Episode #32: Guest: Brew and Brett, PeerStreet, “We Have Long-Term Aspirations of Disrupting the Entire Mortgage Finance and Securitization Market”

Episode #32: Guest: Brew and Brett, PeerStreet, “We Have Long-Term Aspirations of Disrupting the Entire Mortgage Finance and Securitization Market”

 

 

Guests: Brew Johnson is the visionary leader behind PeerStreet. His experience in technology platforms, real estate and law culminated in the unique concept that is PeerStreet. Prior to PeerStreet, he worked as general counsel at VirtualTourist where he oversaw the company’s $85 million sale to Expedia/TripAdvisor.

Brett Crosby crafts the strategy, product and message behind PeerStreet and is responsible for product, marketing, PR, sales and business development. Previously, he was Director of Marketing at Google where his 10-year tenure spanned many of Google’s most prominent products.

Date Recorded: 11/29/16     |     Run-Time: 1:04:52

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Summary: 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 3^rd 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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Sponsors: The Idea Farm and Lyft

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Comments or suggestions? Email us Feedback@TheMebFaberShow.com

Links from the Episode:

PeerStreet

PeerStreet Blog

Video explaining PeerStreet

The Big Short

@PeerStreet

Brew’s Twitter

Brett’s Twitter 

Andreessen Horowitz leads $15M Series A

Why location, location, location matters to PeerStreet

How PeerStreet improves communities

Lessons I took from Google

Bringing Wall Street to Main Street

PeerStreet lowers barriers

 

Beautiful, Useful:

Brett: SemesterAtSea

Brew: HotelTonite

Meb: PowderHounds

 

Transcript of Episode 32:

Welcome Message: Welcome to “The Meb Faber show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncovering new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the cofounder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Sponsor: Today’s podcast is sponsored by The Idea Farm. Do you want the same investing edge as the pros? The Idea Farm gives small investors the same market research usually reserved for only of the world’s largest institutions, funds and money managers. These are reports from some of the most respected research shops in investing.

Many of them cost thousands and are only available to institutions or investment professionals. But now, they’re yours with The Idea Farm subscription. Are you ready for any investing edge? Visit theideafarm.com to learn more.

Meb: Welcome to our early holiday edition podcast, ladies and gentlemen. We have a dual local special guest today, both Brett and Brew. Welcome to the show.

Brew: Thanks, buddy.

Brett: Thanks, Meb.

Brew: Happy to be here.

Meb: Well, great. Look, Brett and Brew, for those who aren’t familiar, are a couple of guys that started a local start-up called Peer Street. And that’s P-E-E-R, Which I thought had a little bit of a double meaning, because their office is located on the Manhattan Beach pier, right down the road from where I live and where we work in El Segundo.

And I met these guys about, what, four or five months ago over a handful of beers at a local spot. If you’ve ever been to Manhattan Beach, Simmzy’s is a wonderful spot to get beers, quickly became friends and very interesting in their business model. So, why don’t we start out, guys? I imagine most of our audience isn’t that familiar with your company.

But before we start the Peer Street discussion and kind of your business model and investment ideas, why don’t we start a little bit with kind of your origin story of how y’all two met and maybe just kind of a quick overview of the…you know, the companies you guys had started and sold into…leading up into starting Peer Street?

Brew: Sure. Sure. This is Brew. So, it’s high-level. So, Peer Street is a marketplace for investing in real estate loans, real estate back debt. And the idea here is that real estate debt is a fantastic asset class that has been…that everybody really has exposure to, in one way or the…another, usually deposits in a bank or through retirement…things like requirement accounts and mutual funds and bond funds.

The way that most people have exposure to it is, it’s not ideal in that there’s a lot of intermediaries, a lot of kind of the yield gets stripped off before people invest in it. So, the idea behind Peer Street is really to create a marketplace that allows investors to invest more directly into real estate loans with more transparency and more control.

And so, you got this great asset class that everybody has exposure to, but there has been really never a way to access it before. So, we’re creating a way to access it. And for investors, it’s similar to buying stock through E-Trade or charlesschwab.com. So, that’s really the kind of high level overview of Peer Street.

And obviously, real estate debt, if you think of mortgages, it’s just that massive, massive market. So, our whole idea is, we’re sort of a very niche part of the whole real estate lending world. But our short-term high interest rate, you know, would have…historically has been referred to as hard money loans or private money loans.

So, our ideal is…our idea here is, well, there’s this great asset class that’s always existed out there that is high-yield and short-term loans. But it’s incredibly fragmented and historically, it’s been almost impossible for any investor to access. So, we’ve created this technology platform that allows us to aggregate up these loans, curate them to surface the highest quality assets and to homogenize them to make it very easy for investors to invest.

