage underwriting and document generation,” said Brett Crosby, COO of the El Segundo, California-based PeerStreet.
Historically, private lenders struggled to scale their business due to lack of access to capital and the inability to create their own due-diligence and operational processes. Lenders needed to raise funds to lend, which was often expensive and not as flexible, which in turn, limited individual lenders to short-term loans of one to two years.
“Reputation and size are often needed to attract institutional capital, but institutions only want to work with lenders that are big enough, so there is a big chicken and the egg problem for private lenders,” said Crosby.
PeerStreet is a tech-forward model that aims to remove these issues and increase efficiency by raising capital that is more flexible. Lenders are able to access pools of capital that they individually could not access on their own – thus creating strength in numbers, Crosby added.
Loans are generally secured by first liens on real estate and are generally shorter-term loans, although that’s changing. PeerStreet started offering residential for rent loans last year for borrowers renting single-family homes to tenants. Because of the 30-year nature of these loans, Crosby said investors are able to invest in an asset class in a way they never could before, and private lenders can close larger and longer-term loans.
“We are using an Amazon-style model that allows investors and lenders to leverage technology so everyone in the mortgage eco-system benefits,” he added.
PeerStreet has funded over $3.5 billion in loans by private lenders since it was founded in 2013. As borrowers-at-large become more open to nontraditional forms of financing, technology is pushing the private lending industry forward. Success will depend a lot on transparency, embracing technology and solving the connection to capital issues the lenders have traditionally faced, according to Crosby. Over the next five years, he expects the private lenders to increase, continue to scale and take more business from banks.
“A lot of what took the economy down in 2008 is the opacity of the entire system and with this, we're not just replacing the old system, we are building a platform that is intentionally designed to remove a lot of the negatives, but also learn from the positives and apply those to the private lending space,” he said.
