By Guglielmo de Stefano on Friday 13 November 2015
Patch of Land CEO talks about his company and how crowdfunding is helping to repair the damage caused by the 2008 Housing Crash.
The global financial crisis (GFC) of 2008 was widely acknowledged to have been caused, in part, by an enormous housing bubble that was in turn aggravated by irresponsible securitisation practises that underestimated risk. Could crowdfunding help fix the after effects of this speculative property frenzy by deploying the power of the crowd to boost home ownership? Jason Fritton certainly thinks so.
In February 2013, motivated by a desire to repair communities across the US, devastated by the real estate crash and the necessity to make sure it didn't happen again Jason, together with his brother Brian and Carlo Tabibi, Jason Fritton founded Patch of Land, a Peer-to-Real-Estate (“P2RE”) lending marketplace in the US. The platform offers various types of secured real estate debt and then matches investors seeking alternative fixed income opportunities to borrowers seeking alternative sources of financing. In less than two years, it has funded almost 150 projects, prefunding and then crowdfunding more than $40M with an average rate of return of 12.2%. The company recently announced it has returned $10M to investors since its inception in 2013 - with no defaults on loans to date.
I caught up with Jason, who provided me with more colour about his company and how he believes that it is still possible to achieve the American dream of owning your own home in a financially responsible fashion. Like many, Jason believes that banks have not worked in the best interest of customers for some time and that P2P lenders are the natural answer. After the 2008 Housing Crash, whole neighbourhoods were abandoned across the US, largely because indebted homeowners couldn’t afford to repay their massive loans back anymore. Patch of Land empowers real estate entrepreneurs to re-hab homes in neighborhoods so people can live in them again. The platform’s mission is solving the problem of slow and inefficient private real estate lending by using sophisticated financial technologies. Jason explained:
"As Patch of Land evolves as a company, it is a big priority for us to continue to grow into a one-stop shop and offer solutions for all aspects of commercial and residential real estate projects, to meet our customer’s needs. In order to get there, we’re working to expand into other underserved markets, namely projects that fill the $1-10 million gap. The solutions and infrastructure we’re building today will allow us to support all of this in the very near future."
But a structural challenge remains. Although many including Jason believe that the crowd represents the way ahead, previous financial crises (2000 with tech and 2008 with asymmetric information flows sparked by lack of transparency about risk) could haunt the market again. What happens if poor risk analysis and ‘too much tech’ sparks the next crisis?
“This time it will be different,” argues Jason. He claims that at the time of the dot-com and the housing bubbles, overvaluation of assets (of tech companies and houses) was the main issue, but these factors are not present at the moment. The Patch of Land boss says that his company is behaving responsibly and it is doing its job properly, without underestimating the potential for risk or acting dishonestly. Naturally, he doesn’t completely deny that another bubble could happen, but he argues that the probability is very low. He also concedes that the real estate market will in all likelihood contract in the future. This ‘downsizing’ won’t be triggered by a risk crisis, but by the fact that this market is cyclical.
Jason also agreed that the environment into which P2P lenders emerged was “favourable”, namely due to low interest rates, low level of trust in the banks, massive intervention from the central banks and the like. When asked what is going to happen when conditions change – i.e. increasing interest rates, or even platform failure (echoes of Trustbuddy, perhaps) Jason suggests that Patch of Land will be ready to react with a more responsive business model.
Lastly, Jason has focused on transparency, one of the main features of P2P lending. Borrowers and investors ought to be able to monitor their financial status in real-time: it is the only way to boost people’s confidence in the industry and to better develop the industry itself. Fair and transparent information is an invaluable resource that platforms can learn from, adjusting their offers accordingly, argues Jason. This new age of finance is based on open communication and information sharing and “Patch of Land is proud to be a part of this new era of transparency”. He concluded:
“Both in finance and real estate, transparency is a relatively new concept. However, thanks to the availability of information, more and more companies are committing to making information available. We are seeing a substantial shift in the way dollars are invested. By taking a stand on transparency, Patch of Land is also opening up lines of communication to receive information.”
Transparency is among the major strengths of this industry, the watershed between the old world of finance and the new one. Indeed, the majority of insiders believe that, apart from lack of regulation, lack of transparency was the main cause of the GFC. And they are right. The banks sold off highly rated Collateralized Debt Obligations, constructed in highly opaque fashion: pooling many tranches of loans together, with different risks and from different borrowers, and making a wicked use of leverage. CDOs could have been considered as “bombs” traded among investors, really fruitful until the “music” stopped, when they quite literally exploded, melting down the entire financial system.
Will this time be different?
In 2010, Carmen Reinhart and Kenneth Rogoff – two American economists – published a book called “This time is different”, which is the sentence experts have always pronounced during new crises in the past, including 2008. With this expression, people indicated that the crisis they were experiencing was not predictable, since the old rules of valuation no longer were valid, and that the new situation bore little similarity to past disasters. In the marketplace-lending era, platforms are surely more transparent than banks and their high level of disclosure feels likely to prevent the eruption of a new crisis in the future. Both insiders and the general public really seem to believe that “this time is different”, not in the Reinhart and Rogoff way.