And so, that’s the idea. So short term, our goal is…well, if you look…let’s provide a great asset class for investors that is basically…you know, in this kind of… in this era we live in where people are just starved for yield, we think we’re just providing access to… Where we live has some of the most mispriced risk of almost any asset for the first time to investors.

So, our first kind of, like, stage is look, let’s provide access to this great asset class, but we have long-term aspirations of disrupting entire mortgage finance and securitization markets. But that’s for a little later in the day, not…

Brett: Yeah. And Brew and I, to your question, we’ve known each other for, gosh, going on what, 20…something-odd years now?

Brew: Yeah, about 20…going on 25 years.

Brett: I thought 15. We’ve known each other since college…put it that way, and have been friends ever since. We were very good friends in college and stayed in touch over the years. And we kind of had our different career paths and kind of very different backgrounds and origin stories and then, we came together to build this business that’s Peer Street.

Meb: Briefly, and I know, Brett, you came from a software background, eventually…was it the Googleplex for a while? Brew, what was you’re…? Prior to starting Peer Street, like, what was the origin, what was the aha moment? How’d you guys link up? Was it a Silicon Beach matchmaking event? What was the…? How did you guys eventually decide to start this and move forward?

Brett: Match.com, actually.

Brew: Yeah. I mean, great question. It’s weird. This is like…this is one of those aha moment kind of things that has kind of took shape over many, many years. So, I mean me, going back, I was… I started my career as a real estate attorney, you know, graduated law school, UCLA in 2001. Eventually planned on doing tech work when I got out of law school, but the dot com boom had blown out.

And the firm I was going to, which was one of the…number two kind of…top 25 international law firm, did a huge amount of tech work and IPOs. This is laid off while the incoming associates before a lot of them even got in the door and asked me…they said, “Where do you want to go?” And the Labor Department or the real estate department?” I said, “Well, I guess real estate is kind of one of these… It just kind of…like, it sounds better to me than labor law.”

And so then, I practiced real estate law from 2001 to early 2006. So just…you know, obviously at the heart of the real estate boom, the housing bubble, everything that was driving that. So, I kind of…in my career, I kind of came out of this, like, dot com blowout and then went into this other bubble that was starting to blow.

The firm I… I ended up then getting pushed to go over to the top real estate firm on the West Coast. But the firm I worked at, I just got this great exposure to real estate work, you know, represent everything from national homebuilders to banks to the largest industrial reed [SP] in the world, the largest office reed [SP]in the world and all these different…all types of real estate clients.

And I mean, stuff that was just happening in the market that just did not make sense to me at all, like, intuitively. And you know, I got to my clients’ projects and you know, I’d qualify to go and buy a house that I thought was a double or triple what I should be able to qualify for. And I just had to understand what was going on and I kind of became obsessed with what was driving everything. You know it drove me to monetary policy, Federal Reserve, the securitization market, everything.

Well, that’s actually kind of how I discovered one of…our mutual friend, Barry Rizzles [SP], was actually by reading the big picture blog back in the day. Guys like Rizzles and Mike Shedlock and Mitch and his global economic analysis site and a bunch of different guys were, you know, uncovering all these facts about what was going on in the market, which was obviously very early on, you know, that it was a house of cards.

So, I ended up, you know, early on, sort of shorted [SP] in Fannie Mae and the banks and made my fiancée sell her condo in 2004, which was about nine months to early. But it was better than selling it nine months too late, I guess. You know, it was basically, I was planning on doing a vulture fund when the world ended, which I was 100% convinced that it would be.

Partners in my office, our clients call me “Bubble Blade,” because you know, I’ll be talking about, “The end is coming,” And nobody would believe me.

Brett: So, that’s the best guy ever at a cocktail party, you know.

Brew: Oh, yeah. I was the worst. It was weird. Everybody was like, so high on life and, “Everything’s great. We can all buy houses and get rich,” And I was just like this negative Nancy all the time. I was not a very fun guy to have around at cocktail parties. Well, anyways, so I was planning on doing a vulture fund, I ended up leaving the real estate law.

And in 2005, early 2006, then I was kind of waiting for things to blow up and start investing when things were on the downside. And my brother had a tech company that I’d actually helped him found when I was in law school that was growing. He went through the bust and you know, the dot com when he was growing his business. He needed help, so I went to work for him while I waited for the real estate thing to unfold.

I started this structural business development and general counsel, ended up basically convincing him to sell the company, because I was…again, I was very confident that the crisis was going to happen. So, we ended up selling that company to Expedia and closed that sale in July of 2008. So, right before it even happened.

And we literally like… obviously, if you were paying attention back then, this…things just started melting down a lot earlier and people said, “Oh, Lemann is the thing that melted it down.” But obviously, it happened a lot earlier. So, we were running to hit the exit and we did, had a great exit for my brother and his cofounder and his employees there. Sold to a great company, Trip Advisor actually, who was wholly owned by Expedia at the time, which was who actually acquired us.

