http://www.bloomberg.com/news/2014-09-08/real-estate-crowdfunding-firm-seeks-lending-revolution.html
The head of consumer-product marketing at Google Inc. (GOOG) and a former general counsel for a travel website are seeking to transform the mortgage-finance industry. Michael Burry, the hedge-fund manager who foresaw the housing market’s nosedive, is betting they can.
Brett Crosby left his post at Google last week to join Brew Johnson, once a lawyer for a company acquired by TripAdvisor Inc. (TRIP), to start PeerStreet Inc., a Los Angeles-based online platform for financing real estate through a form of crowdfunding. They’re partnering with small, non-bank lenders whose short-term commercial-property loans they can fund using a throng of individual investors.
“These guys are really out to solve a market inefficiency,” Burry, an early investor in PeerStreet and a subject of Michael Lewis’s 2010 book “The Big Short,” said in a telephone interview. “A number of large markets are not adequately being served by the financial sector, so it really is time for new thinking.”
Crosby and Johnson, who met at the University of Southern California’s Sigma Alpha Epsilon fraternity chapter, aspire to create the go-to website for real estate crowdfunding, a market already teeming with companies that raise large amounts of money through small contributions for U.S. property investments. PeerStreet also is part of a wave of businesses seeking to profit by providing alternative financing at a time when banks are reluctant to lend.
Loan Partners
The company is focused on raising money for debt, rather than other types of crowdfunding that buy physical properties. PeerStreet is partnering with existing originators, such as Los Angeles-basedThorofare Capital Inc., which makes short-term loans of $2 million to $25 million each.
In most cases, the originators will hold a portion of the debt on their balance sheets, giving them an incentive to issue high-quality loans and preventing crowd investors from assuming all the risk, Crosby said.
“The goal is to get loans in front of people that are very easy to understand,” Crosby said. “We don’t want many variables. We want people to understand the terms, loan-to-value ratio and interest rate.”
Crowdfunding has been gaining steam since April 2012, when the Jumpstart Our Business Startups Act, or JOBS Act, went into effect. When final rules related to the law are enacted, restrictions will be eased on investments in closely held companies, including those set up to own commercial property, by people making less than $200,000 a year and with a net worth of less than $1 million. Firms can now market only to people who exceed those levels, known as accredited investors.
Last Market
He said he wants to use PeerStreet to eliminate unnecessary parts of the lending chain and create a more transparent and inclusive platform for anyone who wants to put money into real estate, including residential properties bought by investors.
“Real estate is a like a dinosaur,” Johnson said in a telephone interview. “It’s like the last financial market to be really transformed by technology.”
For loan originators such as Thorofare, PeerStreet offers a secondary market that helps fill the void of securitization, which for private lenders, or non-traditional banks, dried up with the bursting of the housing bubble.
“It’s like a more efficient alternative mortgage-backed security,” Johnson said.
The businesses may provide needed liquidity to private lenders just as banks expanded their loans with the help of U.S.-owned Ginnie Mae, which guaranteed the first mortgage-backed security in 1970 and now backs $1.5 trillion of debt. Crowd funding has the potential to disrupt the mortgage market, according to Burry.
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