This week SoFi announced they have crossed $1 billion in total loans issued, a milestone they achieved in just over two years after issuing their first loan. This makes SoFi the fastest marketplace lending platform to achieve that milestone.
While that is a significant achievement, what is more impressive is the fact they have done this with no borrower defaults. Zero. They have issued 13,500 refinancing loans and every single one of these loans has either been paid off or is still in good standing. That is a record that no other online platform can come close to matching.
I chatted with SoFi CEO Mike Cagney earlier today to discuss this milestone and more. He told me that SoFi has been growing rapidly this year. Last month SoFi did $132 million in student loans and when you add in their new real estate and personal loans the total was up to around $150 million.
Home Loans Available from SoFi in Five States Today
Cagney discussed at length the home mortgage loans that SoFi is launching in several states this week. Initially SoFi will be available to mortgage borrowers in five states: California, New Jersey, North Carolina, Pennsylvania and Texas as well as Washington D.C. Massachusetts and New York should be added by the end of the year.
These loans are very different to what you will see on real estate platforms like Realty Mogul in that these are traditional home mortgages. These are not short fix-n-flip loans; these are long-term mortgages because people who are applying for loans on SoFi are intending to live in the home they buy.
SoFi is starting their disruption of the home mortgage industry with the application. Applying for a mortgage has traditionally been an incredibly onerous process, even more so given today’s tight underwriting standards. At SoFi they are trying to speed up this process and make it much easier for the borrower.
“Borrowers need to show six months of asset coverage on the loan. To do this they can simply take a photo of their pay stub and bank statement and email it to us,” said Cagney. Existing SoFi borrowers may not have to show any documentation at all if they have recently applied for a student loan.
The borrower profile will be very similar to SoFi’s student loan borrowers. We are talking about young people with good credit and high incomes; they go by the acronym HENRY: High Earners Not Rich Yet.
Opportunities for Investors
The interest rates on SoFi loans start at 3.25% for a jumbo loan with a 20% down payment and a Debt-to-Income ratio of less than 43% and go up to around 5% for an interest only loan with a 10% down payment. Their rates will be very competitive with the big banks – Cagney said their 7/1 Adjustable Rate Mortgage (ARM) is 3.25% which is right in line with what Wells Fargo charges.
While these loans are currently being funded by SoFi’s own balance sheet they do plan to make a real estate product available to retail investors in the near future.
Now, many investors might not be thrilled with these low single digit yields and Cagney is fully aware of that. The hook for retail investors is that they will also be able to participate in potential upside in the real estate backing these loans. Details of how this will work will be available soon.
IPO Coming Early Next Year
The Wall Street Journal reported yesterday that SoFi is planning an IPO early next year. This will make SoFi the third company in the space to go public behind Lending Club and OnDeck Capital, who will both likely complete their IPO some time this quarter.
The Journal reported that SoFi will be looking to raise $250-$300 million in their IPO. Cagney told me that they have been in talks with several investment banks already and are in a good position to go public early next year.
SoFi is Already Profitable
Despite issuing their first loan in 2012 SoFi will end this year solidly in the black. They expect to finish 2014 with around $40 million in revenue and around $8 million in EBITDA. Next year their projections are $100 million in revenue with around $30 million in profits that would make them one of the most, if not the most, profitable companies in the industry.
Their model is slightly different to Lending Club and Prosper in that they make no money on loan originations. All their money comes from the investor side of the business in the form of service fees or management fees. Cagney pointed out that this revenue is recurring and very predictable.
Like many of us Cagney is watching the Lending Club IPO very closely. He expects Lending Club to have a successful IPO thereby setting the stage for others, like SoFi, to follow suit.
Cagney was in New York this week and he stopped by the Bloomberg studios to record this interview discussing his new home mortgage product.
Hi Peter,
Thanks for the update.
Amazing progress and quality of the loan book here. A very creative group.
Were you able to ascertain how the company views risk changing with the addition of mortgage loans ? Institutions (through securitization) and alumni have been funding the student loans. How much balance sheet does the company intend to use before they can securitize mortgages and pass on the risk to others?
In addition, one of the compelling parts of the student loan business has been the difficulty discharging student loans in bankruptcy. These quality borrowers pay back loans. Mortgages are a different story, as the borrower could theoretically default and turn the asset over to SoFi. SoFi on these pages in the past has estimated the true cost of having to absorb a default, and they seem pretty comfortable with that risk. Can you remind us of what that cost is? Interested to hear how the upside participation will work for lenders, as the markets in some cities seem fairly toppy at the moment.
