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Calif. loans dominate SoFi's 1st RMBS deal

Social Finance Inc. is entering the residential mortgage-backed securities space with a private transaction backed by $173.8 million in loans originated on the SoFi platform. The company has been active in the asset-backed securities space since 2013, but previous offerings were backed by personal or student loans, making this SoFi's first MBS transaction. While SoFi is currently the only major digital lender to offer mortgages, a successful offering could spur other digital lenders to enter the market.

S&P Global Market Intelligence estimates that as of the end of the third quarter of 2016, SoFi had originated $12.32 billion in loans across its student, personal and mortgage lending segments since its founding in 2011.

It appears that San Francisco-based SoFi does not stray far from home when originating mortgages. Of the 272 loans underlying the offering, 71.3% were originated in California. This is not surprising, considering that SoFi was founded at Stanford University and offers a technology-driven platform likely to appeal to the demographics in and around the Silicon Valley area. A pre-sale report issued Dec. 12 by Kroll Bond Rating Agency notes that San Francisco and San Jose are the two largest areas of issuance for California. Washington, another tech hub that is home to Microsoft and Amazon, comes in a distant second for originations at 5.5%. SoFi is licensed to operate in 27 states and the District of Columbia.

What stands out the most about SoFi's mortgage offering is the unique terms it offers, certainly outside the conforming loan guidelines used by Fannie Mae and Freddie Mac. SoFi offers loans of up to $3 million, with no personal mortgage insurance and only 10% down on all fixed-rate or 30-year adjustable rate mortgage products. The company also offers a 40-year interest-only ARM that requires a 15% down payment, but again, no PMI. The average original principal balance for loans in the offering was $639,088, putting these mortgages into jumbo territory for most U.S. counties. There was a broad dispersion of original principal balance amounts, with an upper limit of $2.3 million, a median of $608,900, and a lower limit of $102,400. California, Texas and Colorado represent the three states where mortgages in excess of $1 million were originated. Colorado had the highest average original principal balance at $935,000, but this is tied to only two transactions originated in the state.

Interest rates varied, with an average APR of 3.5%. Rates in California, where the highest number of loans were originated, topped out at about 4.5%. Overall, these rates are in line with those offered by large bank lenders and in some cases could be more competitive. All loans in this particular offering are either 15- or 30-year fixed rate mortgages, according to KBRA.

With these flexible terms comes risk. In offering jumbo loans, with 10% down and no PMI, SoFi exposes itself and investors to substantial losses in the case of a default. Furthermore, the company has yet to experience a significant downturn like the 2008 financial crisis, when jobs were eliminated or downsized, and property prices fell across markets. KBRA noted that the weighted-average original credit score for borrowers was 777, well within prime range. It is worth noting that SoFi itself does not rely heavily on FICO scores, and has been vocal about the over-reliance on these scores in the past. While the company does use FICO as a piece of the puzzle, measures like debt-to-income and free cash flow factor heavily into its lending decisions.

It is likely that in offering mortgages, SoFi continues to target the same prime credit, high earning, young customer base it courts through its personal and student loan refinancing businesses. These borrowers are likely able to afford the monthly cash flows associated with a jumbo loan, but are early in their careers and have not saved a substantial enough down payment to apply through traditional lenders. Even those that could go through a traditional channel might find SoFi easier to navigate and use. The company offers an online pre-qualification process allowing consumers to instantly know how much they can borrow, and because SoFi underwrites all of its own loans, borrowers are able to close faster on their properties. Borrowers with good jobs, high cash flows and solid credit scores will likely make investors feel more at ease with the unique products that SoFi offers.