And I spent a couple years at Trip Advisor, incorporating our platform into their business, you know? So, I have this weird real estate background, then I got in the tech world. And so, we sold the company and I was still very convinced that a lot of banks were going to go out of business. I thought, “Wow.” Like, after having day-to-day experience with a tech company, I thought, “When banks go out of business, we’ll need some way to fill the void here.”

Any prospering lending club started up in the peer-to-peer lending space and I thought, “Wow, this would be a really interesting thing to apply to real estate.” Long story short, worked up a similar business model for this back then, but the timing wasn’t right for a lot of reasons, regulatory was too burdensome, technology wasn’t quite there. It wasn’t the right time.

So, fast forward several years to 2013. In the interim, I’d made…you know, bought a bunch of foreclosures during the crisis, bought notes from banks that were…you know, during the crisis, made hard money loans myself. But 2013 kind of the start aligned perfectly for this business and that’s when I reached out to Brett.

Meb: So Brett, you got a pretty interesting background, too. I know you start…helped work…joined your brother in a company that eventually got sold prior to joining Peer Street. Could you talk about that just real quick and kind of how that ended up working, moving into Peer Street?

Brett: So, my background, coming out of college, I cofounded a business called Urchins Opera Corporation. We basically helped create the web analytics space. In the web analytics space, we tell you how people got to your website, what they’re doing on your website and whether people converted on your goal of buying something, or whatever it is.

And you know, we built that company up 2005, we got acquired by Google and then we turned Urchin into Google Analytics. We basically rebranded that, put it on Google’s software…or internal systems. And then we gave it away for free, which is a great growth strategy, by the way. And I stayed on at Google for about 10 years, doing a number of things from helping launch the mobile ads product to helping launch the entire social initiatives at Google.

And I launched Google Drive and then ran growth and global consumer marketing for Chrome, Gmail Docs and Drive and the various teams involved in those. I also ran…this is kind of a random side note, but a bunch of big celebrity and influencer programs at Google and centralized that when I was there, which was kind of an interesting thing.

But at the time when I was running Chrome, Gmail Docs and Drive growth, which we were having phenomenal growth across all those products, Brew reached out to me, and he and I had been college buddies, as I said, known each other for a long time…and so…and kind of ran this idea by me. And I was like, “But, that’s a really, really interesting idea. I love it.” And mainly because…like two things.

One, it was like really outside of the normal tech world. It was going after a space that really hadn’t been touched by technology. And the vision for it was to do it in a way that was not just kind of focused on fixing one small problem, like the symptoms…and solving for one of the symptoms. It was really going after the cure for the entire systemic problem.

And it was…really, if you take this idea that…it’s a very grand idea that we’re trying to do at Peer Street. We’re just starting in a very specific spot. And the more I dug into that, the more Brew and I talked about it, the more I just realized this was one of those really once in a lifetime opportunities to do something really big that really matters to really, every man, woman, child in the country, right?

I mean, real estate… I mean, it’s important. There’s housing and stuff like…you know? And real estate finance is a huge part of that. So, if we can fix some of these problems with one of the most important industries in the world that if done right, can have fantastic consequences and if done wrong, has these horrible consequences, like bringing the global economy to its knees. Yeah. So, that’s how I got involved in this and joined Brew as a cofounder.

And then, we take all these lessons learned from Google and then applied it to the space, like ecosystem play, that we go after lenders rather than borrowers. And you know, now we have 50 lenders in the program, we’re working half the country now. And then they did analytics directly, like, my background in analytics, as Brew pointed out. So…

Brew: And interestingly enough, when we were starting this, I put on the top of the list of my advisors this guy who was like who has short the market, you know, early on. And then, top list of advisors, I put Michael Berry as our number one guy that we wanted to get as advisor. And Brett originally invested as an angel investor before he left Google to come on as my cofounder.

But I was showing Brett my list of, like, hopeful advisors, he was like, “Oh, Michael Berry. I think I’m a co-investor in a business with this guy.” So, Brett happened to be a co-investor with Berry in another business. And got an introduction to him and that’s… bringing him on was kind of like a…he was kind of like an idol of mine, so bringing him on was pretty awesome.

And he’s obviously a very smart sort of a guy, so getting him…getting him bought in on this, which we kind of saw really eye to eye on a lot of different things. It was pretty exciting.

Brett: Yeah, he and Brew were like long-lost brothers in a lot of ways. They saw the world in the same way, but…

Meb: Podcast listeners may not be familiar, but he was heavily featured in the recent movie, “The Big Short,” as one of the ones that was early on to the sub-prime trade, correct?

Brew: Yeah.

Brett: Yeah, he was played by Christian Bale. And he’s a big kind of star in the book too, which is a phenomenal read, if you haven’t read it yet.

