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Presenting The $77 Billion P2P Bubble
P2P lending is hot. Just ask Shanghai Duolun Industry, a Chinese real estate company that decided late last month it wanted to become a P2P lender instead. Last Monday, Shanghai Duolun officially became P2P Financial Information Service Co., and just like that, without ever having facilitated a single micro loan (or doing anything at all to set up the business for that matter) the company’s stock traded limit up in China.
Meanwhile, in the US, Wall Street is itching to bring P2P loan-backed paper to the ABS market. As we wrote in “What Bubble? Wall Street To Turn P2P Loans Into CDOs”, the global hunt for yield makes the 7% return on P2P loans look very attractive, and where there’s demand, Wall Street will figure out a way to provide the supply, in this case by securitizing loans made by companies like LendingClub. If you’re curious to know just how big the market for that paper could become, consider the following from Bloomberg:
Is peer-to-peer lending out of control?
There’s certainly some cause for concern. Consider these facts: P2P loan volume is poised to hit $77 billion this year, a 15-fold increase from just three years ago. LendingClub, the No. 1 player worldwide, is trading at a market value of about $7 billion even though it lost $33 million last year. And in a flashback to the subprime mortgage boom, P2P startups have begun bundling and selling off loans through securitizations.
And now Wall Street is cranking up the volume by running these loans through its securitization machine. In November, Morgan Stanley and Goldman led the sale of securities backed by $303 million in student loans originated by SoFi. In February, BlackRock unveiled the first investment-grade-rated package of P2P consumer loans with a $281 million offering of notes from Prosper Marketplace, a site that lets users apply for loans as well as back them.
Such deals will help P2P platforms spread risk and multiply loan volume, which isn’t necessarily a bad thing. Growth is good, right? Still, the specter of the subprime-mortgage bust looms over this nascent market.
It most certainly does because whether it’s student debt, subprime auto, or esoteric consumer loans, once the securitizing starts it’s just a matter of time before underwriting standards fall. This is especially true in a low rate environment where demand for high-yield paper will invariably outstrip the number of qualified borrowers, meaning standards will have to be relaxed lest the entire originate-to-sell bubble machine should shut down for lack of fuel.
The smart money knows this, which is why it won’t be long before some clever hedge fund comes along and, with the help of their favorite investment bank, builds a customized synthetic CDO comprised of hand-picked bad credits, with the sole purpose of betting against it. Of course the bank will then turn right around and tell its muppets that selling protection on [fill in fancy-sounding deal name like “Abacus”] is a great way to generate income.
Consider also that P2P loans create the conditions whereby borrowers can refi high-interest debt via personal loans, transferring credit risk from large financial institutions to private lenders in the process. It’s not entirely clear what the implications of that shift might ultimately be, especially if the market continues to grow rapidly, but one thing is clear: using a relatively low-interest P2P loan to pay off a high-interest credit card is no different in principle than using a new credit card that comes with a teaser rate to pay off an old credit card. The borrower will very often max out the old card again and thus end up with twice the original amount of debt. Here’s more from Bloomberg:
In the U.S. market, LendingClub and its brethren have enabled consumers to pay off pricey credit card balances with cheaper P2P term loans. So what’s to stop consumers from levering their credit cards back up? Such behavior could spell bad news for investors in P2P loans if an interest rate hike or an unforeseen shock pressures borrowers, Tarkan says.
“We’ve created a mechanism to refinance a credit card into an unsecured personal loan,” says Tarkan, who’s rated LendingClub a sell. “This may prove to be a superior model, but we just don’t know because it hasn’t been tested yet through a full credit cycle.”
It's not difficult to imagine a scenario where this spins out of control as borrowers refi multiple credit cards with multiple P2P loans, only to run up still more credit card debt. Voracious demand for P2P-backed ABS will provide an incentive for P2P companies to ignore signs of trouble as they profit from providing the loans that feed lucrative securitizations. One money manager who spoke to Blooomberg sums it up best:
“Yes, these platforms are low-cost distributors of loans, and investors are frantically chasing yield,” says Tania Modic, the head of Western Investments Capital, a family office based in Lake Tahoe, Nevada. “But loans take time to season and go bad, and Wall Street loves to package and pass along risk. The music will stop—it always does—and this will not end well.”
