#32 - Brew Johnson & Brett Crosby - "We Have Long-Term Aspirations of Disrupting the Entire Mortgage Finance and Securitization Market"

65 minutes

Episode 32 is like no other we’ve done to date. Local guys, Brew and Brett, run a startup in nearby Manhattan Beach – and it’s disrupting the real estate financing market. It’s not long into the episode before the guys give us the overview of how it works.

Peer Street invests in real estate debt. Now, when most people try this, there are too many intermediaries. The effect is the yield is stripped out. Peer Street is fixing this, focusing on short-term, high interest rate loans. The guys’ vision is to enable investing in real estate lending to be as easy as buying a stock through an online broker.

After giving us their fascinating professional backgrounds prior to starting Peer Street, Brew and Brett dive into how the process work.

There’s always been a shadow, niche market in this space. A real estate investor finds a good property that he/she is able to fix up and sell/rent. But to make the deal happen, the developer has to move quickly, and doesn’t have time to get a traditional loan through a bank. In steps a reputable cash lender, enabling the deal. Brew and Brett are enabling retail investors to take part in these localized real estate deals.

Meb asks about the range on yields… how many current deals they have… just general top-down metrics to paint the broad picture.

Since the end of Oct 2015, the guys have opened around $200M of loans. The average yield to investors is 8.5% net of fees and expenses. The average loan duration is 10 months. And the average loan-to-value ratio is 65%.

The guys then discuss how deals are vetted. There are approval processes, several layers of underwriting, a requirement wherein lenders have to commit their own capital, various data analytics, then stress testing of the loans.

Meb asks what would happen to these loans in a real estate Armageddon situation.

The Peer Street guys tell us they use as much data as possible to mitigate potential losses. And these are only 10-month loans, so to lose money, the borrower has to stop making payments and the value of the property has to decrease by about 35%. To try to protect against this, they run algorithms and compare the data to previous cycles. Then they consider what was the worst decline in that submarket. This helps them do a manual underwrite of the loan, after which they get an appraisal from an independent 3rd party. There’s far more on how the guys manage risk which you’ll want to hear.

Next, the conversation steers toward how an investor would actually take part in the deals. He/she can pick from, typically, 3-15 available deals at a time. Or investors can set up an automated system, establishing parameters from which Peer Street would match them with the right investments. Ten or more loans at a time is recommended for diversification, with the minimum investment being $1,000.

There’s way more in this episode, including Brew’s and Brett’s vision for how disruptive this could be, where this type of investment would fit into an asset allocation model, and an “imposter Cambria” that has Meb very angry. Curious why? Find out in Episode 32.

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