Peer-to-peer lending is hardly a new concept but it went high-tech in 2005 when Prosper.com opened a market place to link people who had money with those who needed it. Under Prosper's business plan lenders bid to fund entire loans or pieces as small as $25. The more investors who bid the lower the interest rate the borrower is likely to get.
When we wrote about Prosper in 2006 we said we could see such a concept eventually moving into home mortgages. Prosper however has continued to focus on small - $2,000 to $25,000 - and short - one to five year - term loans and its borrowers are usually seeking money for debt consolidation, home improvement or small business purposes.
Now there is a new on-line player focusing on real estate financing although with a very different business model than that of Prosper. Money360 has moved from its original business, direct real estate lending in California, to an internet marketplace for private residential and commercial real estate lending.
Where Prosper targets small investors, Money360 is looking at a more sophisticated audience. Many of its investors have extensive involvement in real estate as developers and operators as well as investors and are often looking to invest in the same types of property with which they have had hands on experience. The company claims its lenders represent a potential pool of more than $500 million for residential and commercial real estate loans.
While Prosper qualifies borrowers, evaluates and rates the loan's risk, handles the legal work and services the resulting loan, Evan Gentry, CEO of Money360, describes its business model as "an eHarmony or Match.com for lending." Potential borrowers are put through an on-line screening process to qualify them by experience, abilities and capacity and their loans by size and the quality of collateral. Money360 then matches borrowers with lenders who have been screened for their preferences in a similar manner.
Once buyer and seller are put together, Money360 steps out of the picture. The two parties negotiate the loan, close it and the lender arranges for its servicing. The minimum loan size is $25,000 and there is no fractional lending although there is nothing to preclude groups or syndicates from participating.
Money360's revenue model is simple. Registered lenders review loans matching their parameters and can "purchase" more details and contact information on those they like for a small fee of $5 to $10. If the loan closes the lender is charged a marketing fee of 50 basis points for commercial and non-owner occupied residential loans. There is no marketing fee for loans that fall under RESPA laws.
Gentry sees a real niche for his young company. "Right now people don't know where to put their money," he said. Bank interest rates and dividends are low and both local private lenders and high net worth investors are looking for a high rate of return with solid collateral. Some of them have years of experience owning or managing the types of properties on which they would now like to lend but can't always find. "The private lending market is very fragmented and disorganized," he said. He notes that lenders have used Money360 to identify opportunities right in their own communities.
Gentry does not see the company as a competitor of traditional lending, especially in the residential area. "If a borrower can qualify for a regular loan at low rates then our investors are not competitive," he says. But there are a lot of good loans that aren't being funded because they are slightly outside the box of traditional lending even though the borrowers may have equity or cash for a down payment. Gentry even sees eventual reciprocity between his company and traditional loan originators where each could refer to the other those loans for which they would be the better and more cost efficient lender.