Thank You
B, While we didn’t get into details here I have heard SoFi intends to sell these home mortgages through securitizations.
In my podcast I recorded with Mike Cagney a couple of months ago he said he is going in to the mortgage business with his eyes wide open fully aware of the potential problems and costs. I recall that he said for a $1.5 million loan it typically costs a bank $100,000 to go through the foreclosure process and that cost he has factored into his models.
You keep touting their zero defaults every time they are mentioned, but have you asked the tougher questions about how many have been deferred, put in their various repayment programs, etc? On your podcast they sound like they have very creative ways to keep the default number down, but that doesn’t mean the loans are all doing well.
Non investigative journalists don’t ask “the tougher questions”…………..hence the label non investigative. Most non investigative reporters rightfully resent the term & deny vociferously to being one since the term is meant to disparage or shame them. Peter on the other hand is a self admitted non investigative journalist. Need I say more!
Rawraw, It is true that while a student is in school they can defer their loan so not all 13,500 loans are active with monthly repayments. But my understanding is that the majority of their loans are to graduates refinancing existing debt and for these loans payments are due immediately.
It is also true this is a young loan book with most loans only at the start of their repayment process. Regardless, even allowing for a a certain percentage of deferrals, to have no defaults at this stage of the game is truly impressive in my opinion.
Let’s just assume you can defer 12 months. I can’t recall the exact number. Would it really be amazing a year old company has had zero defaults with a 12 month deferral policy? In SoFi case, it may be amazing, or it may not be. I think it’s important to ask these questions, if only to help ensure your reputation stays good.
Honestly SoFi is the first company to me that sounds like they would be cool to work for. The guy sounds like he thinks like a finance person, which is surprisingly rare in this sector so far.
These are fair questions Rawraw and ones I should have asked. I am going to see if I can get Mike Cagney or someone at SoFi to chime in here.
Great questions re: deferrals. For example, with the governments loan book, “only” 14% loans are in default, but less than half are in repayment for a variety of reasons, including grace, deferral, IBR, etc. The repayment rate is a much better indication of credit quality.
Currently, 97.9% of our loans are in repayment and current. The rest are primarily in grace, meaning the borrower graduated in the last six months and is still in their grace period. Less than 0.10% are in 1-29 day delinquency.
We’ve been lending for three years. If our loans performed in-line with government cohort default rates, we should have about 100 people in 90+ day delinquency (which to us is recorded as a loss).
We certainly will have defaults, but believe the combination of our underwriting and the moral hazard defense (e.g., all borrower performance is transparent to investors – that’s why we try to get alumni dollars tied to every loan) will continue to keep default rates well below comparable loans in the industry.
Thanks for the reply Mike.
Peter,
Nice update. I find it rather amusing that Dan B. seems to attack you on an on going basis. Did you do something to him?
Keep up the good work and I guess you have to deal with the arm chair quarterbacks of the world.
Thanks Jack. Dan B has been contributing here for many years and likes to provide an alternative perspective on most things I write and I am fine with that.
I find Mike to be very intelligent. And the business appears to be a good one. But are these guys trying to pull the wool over peoples’ eyes and position themselves as a tech/mktplace company? I hope not…cuz it aint
While I recognize why there is such buzz surrounding companies like SoFi and Lending Club (both very interesting businesses that create value and have the potential to deliver reasonable returns), investors should be cautious in viewing the company as a very high growth technology play deserving stratospheric multiples. In my view (and that of the link I’m sharing below), SoFi is essentially a specialty finance lender and should be valued as such, without regard to the usual euphoria that precedes IPOs (like OnDeck, who has already fallen 10%). Here’s this guy’s take that I wholeheartedly agree with: https://sentienttechnologies.com/social-finance-p2p-lending-bubble-making/
Jannett, This argument was made again and again prior to the Lending Club IPO and given the initial valuation it didn’t catch on. While I tend to agree with you that investors shouldn’t approach these companies as tech companies, more like specialty lenders. The big difference is that they are specialty lenders that really know how to market and scale.
There is still a great deal of exuberance for the space and so I think we will see a strong IPO from SoFi later this year. But I also think in the long run these companies will be valued at multiples somewhere between specialty lenders and tech companies.