Asset Backed Securities – Boosting the Thriving Online Lending Market

The online lending market has been one of the fastest growing segments of the financial lending industry and has made major impacts on the national and local economies through the jobs and taxes it generates. While it is more readily recognized as a successful market for familiar short-term financial solutions, such as payday loans and installment loans, it is beginning to receive a significant boost from large-scale investments.

Changing the Landscape of the Online Lending Market with Asset-backed Lending

According to a financial research report released by investment banking firm Keefe, Bruyette and Woods, the online lending market is being expanded by a flood of funds. The source of the money comes from:

 

  • Substantial investments made in online financial startup companies

 

  • Loan securitization services

The startup online marketplace lenders are obtaining consumer and small business loans and are converting them into asset-backed securities, particularly bonds, which are then sold to a variety of institutional investors, such as traditional banks, hedge funds, insurance companies or mutual funds. Any funds that are earned from the securities sales are then converted to additional loans.

The report, which examines three online lenders as a sample of the online lending industry, scrutinizes the breadth of the online lending business and makes predictions about the effects of using asset-backed securities in the industry.

The Case for Using Asset-backed Online Lending in the Current Economy

There are a number of advantages to using asset-backed lending transactions during periods of economic growth. A significant benefit is that the securities can be customized and diversified to give investors choice as to what sector of the economy in which to invest. Another benefit for investors is that asset-backed securities typically offer low risks. If the online lending startup was to undergo bankruptcy, the income the investors receive from the securities will generally continue uninterrupted from the payments made by the borrowers. Of course, the market for asset-backed online lending is predicated on the quality of the loans that are generated.

According to the report from Keefe, Bruyette and Woods, the majority of the loans generated by the online lending startups that are flooding the online market are rated as very high-quality loans, making them highly sought after by large number and variety of institutional investors. Caution is still stressed as the use of asset-backed securities is not a new concept to the lending industry and has not always fared well in the past. In fact, asset-backed securities have been commonly used for mortgages, including many of the subprime mortgages that were packaged into asset-backed bonds by mortgage lenders and then sold to investors, spurring the economic crisis that began in 2008.

Subprime mortgages aside, the asset-backed, online lending market is expected to prosper and funnel cash back into the economy as long as the proper safeguards are in place, such as:

 

  • The enforcement of proper online lending procedures ensuring highly rated asset-backed securities

 

  • Continuous investor interest

 

 

How Much of an Effect Will Asset-backed Loans Have on the Online Lending Market?

The confidence in the success of the expansion of the online lending market due to asset-backed lending is reflected in the funds that are being raised by online lenders. For example, Social Finance, Inc., a marketplace lender, recently acquired $1 billion worth of funding based on valuation alone.

Industry-wide, the asset-backed, online lending market is expected to flourish. In their research report, Keefe, Bruyette and Woods analyzed the data collected from the three online marketplace lenders and forecasted growth rates for the industry. They estimated that the amount of consumer and small business loans that was generated by the online lending market in 2015 was $14 billion dollars. They also predicted that the amount of loans that are issued by only three startup online lenders could produce close to $38 billion by 2018.

Additional articles regarding the asset-backed lending in the online lending market can be found on the financial blog at PersonalMoneyStore.com.

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