Internet lender’s bond deal souring a year after sale

Online consumer loans made by LoanDepot Inc are going bad faster than underwriters expected, threatening payments to investors who bought bonds backed by those debts less than a year ago.

Lenders typically expect to write off a portion of their loans as some of the borrowers go delinquent and eventually default. But in the bond deal tied to LoanDepot loans called MPLT 2015-LD1, overdue payments are already so high that they’ve triggered a provision that diverts cash from low-ranked bondholders to protect investors with higher priority.

Cumulative losses rose to 4.97 per cent in September, breaching the 4.9 per cent “trigger” in the $140 million (Dh514 million) securitisation that Jefferies Group assembled last November and sold to investors that now include the Catholic Order of Foresters, according to data compiled by Bloomberg. Bondholders in the riskiest portion of the deal who may see funds diverted couldn’t be identified because the offering is private.

Representatives for New York-based Jefferies and LoanDepot, based in Foothill Ranch, California, declined to comment. Officials from the Catholic Order, which provides insurance services, didn’t respond to requests for comment. The newsletter Asset-Backed Alert reported the trigger values on Friday.

New breed

Since 2009, more than 160 start-up lenders have emerged as traditional banks withdrew from making unsecured loans to risky borrowers. The online lending industry is now led by LendingClub Corp, Prosper Marketplace Inc and Social Finance Inc, which together arranged more than $36 billion of financing in 2015, mainly for consumers, up from $11 billion the year before, according to KPMG.

LoanDepot, which for years has specialised in traditional mortgage banking, began making small consumer loans over the internet last year. LoanDepot’s investors have included Ellington Financial, which earlier this year said recent weakening in the sector has made the cost to acquire such debt more attractive.

Critics such as Steve Eisman, who gained fame in The Big Short book and movie for predicting the sub-prime mortgage crisis, have said some start-ups don’t have the experience to properly underwrite risky borrowers.