SAN FRANCISCO, Aug 14 (Reuters) - A public online exchange for subprime home and consumer loans opens for business on Friday, aiming to fill a niche by providing open, centralized bidding for investors in packages of smaller debt.
Start-up DebtMarket hopes to do for subprime home and consumer loans what online retailers have done for merchandise, by providing a national platform with open bidding.
DebtMarket, which already runs a website for trading auto loans, hopes to lure banks, funds and other investors ready to buy subprime home and consumer loans at a discount.
‘We thought if we created a big eBay ( EBAY - news - people ) for debt it could create market efficiencies,’ said Chairman Scott Walchek.
Advised by Stuart McFarland, former general manager at GE Capital Mortgage and ex-chief financial officer at Fannie Mae ( FNM - news - people ), DebtMarket took on the challenge of opaque, fragmented markets. It standardized loan information, so its software can assemble portfolios after buyers specify what they are looking for.
‘That is what we really solved,’ said Chief Executive Mike Sheridan. ‘We have standardized the data.’
Its existing auto loans platform has attracted customers Wells Fargo ( WFC - news - people ), JPMorgan’s securitization desk, and ReMark Capital, a unit of Goldman Sachs ( GS - news - people )
DebtMarket’s beta test auto exchange completed loans worth less than $5 million in the past year, of $300 million listed.
The online exchange for consumer and home loans will go up against giant DebtX, which helps the likes of the Federal Deposit Insurance Corp sell billions of dollars of distressed loans. DebtX, a nine-year-old venture-backed start-up, runs open debt auctions but not of distressed assets.
‘We believe … (an open bidding platform is) a failed business model for distressed assets and we do not it believe it maximizes the proceeds to the seller,’ DebtX CEO Kingsley Greenland said in Boston, adding they had tried it but results had been poor.
Sheridan acknowledged under 2 percent of loans on his auto platform sold but said a third attracted bids and he expects ‘as we unwrap this you will see a much higher close rate.’
Craig Focardi of TowerGroup, which does consumer loan research, said similar efforts failed years ago, but ‘technology has improved in the last decade such that the model stands a greater chance now.’
(Reporting by David Lawsky; Editing by Steve Orlofsky) Keywords: DEBTMARKET/
(E-mail david.lawsky@thomsonreuters.com; Phone +1 415 677 2505; Reuters Messaging david.lawsky.reuters.com@reuters.net)
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