Their third securitization in the last year, the funds allow SoFi to lower borrower rates and expand into other areas. The transaction received high marks from the ratings agencies.
“This was the second marketplace deal for Standard and Poor’s and the first for Moody’s. Both rated it A,” said Co-Founder and CEO Mike Cagney.
“It is important for us because it drives down our costs of financing,” Mr. Cagney continued. “We are at a stage where we have sufficiently low costs in capital that we can go after the broad U.S. consumer credit market from a disruption standpoint.”
In choosing a structuring agent, SoFi went to a familiar source.
“We have a longstanding relationship with Morgan Stanley who are co-leads with Goldman Sachs (on this transaction),” Mr. Cagney said. “Morgan Stanley were the first ones to provide warehouse financing to us in 2013.”
SoFi opted to use multiple distributors and had many reasons for doing so.
“We like to be significantly oversubscribed on the transaction,” Mr. Cagney explained. Using multiple distributors draws a diverse pool of borrowers so that when market positions shift there is an increased chance of strong demand for SoFi offerings, he added.
This also lays the groundwork for SoFi’s future plans.
“The more folks that get visibility to it the better. We’re going to be coming to market every quarter with larger and larger issues,” Mr Cagney explained.
With student loans operating under a blanket system where everyone pays the same rate and not a merit-based one where the rate is determined by factors such as salary and job prospects, there are plenty of large pockets of lower risk borrowers who make excellent candidates for refinancing.
“We underwrite against an ability to repay structure, so we are not a FICO-based underwriting model,” Mr. Cagney said. “We look at cash flow, expense and other factors such as how robust your employment is.”
And there is the disruption point. “That is why there is an opportunity because the way the government loans work everyone gets the same rate. The reality is if you graduate and get a good job you probably shouldn’t be paying 6.8 percent. You probably should be able to finance that to a much more attractive level and that is where we come in.”
“If you look at the Moody’s and S&P deals we have the lowest expected cumulative default of any unsecured consumer credit of any deal they ever rated,” Mr. Cagney said. “Their view is we are well ahead of how any bank approached underwriting, but ironically it is perfectly in line with the Consumer Financial Protection Bureau’s Ability to Repay rules because we are underwriting against free cash flow.”
As SoFi looks to broaden their customer base and grow with their initial clientele, low-down-payment mortgages were the next logical step.
“Mortgages a logical extension for us. You pay down that (education) loan or pay it off, and the next decision point is around buying a home.”
Despite what some thinkers believe, millennials do not lack the desire to buy homes, they lack the opportunity.
“The reality is millennials don’t have the credit to buy homes,” Mr. Cagney stated. “If you want to buy a home in a region that is moderately expensive the bank is going to want you to put 30 percent down, and that can be a very difficult thing.”
“Even though you have more than sufficient cash flow, even though you pass the rules with flying colors, you still have a difficult time accessing credit because you are not at that range. Our view is that is kind of a goofy system, and the higher the loan amount it becomes even more goofy.”
The transition to a wider range of products was quite easy for SoFi.
“We found it relatively seamless to extend the underwriting methodology into the mortgage product and be able to bring a solution to a market which desperately needs one, that 25-40 year old who can’t get credit extended because they do not have that 30 percent down,” Mr. Cagney explained.
“We’re not really fighting it out with Wells Fargo or First Republic for mortgage originations,” he continued. “We’re really dealing with a bunch of people who didn’t think they could even get a loan. We are getting them a loan and a really good one. Not an eight percent mortgage, a 90 percent LTV (loan to value) at 3.5.”
SoFi is also structured in such a way as to protect them from the initial rate hikes.
“There might be a false dichotomy assuming the rates ever go up again,” Mr. Cagney said. “We have been aggressively driving down our costs of financing and that has widened the gap between where student loans rates are today and where we’re refinancing folks. They are getting bigger and bigger savings. It is putting some degree of cushion in place so that when rates go back up even 250 basis points we still have value to deliver.”
SoFi made their hay with student loan refinancing. From that starting point, they can branch out and grow with their client base through the offering of other types of financing.
“The whole SoFi focus has always been that we use student loan refinancing as a beachhead to build credibility and brand with investors and borrowers and then extend it to a broad range of credit products.”
Student loan rates only change once per year, so it gives SoFi time to adjust while minimizing the damage of a sudden hike.
“If the rates spike up it might be difficult to refinance some of the loans from last year but it won’t be difficult to refinancing someone who is graduating next year.”
Another way SoFi keeps strong bonds with their core community is by offering creative value adds.
“Job assistance is really an extension of the thesis of SoFi,” Mr. Cagney explained. “We consider ourselves a community-based group. We try to get as many folks from your school invested in your loan as possible. Consequently there is a vested interest, not just in the economics but on the success of the borrowers – that is very important to us. So if someone loses their job, we don’t want to call them up and say we’re going to take away your car. We want to call them up and say, who do you want to network with to get a job? What can we do to help you?”
“We’ve done this for 50 borrowers, got them re-employed. It’s great because they are current on their loans again and that’s always a big plus, but it creates value for the community, it creates ways for people to get involved at this stage. The concept of living outside the bank, this is a huge differentiator.”
SoFi also offers assistance to entrepreneurs, not just if they need some help along the way with their mortgage, but in other ways only someone who has walked their path can properly provide.
“We are entrepreneurs ourselves,” Mr. Cagney said. “We started the company. How many folks couldn’t go on an entrepreneurial path because they had to service student loans?