//Fintech targets banks keen for out-of-market CRE loans

Fintech targets banks keen for out-of-market CRE loans

As more banks take the often risky step of expanding outside their traditional markets, especially through digital means, some fintechs sense an opportunity to offer them data they need to find new customers and assess risk.

LendingClub, OnDeck Capital and Lending Tree are each online lending platforms that have bet on this trend. CrediFi, a finance data provider, aims to do the same with a focus on one of the largest asset classes around: commercial real estate.

“Historically lenders tend to lend only in their network of relationships,” CrediFi Chief Executive Ely Razin said. “In other words, ‘We’ve known this family that’s owned real estate for a hundred years so we lend them money.’ But if they are in growth mode, their network runs out and they need other ways to spot opportunities to find the owners and even contact details.”

In April 2017, the firm launched an online lending platform connecting borrowers to CRE lenders. It continues to develop new products thanks to $19 million in Series B funding that it received in two tranches, $13 million in February and $6 million last week. The latest infusion was led by Liberty Technology Venture Capital II, with participation from the Japanese real estate investor Mitsui Fudosan, Maverick Ventures Israel, Battery Ventures, Viola Ventures and the crowdfunding site OurCrowd.

The startup earns revenue by charging banks a flat fee for its service based on the number of employees using the product.

“I haven’t seen anything like this directly,” said Karl Augenstein, executive director at Capco. “I know there are pieces and parts available. If you go to a title agency, they can tell you what has been filed on that property. But I have to know exactly what I’m asking for to get that data back. I can find out if there is a lien on this property or this business, but that’s a one-off.”

commercial real estate

The need for data partly springs from the need to avoid past mistakes: CRE loans by banks peaked in 2007, just before commercial real estate prices fell 30% during the financial crisis, according to a Federal Reserve Board study. Defaults contributed to many bank failures and led to stricter loan underwriting standards.

For bankers thinking more regionally or nationally in scope, working with CrediFi makes sense, said H. McCall Wilson Jr., CEO of the $614 million-asset Bank of Fayette County in Piperton, Tenn. “There are community bankers whose whole model is taking wholesale funding and buying real estate loans all over the country,” Wilson said. “They have underwriting criteria; they look at an appraisal and do the deal.”

That banking model doesn’t suit the Bank of Fayette County: Wilson relies on real estate agents and appraisers whom he knows and trusts. But he said some regional and national banks pursue out-of-market loans. “If I am a bank that’s not focused on my community and focused simply on profitability, then maybe it makes sense for me to get the lowest-cost funding and get the highest-yielding loan that’s collectible,” Wilson said. “I would be just looking at my return on equity or return on assets. That’s what a lot of internet banks do.”

Both the data and lending platform CrediFi provides could add transparency to the industry, Augenstein said, but that transparency could be more of a boon for borrowers than lenders. “It could create more of a race to the bottom in terms of lower interest rates,” Augenstein said.

Lenders may also have more leverage in avoiding bad loans, said Joe Ganzelli, a senior director at Cornerstone Advisors. “Bankers are focusing on strong credit quality deals,” Ganzelli said. “If this platform allows them to identify commercial real estate opportunities and filter them based on their own commercial real estate appetite and readily and quickly identify that specific criteria through a web portal platform, then that’s a strong value proposition.”

Later this year CrediFi plans to release a product that measures distress both in the CRE market and in individual CRE portfolios at banks. “Lenders want to know what markets are overloaned right now and which ones are seeing a withdrawal,” Razin said. “And since real estate is an extremely local business, there are significant differences city by city.”

Banking vendors are responding to demand for better CRE lending data as banks expand their loan portfolios. In August of last year, Moody’s Analytics acquired Reis, another commercial real estate data provider.

“Bankers have a mandate from senior management: Do a more rigorous analysis and monitor the portfolio,” said Cristina Pieretti, managing director for strategy and innovation at Moody’s. “We are seeing a lot of focus on being judicious about which markets they are doing business in.”

Online competition, she noted, has put more pressure on bankers to get underwriting right in the CRE space. “I don’t think anyone has the answer yet — it changes at such a fast pace,” Pieretti said. “Banks need to quickly figure out what are the new variables that they should be looking at.”

There is added emphasis in making sure banks are in the right submarkets and have the right geographic focus, too. The fee structure that CrediFi offers will be important for attracting banks, Ganzelli said.

Regional banks looking to compete with national banks are prime targets, said Scott Tobin, general partner at Battery Ventures. CrediFi “has the ability to map geographies in a way that banks don’t,” Tobin said. “Banks have information on assets that they have, but not information on comparable assets. Likewise, banks don’t have great data on their competitive set, the borrowers they work with and the loans they are losing to them. They can’t benchmark a whole number of data elements against a wide variety of data assets.”

CrediFi also gives banks competitive intelligence about borrowers, interest rates and maturity dates. Banks then use it to source more CRE lending business, to compete in bidding situations, and to find nonperforming assets. “Banks want to know who’s putting money to work where and at what price,” Razin said. “The world of real estate ownership itself is opaque. Most people don’t know who owns buildings in the United States. We do, so we help banks understand that.”

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