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tick tock ....
Feez bitchez
Securitized loans...WHAT COULD GO WRONG???
"using a new credit card that comes with a teaser rate to pay off an old credit card. The borrower will very often max out the old card again and thus end up with twice the original amount of debt."
this simple strategy has made the global economy in general, and the western economy in particular, that magnificent wealth engine we have come to revere
technology.
health.
quality of life.
prosperity.
peace.
security.
education.
happiness.
hugs,
krugs
Wall Street bankers take anything, leverage it and run it over a cliff hoping to jump off just before. I guess I would do the same if I knew someone was covering my losses.
"It's not the stock, it's the flow" - Tyler down and dirty Durden(s).
Pre negotiated parachutes will open.
As they say:' There's a sucker born every minute'. I'll pass.
Only $77 billion? What's to worry about? Billions are so twentieth century. If it doesn't start with a "t", it's inconsequential. Even trillions will soon be passe in our brave new world.
Trillions, sure. And real men aren't afraid of the number that starts with "Q."
What comes after a trillion? kiloTrillion ?
Lather, rinse, repeat. Ponzi debt pyramid. This is the new reality.
A lie built upon the backs of individuals and families.
Those who remember 2006-2008 should know how to play this. Go liquid, wait for the "2009-low", then buy cheap.
God, how the rich hate the poor! From the needy to the greedy in ever-newer forms.
A securities product backed by a high risk of default item. This seems vaguely familiar.
Bubbles always burst, most quite violently. The current debt bubble is the largest in history and this analysis of a bubble's anatomy explains why...
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
P2P lenders are digital loan sharks and crowd-funding sites support the ne 21st Century Beggers.
You can slap lipstick on a Pig...
As a pawn shop owner, we see shops popping up in our area everywhere slinging "signature" loans. We view them as competition. Our loans are fully collateralized, and we still see an 8% default rate. Of course we don't mind because we now own the borrowers stuff, which is commonly jewelry. I shudder to think what the default rate would be if we had zero collateral. How can this P2P model possibly work? It must be designed to blow. But only after it's been passed on. Remember MBS?
P2P has more of a "shame" factor because you are borrowing from individuals instead of a bank. They are more likely to pay them back because of the social nature of the market. Also, I believe they are fairly selective in their loans when it comes to credit score. Not sure how long that will last once they're securitized through..
Seriously? A "shame" factor?
Are they borrowing from a few individuals they know or a large number they don't via an online intermediary?
Plenty of people have borrowed from and stiffed family and friends, where you would expect a "shame" factor to be strongest.
Simple fact is that a large proportion of the population has no shame and can rationalise any bad act.
77B is a drop in a bucket in the sea of printed money. No threat.
Put 77B into physical gold - that's just short of 2000 metric tons... or ~75% of global mine supply per year.
Goldman sachs put out a research report a few months ago framing the "credit card refinance market" at something around 250b -350b in addressable market for the states alone. This probably has a couple years left in it for personal loans.
Agree.
P2P microfinacing is great because it bypass's fractional reserve lending when its done as intended namley person to person. Because in this situation if you borrow you actually borrow money previously earnt rather than money conjured on a computer and so the economic effect is that it does not dillute total value of the money suply but instead charges it with additonal energy.
It is unfortunate that banks have got involved who can now buy the debt on these platforms package it and then create new money because their assets have supposedley increased.
It would be nice to see some of these platforms evalute their customers and ban the resale and packaging of the debt.
Other than that 77 billion is not a bubble this is a major part of the future finacial system and it will be double that next year.
The perfect finacial system of course is real and soverign currencys like Bitcoin combined with p2p finacing.
These things have sucker written all over them. You're just throwing money at the banks to pay off deadbeat loans. And using your retirement money to do it? Double down on retard.
Just buy the solar developers. They're doing the exact same thing. They're borrowing money to build bullshit, contracting it for 20 years, and dropping down the asset at 15x into the YieldCo. Then they lobbying congress to force utilities all over the country to Pay them a REC off it. It's like a loan that everyone has to pay off via their utility bill