A ratings agency has predicted a “significant performance degradation” in US peer-to-peer lending portfolios that will put some platforms’ viability under threat.
Fitch Ratings said that the coronavirus pandemic has caused a sharp economic contraction and a rapid increase in unemployment, which will pressure borrowers’ income levels and ability to make loan payments.
In a report focused on US marketplace lending (MPL) asset-backed securities (ABS), the ratings agency said that peer-to-peer lenders may be more impacted by these headwinds than other consumer ABS sectors, It warned that newer firms whose credit models remain the most untested could be particularly badly affected.
“Most MPL sponsors did not originate in material volumes until after the 2008-2009 financial crisis, and ABS issuance began slowly around 2013,” Fitch Ratings said.
“These more recent origination periods mean that all performance data available comes from a stable economic time period with low unemployment. Furthermore, Fitch observed volatility in vintage default performance for most originators over the benign economic period prior to the pandemic, even when accounting for portfolio composition.
“MPL sponsors’ underwriting models, and the loans themselves, are untested by times of high, or even moderate, unemployment or other significant macroeconomic stress.”
The ratings agency said that most P2P lenders operate an “originate to sell” model, by conducting whole loan sales to investors, packaging the loans in ABS transactions or through bank warehouse lines.
“Thus a substantial proportion of their revenue is derived from the sale or securitization of loan originations,” Fitch Ratings said. “Furthermore, dislocations in the capital markets are impacting MPL sponsors’ funding sources and thus the sponsors’ ability to originate loans and generate origination fees.”
The ratings agency also warned that it had concerns about P2P lenders’ back-up servicing arrangement, as it was unsure whether the back-up servicers were able to take on the volume of loans without operational issues that could exacerbate defaults in times of economic stress.
Fitch Ratings’ research follows a report from fellow ratings agency Moody’s last month which focused on the UK P2P market.
Moody’s report said that the coronavirus outbreak will pose the first economic test for most P2P lenders.