The yield curve continued its unrelenting flattening after last week’s Fed meeting. The spread between 10-year and 2-year treasury yields now stands at 36 bps (about 1 to 2 rate hikes from inversion). An inverted yield curve and lower-long term yields have presaged economic slowdown or recessions in the past. You can read our analysis of the Fed’s interest rate decision here.
Rising interest rates are also putting a dampener on home sales. Existing home sales have now declined in 4 of the 5 months of 2018. Former Treasury Secretary Larry Summers described the economy as “brittle” and cautioned against the Fed raising rates and said that most economies, especially emerging markets, may be unprepared for a recession. Summers also noted the typical policy response of reducing rates by 500 bps is not available.
Amazon continues its expansion into financial services in India. Amazon will finance commercial loans to Amazon’s sellers. However, unlike the model in the US where Amazon lends on its own balance sheet, Amazon will utilize a marketplace model with six participating banks at the outset. The lending program has grown 150% in the first five months of this year (total volumes are unreported).
Fintech companies are racing to provide full-fledged banking services by partnering with traditional banks. The latest potential entrant in this space is Robinhood, a venture-backed online platform that provides free stock trading. FinTechs that offer banking services can deepen their relationships with their customers, access more data, and cross-selling into other services. SoFi is also offering SoFi Money, a full-service checking and savings account with an emphasis on customer experience and transaction speed. Meanwhile, Zelle, the bank consortia funded payment service, has already overtaken Venmo as the most popular customer-to-customer payment transfer service.
The battle for bank accounts faces competition from Goldman Sachs’s Marcus offering to pay top savings rates for customer deposits, while banks like Morgan Stanley and Bank of America are expanding their retail brokerage offerings with a digital spin to garner clients’ brokerage assets.
In regulatory news, a New York judge has ruled that the CFPB’s structure is unconstitutional, while the White House prepares to nominate Kathy Kraninger to head the CFPB. CFPB director Mulvaney fired all 25 members of the CFPB’s advisory board to make a “fresh start”. Former board member and founding partner at Core Innovation Arjan Schutte has penned a critical note citing the diversity of the advisory council and the decision’s lack of a reasonable basis.
In Fintech financing news, Chinese fintech company Yirendai has announced a RMB 324 Mn ($50 Mn) term loan from Goldman Sachs which will be used among other things for share repurchases. We have a slew of securitizations in the market as issuers look to lock in funding before the lull in market activity in the summer. We will be tracking all these deals in our quarterly securitization tracker, and you can find our Q1 Securitization Tracker here.
Kroll has rated Cross River Bank’s third consumer unsecured loan securitization of $180 Mn A- on the senior tranche. Opportun’s $225 Mn unsecured consumer loan securitization has been rated A+ on the senior tranche by Kroll. Mosaic Solar is also in the market with its 4th deal, a $317 Mn securitization of residential solar loans which has been rated A- on the senior tranche by Kroll.
Freedom Financial issued their inaugural securitization, a $270 Mn deal, this week. The tranches were rated A, BBB and BB(high) by DBRS. We congratulate Freedom on completing their first securitization and look at the deal in detail below.
FREED 2018-1 Deep Dive
This week we look at Freedom’s inaugural securitization. Freedom’s $270 Mn deal offered classes A and B, which priced at spreads of 100 bps and 170 bps respectively. We compare this deal to LendingClub’s and Prosper’s latest deals, although we note that Freedom’s Consolidation Plus loans are not strictly comparable to other unsecured personal loans.
FREED 2018-1’s collateral pool consists of 2 types of loans – 61.6% Freedom Plus (F+) and 38.4% Consolidation Plus (C+).
F+ Loans: F+ loans are unsecured consumer loans to near prime and prime borrowers. F+ collateral has a WA age of 8 months and WA remaining term of 41 months. The WA current FICO score of the pool is 723 and the WA interest rate is 14.8%.
C+ Loans: C+ loans are offered to select qualified debt settlement clients as an option to shorten the duration of their debt settlement program by making funds immediately available to fund settlements reached by Freedom Debt Relief. C+ collateral has a WA age of 8 months and WA remaining term of 44 months. The WA current FICO score of the pool is 654 and the WA interest rate is 22.9%.
Freedom’s C+ loans have the highest loan balances, weighted average coupons and original loan terms among all the pools, and Freedom’s F+ borrowers have the highest weighted average credit scores. The higher weighted average coupon on C+ loans should help the deal generate significant excess spread.
Source: PeerIQ, KBRA, DBRS
Below we look at representative collateral pools of Freedom, LendingClub and Prosper containing loans originated after 2016. LendingClub and Prosper pools contain only prime collateral.
Freedom’s WA coupons at origination are higher than those of LC and Prosper. Freedom C+’s WA Coupon is 22.51%.
WA Coupon at Underwriting
As the chart below shows, Freedom’s C+ loans have the lowest Cumulative CDR curve over the first 24 months, with Freedom F+ in line with LC and Prosper.
Cumulative Net Loss (%)
Freedom F+ loans have the highest cumulative prepayment rate in this group. Overall, Freedom’s pool has higher WAC coupled with lower losses and higher prepays on these representative pools.
Cumulative Prepayment (%)
Bond Characteristics and Pricing
In this group, PMIT 2018-1 was by far the largest deal and had a D class which Kroll rated B+. Freedom received lower initial O/C than did Lending Club and better overall subordination levels than both LC and Prosper. Only Prosper’s A tranche had a higher initial rating than Freedom’s tranches. Freedom also has the lowest expected base case loss range in this group.
