[This post is by Jason Jones, one of my new partners at Lend Academy. He has been following SoFi since they launched and believes they are a very important player in this space. – Peter]
The name SoFi is interesting, it is short for Social Finance. When Mike Cagney chose the name, we think it was very intentional that he focused on the type of transaction rather than on the student lending category. Now that SoFi has raised another $80 million in their Series C round, their grand vision is starting to become clearer.
SoFi improves lives through Social Finance. Their business model already shows us the benefit of building a support network and social ecosystem around lending. Their alumni funds make it possible for school alumni to lend to students from their alma mater and then mentor those students through their career. SoFi ties together affinity, ecosystem, and lending in a social financial exchange. We think that the grand vision for SoFi is to completely change the way we view banking by making it more personal. They took a big step towards that vision last week when they announced their expansion into a new category.
SoFi’s First Move Beyond Student Loans: Mortgages
The biggest news of this funding round is not the absurd amount of venture capital money raised (side note: this investment is a statement about Peter Thiel’s college debt crusade), it is that SoFi is embarking on a transition from a student lender to a generalist lending marketplace. Their first step beyond their friendly confines of student lending is to enter the mortgage sector.
SoFi will tap into their network of incredibly high quality student loan borrowers to assist with another major life event, the purchase of their first home. Their focus category is on “thin file” clients who are just starting out and, by all indications, will have incredibly successful careers. These borrowers may have difficulty accessing a traditional mortgage because of their misleading credit profile snapshot (little credit history, little job history, high student loan debt). As a result, SoFi’s borrowers may require high LTVs and their DTI ratios are probably higher than average, but these are recent graduates from top graduate schools who are poised to do well. SoFi call these borrowers “HENRY’S” for High Earners Not Rich Yet.
A New Trend
So there you have it. Last month Lending Club announced that they were expanding from consumer credit to small business lending. This month SoFi announces that they are expanding from student lending to home mortgages. Do you see the trend here? Traditional banking categories are being disrupted one at a time. SoFi is going after the huge categories where Lending Club isn’t focused. This is really smart. There is less competition and the market sizes are huge.
SoFi’s challenge is that they have focused on the longer duration, lower yielding categories so far. In comparison to Lending Club, their yields are much lower and the time to maturity takes years, which makes it a tougher sell to retail. So far SoFi has appealed more to institutional lenders (pensions and insurance companies) that are attracted to the safe and secure nature of their loans, which was best demonstrated by SoFi’s securitization in late December.
But we expect that over time SoFi will become increasingly retail friendly. We can tell by talking to Mike that retail is really important. Right now the split is approximately 80% institution and 20% retail but over time their goal is to grow retail closer to 35% of total originations. If they really want to be THE Social Finance company, then they should continue to expand to new lending categories that help borrowers with life events and they should really emphasize new ways for individual investors support the success of others. SoFi is poised to make it happen and we are rooting for them.
Great writeup on SoFi. I really like their focus on HENRY. At this stage, biggest challenge for any p2p lending platform is how to attract borrowers cost effectively. By focusing on HENRY lifecycle, SoFi can generate a steady stream of repeat borrowers. Lending Club has already solved the lender side equation for other platforms. I hope one day SoFi will accept non-accredited investors as lenders.
Hi Anil – thanks for the kind comments! Based on my numerous conversations with the company, I think that SoFi truly desires to offer options to non-accredited investors. I think it is a matter of time before they figure out a legal and operating structure. It seems like it is in their DNA.
Does SoFi actually verify whether investors are accredited or not? If not…
I don’t know specifically about SoFi. Most institutional funds for accredited investors require an Accredited Investor Suitability Form where you fill out Accreditation Questionnaire (basically check boxes for complying with various Security Act sections and regulations), Prior Investment Experience, and Investment Profile and Background.
With regard to the accredited investor comments above, some of you may find it interesting to know that Forbes is saying Title III of the JOBS act may be implemented as early as this or next month:
https://www.forbes.com/sites/chancebarnett/2013/10/23/sec-jobs-act-title-iii-investment-being-democratized-moving-online/
If this comes to fruition, it will be much easier for all platforms to accept/permit non-accredited money. Food for thought.
Nice analysis. Thanks
Saw someone post these questions on another site and wonder if you can answer:
What is the size of SoFi’s target HENRY mortgage mkt vs the size of their target student loan mkt? 5x? 10x?
How does adding Theil and Niederaurer better position the company?
What raise so much equity and dilute themselves if they can raise institutional debt to make student loans and mortgage loans?
Any idea what the valuation of the company is?
Did Thiel invest personally or through one of his three VC funds ?
Thanks!
Hi – thought I’d leave a few comments.
We are moving towards both a short term liquidity product that is available to any investor, and registering our term notes. We had thought we would have gotten relief from the JOBS Act much earlier, but status to date has been disappointing. You can get the latest from our investor site.
Second, there are 5X as many addressable HENRY borrowers in the mortgage market, but at 10X the average loan size. We raised the capital to repeat what we did in student loan refinancing. When we started, no one believed in the credit or the model. We raised capital, funded loans with the help of a small amount of alumni money, and proved the model worked and the credit performed. Over time, our capital went from being the majority of the funding to a significant minority, as we accessed more alumni money as well as bank participation, and ultimately securitization.
While we think the market has a better appreciation of our borrowers, given the size of the mortgage market and the fact that it’s a new product for SoFi, we anticipate we’ll have to fund the majority of mortgages in the beginning. Hence the capital raise.
Hi Mike, Appreciate you jumping in and providing some clarity for the readers. Best of luck to you and SoFi – exciting times.
Great write-up.
However, just a few thoughts on SoFi. I recently refinanced my grad student loans w/ SoFi. Overall the experience was great, but SoFi obviously is not the ultimate servicer that I am dealing with during my repayment. As a result, I’ve had zero interaction with SoFi since my loan closed. There has been no “Social” component. I wouldn’t even know how to tap into that social component should it actually exist. There has been zero mentoring/advising from Alumni that apparently invested in my loans.
and when I say “recently” it was actually closer to 6 months ago that I completed the refinancing.
Hi Jen – Arden from SoFi here – I appreciate you sharing these candid comments and want you to know it’s important to us that you get what you’re looking for throughout your time as a SoFi customer. While we offer opportunities to engage with SoFi & the broader community through our career services resources and entrepreneur program, we are always developing new ways to facilitate interaction and connections. I am personally leading this charge and would love to hear your thoughts about what you’re looking for from SoFi and what social components you would benefit most from. You can email me: agrady@sofi.org. All the Best!
I’m glad to read your article. I can understand the Sofi completely. All this time I’ve got information about Sofi, but only partially. Yet complete as what you describe here.
Sofi is a new model for the lending industry. The vision and mission are very interesting. Anyone in the world can take inspiration from Sofi, whatever their business. Thank you.