Homeowners who actually live in their home were hammered during the recession, and for many the pain continues.
These are the people who have been forced to adjust to the new economy by cobbling together several jobs, starting their own business, or freelancing at a series of short-term positions.
These people go to their established bank for a mortgage but do not fit the mold of a borrower that was forged during the Eisenhower administration – stable job, stable pay, predictable situation. They are caught between a new reality and a lender from a sector topping the list of slow adapters.
This is what motivated Michael Slavin to create Privlo in 2009.
Most traditional mortgage providers and the United States government, which buys many of those loans, are not an adventurous bunch. They like predictability and reliability, Mr. Slavin said.
“The biggest standard is the borrower’s ability to repay, and they judge that by income and employment stability.”
That is wonderful for those in long-term, salaried positions, but more and more people are faced with a different reality where they start a small business such as a contracting trade or retail operation, businesses that are at the whims of consumer preferences, trends, and even the weather.
“There are fewer W2 workers and a large trend toward self-employment,” Mr. Slavin explained. “Incomes can be spiky and seasonally driven.”
In 2014, close to 18 million Americans worked as a freelance or independent worker, a 12.5 percent increase in three years.
Some business owners also deduct income for tax purposes, which helps at the time but does them no favors when applying for a mortgage, when on paper it looks like they cannot afford a larger home when in reality they can.
Privlo’s recent expansion into Illinois serves as a perfect microcosm of the national economic state when Privlo was created in 2011. One in three working people in the greater Chicago area are self-employed, and not coincidentally one in three traditional loan applications in the area are denied.
Back in 2011 Mr. Slavin and the Privlo team recognized this and started working with consumer credit scientists to discover previously unidentified yet highly correlative data points that can be used to identify creditworthy borrowers. Privlo’s current model accesses hundreds of such points along with alternative documentation.
Privlo recognized they would have to take extra steps to assuage fears of the unknown that many in the industry were bound to express, and they took several steps.
Following Privlo approval, all loans are reviewed by an independent third party. Privlo also retains ownership of a portion of every loan.
A minimum down payment on Privlo is higher, starting at 20 percent of the property value. Privlo accepts more types of asset sources for down payment, including illiquid assets and gift funds.
Privlo’s underwriting model has allowed them to identify several groups of people previously deemed high risk that in many cases are reliable borrowers. These include foreign nationals, recent graduates with good income potential, and commission-based and seasonal workers. Many who experienced a foreclosure on medical bankruptcy more than a year back also qualify.
Investors clearly like what they see. Privlo backers include Spark Capital, which has also invested in Twitter and Tumblr, and QED Investors whose past investments include Prosper and Credit Karma.
Mr. Slavin said investors are attracted to Privlo for several reasons.
“Private capital likes that we have found success in our ability to underwrite the consumer. We take loan performance data, run it through our model and demonstrate how loans will perform.”
The average Privlo loan closes in 17 days. The industry average is 60.
Prior to the financial crisis, Mr. Slavin worked at private equity firms in California and saw many large residential projects constructed at a time when capital freely flowed. Property values were rising and people were building as many condos as they could.
“Everyone knew it was going to stop, but no one knew when,” he said. “When a bubble is occurring many people think they can time the market.”
As the economy worsened TARP began to purchase assets, which Mr. Slavin said helped the government and prevented terrible inflation. It did not help investors.
Mr. Slavin knew many people in Hollywood, which is a unique environment where skilled people get together for short terms, complete a shoot and then move on. They may work only eight months every year, many by choice. They had strong FICO scores but could not get a loan.
He set to work on developing Privlo and things began to move quickly, he recalled.
“We had some traction and began to raise venture capital. That was when I began to think there was something to this.”
Discussion at the first Privlo board meeting revolved around platform scalability with them immediately identifying borrower and lender acquisition as initial problems to solve along with underwriting.
Because of the early movement with Prosper and Lending Club, Privlo was initially built as a peer-to-peer platform, but they soon evolved their model, Mr. Slavin said.
Technology has enabled Privlo to cut average approval times by more than 70 percent and accept creditworthy borrowers with unique histories. Mr. Slavin shared more detail on how technology led to those achievements.
“People do not need to replicate getting paperwork to the banks. It is a painless experience and only a few clicks, not 10 pages worth.”
Technology also enabled Privlo to analyze enough unique data points that they did not have to look at more exotic variables.
“They are not interesting to us,” Mr. Slavin said.
Privlo’s growth has come fast, which validates Mr. Slavin’s vision back in 2011. That means the underserved are able to fulfill their dream of buying a home..
“It is so cool to see approval letters go out,” Mr. Slavin said.