Source: PeerIQ, KBRA, DBRS
Freedom’s A and B tranches priced at spreads of 100 bps and 170 bps, wider than the spreads seen on LC’s and Prosper’s deals.
Source: PeerIQ, KBRA, DBRS
FREED 2018-1 has 10% over-collateralization and a reserve account of 0.5%. Tranches A, B and C have credit enhancements of 26.45%, 15.05% and 10.05% (including the reserve account) respectively. DBRS’s expected net loss on the pool is 12.4% with estimates of 13.11% on F+ loans and 11.91% on C+ loans.
Source: PeerIQ, KBRA, DBRS
FREED 2018-1’s has the most aggressive cumulative net loss trigger, which starts at 3.25% and goes to 18% by month 35, providing senior bond holders the best protection in case of higher than expected losses.
Source: PeerIQ, KBRA, DBRS
Investors that seek to analyze these collateral pools further on the PeerIQ platform should reach out to learn more.
- Spring Home Sale Season Shows Signs of a Bust (WSJ, 6/20/18) Rising interest rates are putting a dampener on home sales as existing home sales have now declined in 4 of the 5 months of 2018.
- Summers Warns the Biggest Economies Are Not Prepared for Another Recession (Bloomberg, 6/18/18) Larry Summers cautioned against the Fed raising rates and said that most economies were unprepared for a recession, which might be brought about by the end of expansionary monetary policy.
- Don’t Fight the Fed’s Balance Sheet Taper (WSJ, 6/19/18) The Fed is reducing its balance sheet at the same time when US borrowing to finance its deficit is increasing, causing a dollar shortage in emerging markets.
- Another judge says CFPB structure is unconstitutional (American Banker, 6/21/18) Judge Preska ruled that the CFPB’s structure was unconstitutional and that it lacked the authority to bring claims against offending parties.
- Kathy Kraninger to Be Nominated to Head Consumer Financial Protection Bureau (WSJ, 6/16/18) The White House is nominating Kathy Kraninger, a Budget office staffer, to succeed Mick Mulvaney.
- Op-Ed (Medium.com, 6/10/18) Former CFPB board member and founding partner at Core Innovation Arjan Schutte has penned an op-ed arguing about the need for sensible regulation to protect consumers.
- Amazon launches lending platform for sellers (Economic Times, 6/13/18) Amazon continues its expansion into financial services, by launching a marketplace to connect commercial lenders and Amazon sellers in India.
- Robinhood in Talks with Regulators to Offer Bank Products (Bloomberg, 6/20/18) Robinhood, the online platform that offers free stock trading, is looking to offer full-service retail banking, as more technology companies move into the banking space.
- Are you ready to ditch your bank? SoFi is betting its future on it (Fast Company, 6/19/18) SoFi is launching SoFi Money, a full-service checking and savings account, as it looks to deepen its customer relationships.
- SoFi CEO’s strategy for success: ‘Make every transaction faster’ (American Banker, 6/20/18) SoFi is betting on speeding up routine banking transactions as a competitive edge for SoFi Money.
- Goldman Will Pay Big Money for Cash — Yes, Even Your Measly Savings (The Street, 6/19/18) The battle for customer deposits is intensifying with Marcus offering top deposit rates as it looks to gather customer deposits.
- BofA’s next big push: Expanding Merrill Edge (Financial Planning, 6/13/18) BofA is expanding its retail brokerage operation to garner customer brokerage assets.
- Morgan Stanley puts a digital spin on advisor training (Financial Planning, 6/18/18) MS is training its wealth management advisors on its digital-first approach to help them take advantage of all the company’s technology tools.
- Zelle, a payments service created by the 7 biggest US banks, is on track to be more popular than Venmo in 2018 (Business Insider, 6/14/18) Zelle, the payment service launched by 7 top banks like JP Morgan, has already overtaken Venmo as the most popular customer-to-customer payment transfer service.
- Yirendai Announces Institutional Funding from Goldman Sachs (CrowdFund Insider, 6/19/18) Chinese fintech company Yirendai has announced an RMB 324 Mn ($50 Mn) term loan from Goldman Sachs which will be used among other things for share repurchases.
- Prosper Announces Pricing Changes (Prosper Blog, 6/13/18) Prosper has raised the interest rates on its loans by between 5-110 bps in response to the Fed raising rates.
- FREED 2018-1 Presale (DBRS, 6/12/18) Freedom Financial issued their inaugural securitization, a $270 Mn deal, this week. The tranches were rated A, BBB and BB (high) by DBRS.
- CSABS 2018-LD1 Presale (KBRA, 6/20/18) Kroll has rated Cross River Bank’s third consumer unsecured loan securitization of $180 Mn A- on the senior tranche.
- OPTN 2018-B Presale (KBRA, 6/21/18) Opportun’s $225 Mn unsecured consumer loan securitization has been rated A+ on the senior tranche by Kroll.
- MSAIC 2018-2 Presale (KBRA, 6/21/18) Mosaic Solar’s 4th deal, a $317 Mn securitization of residential solar loans has been rated A- on the senior tranche by Kroll.
- A machine has figured out Rubik’s Cube all by itself (MIT Technology Review, 6/15/18) Machines continue to break through bastions of traditional human intelligence by learning to solve a Rubik’s Cube without any human help.