Money manager assails ‘clueless’ Silicon Valley over online lending industry
A MONEY manager who famously predicted the collapse of sub-prime mortgage securities, Steve Eisman, has turned his sights on the internet loan industry.
While the loans these companies make are small on average and don’t portend to be the next “Big Short” – the title of the book and film that detailed Eisman’s bet against the debt central to the 2008 financial crisis – there is reason for investors to be cautious, he said.
The central problem is that these lending startups, their founders and backers in particular, don’t have a lot of experience making loans to consumers, and some of them approach loan-making as they would retail sales, Eisman said in opening remarks at a conference of investment bankers and investors in Miami Beach, Florida, on Sunday.
“When you go to Amazon and buy a book, you buy it and the transaction is over,” he said. “But when you take out a loan, that is just the beginning of the transaction – it’s like a relationship.”
“Silicon Valley, I think, is clueless” to this, Eisman said.
The remarks were given inside a large conference hall of the beachfront Fontainebleau Hotel, where several thousand Wall Street securitisation professionals are convening this week for their 22nd annual ABS East Conference. It’s the same gathering where, in one scene of the film “The Big Short,” the character based on Eisman bursts into outrage at a mortgage executive giving a talk.
As risky private mortgage lending has faded, Wall Street firms looking for outsize returns have turned to other types of consumer loans, with online lending sprouting as a hot new trade.
It started with substantial support from venture capitalists who poured money into developing software and algorithms meant to make the process of underwriting loan applicants more efficient. Startups employing this technology find investors to finance the loans, rather than directly funding borrowers themselves.
More than 160 startup firms of this kind have emerged since 2009. The biggest include LendingClub Corp., Prosper Marketplace Inc. and Social Finance Inc.
Together these companies arranged more than US$ 36 billion of financing in 2015, mainly for consumers, up from US$ 11 billion the year before, according to a report from KPMG.
LendingClub shares declined as much as 5.4 per cent last Monday, the biggest drop in more than a month, and were trading at US$ 6.17 as of 2.05pm. in New York.
A representative for LendingClub didn’t return messages seeking comment about Eisman’s remarks. Spokeswomen for SoFi and Prosper declined to comment.
“We have seen loans underperform from their expected loss estimate at the time of underwriting,” Stephanie Yeh, a director at Credit Suisse Group, said on a Monday morning panel discussion. “There still isn’t a lot of data.”
Earlier this year, a spike in delinquencies and defaults from some lenders rippled through the community of investors who buy these securitisations. Investors demanded that lenders raise their rates to protect the high returns that they’ve come to expect from the debt.
In an audience poll on the same panel, more than 50 per cent of the crowd said in a live electronic survey that there is not sufficient data for investors to assess risk tied to unsecured consumer loan securitisations.
Benefits of this technology, lenders and their backers say, include faster approval times, cheaper transaction costs, and more availability of credit to borrowers who may otherwise not qualify for traditional consumer loans, typically of several thousand dollars and with higher interest rates.
Big banks, money managers, hedge funds, insurers, trustees, law firms and credit ratings firms are all competing for the online lenders’ business.
But these lenders and their wares are new, and they haven’t been tested in an economic downturn yet.
This has drawn concern from sceptics like Eisman, who say there’s no telling how the loans will perform long-term. — WPBloomberg