Oh, the pleasure taken by an old guy at a new tekkie pratfall! Schadenfreude, the Germans call it.
Too bad about Lending Club. Shed a crocodile tear.
The history of online lending
I am old enough to remember early electrons: my grandparents raised their voices on the phone proportionate to the physical distance to the other party; and when calling “long distance” kept egg timers by the phone to stay under three minutes. (Could we please make texting a “toll call”?)
The first online lending appeared about 25 years ago, about the time we got our first email addresses.
Then or since, anybody can make a loan online, in the sense of gathering information, approving and closing. But online sounded so…so cool. Just as “untouched by human hands” in the 1950s replaced the prior benefits of “hand-made.” So, lenders appeared as websites, not just e-facilitation of ordinary lenders.
What makes e-commerce different?
E-commerce focuses on price, as there is no other angle — no local reputation (or vulnerability after bad service), no tires to kick, not enough density of prior customers to generate or validate referrals.
So blast price in ads and quotes, set out to undercut brick-and-mortar rates. Which any lender can do, principally by cutting out salespeople and conducting business directly clerk-to-victim.
Many salespeople deserve to be cut out, gifted only at finding clients, not serving them well. Many clients prefer never (ever) to deal with salespeople good or bad, and dealing directly with a processor suits them. Online is a valid model.
But there is a large universe of mortgage salespeople who are really good at it, who create tremendous value by helping people with embedded mortgage games, and by identifying and counseling on family-financial issues.
Web-based lenders often oversell their price advantage. One lender friend was losing a client to a cut-rate online dealer, who had said, “We’re cheap because we’re online!” The friend’s riposte, which saved her day — “What, they work in a parking lot?”
Advantage of speed, access — but rules still exist
Online lending today is borrowing an advantage developed by Amazon. That web vendor has always been cheap, but has discovered speed of delivery: We’ll get that book to you before you know you want it.
Many lenders now offer very rapid and formal approval and closing (not “pre”), in a day or hours — if you would send to us all of your account numbers and passwords. We offer that service (hardly alone), and although I’m not an e-security-worrywart, I would much rather provide paper and scans to a lender.
Online has been just another means of access, the lending part unchanged, until some entrepreneurs tried to apply crowdfunding principles. We’ve got a ton of mini-investors desperate to earn some yield, Fannie is a pain in the fanny — why not deploy peer-to-peer lending? Raise the money from the public and lend it?
One reason: the exceptionally wise federal statutes governing securities, defined as selling a partial interest in any financial product. Rules, rules and rules.
These P2P platforms quickly discovered that running a mini-Fannie with individual investors was a pain. Kind of like a community bank without the community, depositors or the bank. The P2Ps needed more investors and bigger ones. More than 100 years ago, that’s what a “mortgage bank” was. And is.
Trying to raise a bunch of money to make and hold a bunch of loans — that’s what a Savings & Loan was. Hopeless problems with liquidity (“I want my money back.” Okay, but we have to sell a loan first.), and interest-rate mismatch (“I can get 10 percent down the street.” Our loan portfolio only pays 8 percent. “Tough. Gimme my money.”).
Hence the mortgage-banking model: raise operating capital and make loans, but immediately re-sell them to a wide array of investors, usually institutional. The buyers have to be big institutions because few individuals can bear the loss on foreclosure of a $400,000 loan. The need to distribute risk led a long time ago to selling small pieces of mortgage-backed securities.
Thus P2P has morphed into “Marketplace” e-lenders, which really are no different than a mortgage bank in 1950. Just e-sizzle. Same steak and gristle.
Lending Club cratered this week, but the cause had nothing to do with its e-status — just old-fashioned monkeying with documents and a CEO who had not disclosed a conflict of interest.
Sometimes the world is the way that it is because it works. Technologists, bless their brave hearts, have been in a constant and massive effort to reinvent all of commerce, to see if online works better than the old way. Frequently, we’re left with businesses just as they were, but painted with e-glitz attractive to texters.
If that’s the way you want it, we’ll do it, but the egg-timer is still there. A little dusty, but the same lending, good and bad.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
