BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Why SoFi Will Take Mortgage Market Share from Wells Fargo and JPMorgan Chase

Following
This article is more than 8 years old.

Wells Fargo (in which I own shares) and JPMorgan Chase seem like they are pretty impregnable. But a closer look at competition from so-called marketplace lenders suggests that their share of the $1.45 trillion market for home loans could be at risk.

I'm an investor in SoFi, one of these marketplace lenders -- companies such as CommonBond, Lending Club , On Deck Capital, and loanDepot that originate new loans and refinancing across asset classes including student debt, mortgages, and personal lending.

And with memories of the somewhat excruciating process of applying for and getting a mortgage from Countrywide -- now part of Bank of America -- I see these incumbents as being quite vulnerable to any company that can make the loan application process less painful.

Before getting into why SoFi and its peers are growing fast, it's worth pointing out that they have very far to go before they represent a big threat to incumbents like Wells Fargo, JPMorgan Chase, and Bank of America.

The mortgage market is huge and those leading lenders have enormous volume. According to the Mortgage Bankers Association, in the second quarter of 2015, $395 billion worth of mortgages were originated.

The three biggest were Wells Fargo ($62 billion), JPMorgan ($29.3 billion), and Bank of America ($19.3 billion).

Inside Mortgage Finance found that nonbanks are gaining mortgage market share -- they were responsible for 37.5% of 2014 U.S. mortgages -- a big leap from 2013's 26.7%.

And marketplace lenders are expected to get bigger quickly. While they originated a mere $6.5 billion worth of loans -- including mortgages -- in the US in 2014, PwC forecasts that their market share could grow at a 33% annual rate to $150 billion by 2025.

If that forecast is correct, it is not a stretch to believe that marketplace lenders will take share from the big banks.

And the reason for the market share gain is that marketplace lenders make it much easier for a potential borrower to get approved for a mortgage.

A case in point is Jeff Patmont, 30-year-old marketing manager for a medical-device company, who used his smartphone to get a got a mortgage from SoFi for his $980,000 house in Lafayette, California.

As he told Bloomberg, “I didn’t want to deal with a bank. I signed my offer sheets and loan documents on my phone while I was sitting in a bar. I like that SoFi didn’t inconvenience my life. Maybe somebody in an older generation would want someone to sit down with them, or be at closing, but I didn’t feel like I needed that. It would’ve been a pain in the butt.”

Patmont recommended SoFi to his parents who used the marketplace lender to refinance their house in 2015.

SoFi got off the ground refinancing government-backed student loans and is now originating roughly $50 million a month worth of mortgages that can be bundled and sold to Fannie Mae and Freddie Mac with help from bank credit lines, according to a Bloomberg interview with CEO Mike Cagney.

In 2016, SoFi plans to issue $3 billion worth of such mortgages.

SoFi uses a borrower's free cash flow -- rather than the industry-standard debt to income ratio -- to decide how much to lend. And a SoFi representative accepts photos of pay stubs and other financial instruments sent via smartphone.

Other marketplace lenders find ways to cut operational costs and streamline the process for consumers and Fannie Mae and Freddie Mac.

As Bloomberg reported, Jason van den Brand, co-founder of San Francisco-based Lenda, said that the company has funded "more than $60 million in mortgage refinancings using technology to cut costs so it can offer loans at lower rates than traditional competitors" after five- or 10-minute conversations with representatives.

Another approach is to provide software that streamlines the interaction among participants in the mortgage value network.

That's what software developer, Roostify, does. It has raised $7.5 million from investors including Wells Fargo according to co-founder Rajesh Bhat.

Roostify "can gather information needed for the mortgage application from online tax returns, bank accounts and other Internet sources, as long as customers provide passwords."

Moreover, as Bhat explained to Bloomberg, "It offers a secure virtual dashboard where borrowers, realtors, title companies and lenders can exchange messages, coordinate appointments and electronically sign documents. And it can feed directly into Fannie Mae’s automated underwriting system so approvals can be completed in as little as 20 minutes."

Since marketplace lenders don't take deposits, they are regulated by the Consumer Financial Protection Bureau in the states where they operate, rather than the likes of the FDIC.

My experience in the banking industry suggests that rapid loan growth often leads to loose credit standards. And too often the institutions that end up holding those rapidly-gathered loans lose money when borrowers can't make their payments.

If marketplace lenders can grow fast by offering consumers an easier application process and maintain high credit quality, they will have accomplished something new.

They will take market share from banks while cherry-picking the most creditworthy customers.

That could leave Wells Fargo and JPMorgan with lower-quality borrowers -- giving an investors a reason to sell their shares.