It was just one week ago in “A $1.3 Trillion Quandary” that I (re)introduced you to SoFi, the marketplace lender that’s made a splash (or maybe “belly flop” is better) in the private student loan securitization market.
SoFi went full retard in early 2016 when, amid prevailing concerns about an imminent turn of the credit cycle (remember, the environment for credit at this time last year was night and day compared to the current market), the company decided to start a hedge fund to buy loans from itself. No, there are no typos in there. SoFi actually did that. Here’s what Bloomberg wrote at the time:
The company relies on credit facilities from other financial institutions to make loans, but has historically sold them off after a few weeks. One of the company’s main strategies for getting the debt off its books has been to bundle loans into securities. That approach can run into snags in choppy markets.
Social Finance Inc., a rapidly growing online lender, is hoping to stoke investor demand for the debt it originates by starting a hedge fund that will buy its own loans –– and potentially those of its competitors.
In recent weeks, the company established the SoFi Credit Opportunities Fund and raised $15 million from investors, according to a regulatory filing and a company spokeswoman. It’s seeking to attract more money from wealthy individuals, funds of hedge funds and other institutional investors that may not want to buy whole loans directly from the company or securities backed by the debt.
Now clearly that’s ridiculous for any number of reasons – not the least of which is the fact that it creates a patently absurd dynamic whereby if the market goes south, the hedge fund must nevertheless keep buying loans from SoFi even if it knows those loans are likely to go bad because if it doesn’t, SoFi won’t be able to make any more new loans and will thus go out of business – but the overarching point is that the company has to continually find ways to attract capital so it can keep lending.
If the securitization market isn’t moving fast enough in that regard (i.e. if demand for student loan ABS isn’t there or is otherwise diminishing), then SoFi has to either tap the market for funds, or do something f*cking stupid like start a hedge fund to buy debt from itself.
Well, what a difference a year makes. Whereas in March of 2016 credit markets were looking decidedly nervous and spreads were widening, forcing SoFi to resort to the hedge fund idea to ensure it could continue to lend, this year credit markets are wide open thanks to massive spread compression off of last February’s deflationary doldrums. And so, guess what SoFi did? Why they raised a new funding round. Here’s FT:
SoFi, the biggest and the brashest of a new breed of online lenders in the US, has sealed a $500m funding round, giving it firepower to push into new products and markets including Canada and Australia.
The private San Francisco-based company last received a big shot of funds – its fifth – in September 2015, when SoftBank of Japan led a $1bn round, the biggest in the history of “fintech”. The latest infusion was led by Silver Lake, the private equity firm, supported by SoftBank and GPI Capital, an asset manager, among others.
Many online lenders have had a tough time of it over the past year, as choppy credit markets, rising delinquencies and a governance scandal at Lending Club prompted many buyers of the platforms’ loans to put programmes on hold. That, in turn, has caused several groups to cut back on generating assets, squeezing their bottom lines as revenues falter.
But in recent months institutional investors have begun to return, apparently convinced that the platforms have smartened up their acts.
Last year SoFi originated $8bn of loans, it said on Friday, up from $5bn in 2015.
The company continues to home in on people in their 20s and 30s with good salaries and good prospects. Mr Cagney has called them “Henrys” – short for “high-earning, not rich yet.”
A $600m package of loans sold last month via the securitisation market was a good illustration of the target demographic: borrowers who owed an average of $75,000 had an average age of 34, a credit score of 764 – well into super-prime territory – and annual income of $170,000.
So the takeaway there is that SoFi gets to keep on originating and you can bet a lot of that new origination volume will end up securitized, embedding a still greater percentage of America’s $1.3 trillion student debt load in the financial system.
Yes, SoFi may be skimming the crème de la crème from the borrower pool (i.e. refinancing the high earners), but that doesn’t change the fact that the more of this stuff that gets securitized, the greater the potential for the student debt bubble to become systemic if it ever bursts.
If you want proof of just how desperate SoFi is to perpetuate this model, look no further than an article the company published a week before Valentine’s Day. In a blog post entitled “Dating With Debt: When ‘Netflix And Chill’ Meets Paying The Bills,” the company pitched its refis to potential customers by touting a survey which concluded that when it comes right down to it, nearly 40% of Millennials would rather talk about an STD they already have than they would talk about the debt they carry. Here’s a screengrab:
The message there, I guess, is that there’s a 40% chance the person you’re dating cares more about your student loan than your herpes, so you’d better get to refinancing that loan right now.
If you think that sounds like a horribly sleazy pitch, that’s because it is.
As for all of the Millennials whose new boyfriend/girlfriend falls into the ~61% of people who “of course” care more about STDs than debt … well… SoFi has no answers, so I guess those folks are f*cked. No pun intended.
I keep asking myself if this life can get any more absurd? WTF, OF COURSEEEE it can, fool.
I refinanced some of my student loans through SoFi and can confirm that their marketing and client communications are pretty cringy. In fact, I have the SoFi T-shirt and selfie stick to prove it.
To their credit, however, they’ve marketed pretty heavily to medical professionals (med students and dental students in particular) which explains the average age, incomes, and credit scores of their borrowers. If they can manage to sustain their business by lending almost exclusively to those with STEM degrees, good incomes, and job security, they ought to be fine. What has yet to be seen, however, is how they’ll behave if/when they run out of doctors, dentists, and engineers to loan to.
would be awesome if you could send me a picture of the t-shirt and selfie stick.