Brew: Yeah. He’s pretty much the first guy to identify it all and then figure it out. And there’s three other guys that are in that book and movie that are also investors, but have asked us to keep it…that’s on the down low. But for us, like…you know, our long-term goal within a platform that this can literally transform mortgage finance for the better for everybody.

So, having these guys that were like the smartest guys in the room that identified all the issues, all the downside and all the problems, kind of be involved in helping to do something long-term that creates these potential fixes to those problems is really exciting for us and humbling for us, too.

Brett: Yeah. And then, once…I mean, Brew came on board even before I left Google, which was pretty cool. And then, so…but once we had the ball rolling, then I was like, “This is it.” So, I specifically left Google to do this business with Brew, moved my family down to Manhattan Beach, you know, torture to be here around all these sunsets and great people and you know, bathing suits and whatnot and good surf, so…

Although to be honest, we’re not…we don’t surf as much as we used to. What happened there, Brew?

Brew: A little too busy.

Brett: But yeah. So anyway, it’s been great. It’s been great.

Meb: It’s interesting. And so, the company was started. And then, when did y’all make the first loan? Is it about a year ago?

Brett: First loan we did was actually in October of 2014. It was a $100,000 loan, a property in Oakland California on Thermal [SP] Street. We remember it very well.

Meb: So, take a step back. And you know, I’ve watched y’all’s cartoon video, which is particularly helpful in explaining this process, we’ll post it to the show notes. But for the listeners out there currently walking their dog or on the subway in New York, give us a very basic overview of how the process works.

You know, an investor comes to your website, how’s the basic, you know, two, five-minute overview on a simplistic level of this process? And then, we’ll get into some more of the details a little bit later.

Brew: Sure. Sure. And I rambled on so long, we didn’t get into Brett’s background stuff, but that’s an important piece. We might talk about that later…it’s an important piece of the puzzle of how we structure things. But yeah. So just used[SP] case first of all. So, there’s always been this kind of shadow or niche lending market that’s always existed, this kind of non-bank, hard money lending market. And so, that’s our focus.

And so, here’s the “typically use” case that comes through. And I think that’s important for people to understand. The “typically use” case as a real estate investor entrepreneur who finds a good value property that they can buy at a…basically at discount to the market. And then, they can either fix it up to sell out or rent out as an investment property. That’s effectively that kind of main-use case for the borrower in this asset class.

Now, when they’re have a good deal, they need to move extremely quick. So, they don’t have time to go to a bank and go through the 60, 90-day process of potentially getting a loan and then, probably at the end of that process, not getting a loan. So, instead of going to a bank to go buy this property to fix up and sell, those borrowers would historically go to a local lender, which was another non-bank, another kind of real estate expert in their town and get a short-term loan to buy the property and fix it up.

It’s a very localized business when you’re dealing with kind of these local real estate investors and entrepreneurs, you know, these fix and flip guys. And the lenders that operate in this are also very localized. And so literally, it’s thousands of these borrowers and also lenders scattered around the country that make loans in their hometown, their geographic areas that they kind of have expertise in.

And these lenders that make these types of loans, because they lend in areas they know very well and to borrowers they know very well, of many cases, they can make underwriting divisions very quickly. So, you have a borrower who needs money fast, you also have these lenders who need money very fast, they can make loans very quickly, so it’s a perfect match made in heaven.

So, borrower will go, lender will make a short-term loan, typically 6 to 12 months at anywhere from 10% to 15% interest rate, sometimes even higher. And everybody’s happy, because the borrower gets the money he needs to do his deal and he has a profit in it, the lender gets a nice return for the time his money is outstanding. It’s great.

Meb: Who’s setting the interest rates? Is it the…?

Brew: The lenders typically historically have set the interest rate. And it’s… You know, just the way markets… This is one thing. For borrowers, historically, there was only… You know, you had these things where it’s kind of word-of-mouth who makes these loans. And most borrowers… I mean, if we’re going back 5, 10, 30 years, most borrowers only had one or two options to get to. So a lot of times, they just pay incredibly high interest rates because it was the only game in town, really.

But at the end of the day, when these loans are underwritten well, they’re incredibly low risk if they’re underwritten and structured correctly. And to give you an example, my best friend’s dad, growing up, would make these loans all the time. He was a local real estate guy that owned a bunch of rental properties, so as soon as it came to him, he knew the properties very well. He knew like the…what price he’d be happy to own it at, so he’d make these loans.

And in 30 years, he never took a loss on a property, making these loans. So, when I was growing up, I always saw that as an example. So, it was a…kind of the asset there that we’re trying to open up is these great assets, very, very lucrative, misprice risk when done correctly, but incredibly fragmented. So, almost impossible for anybody to invest in.

And if anybody could access it to invest in, they’d historically have to make a very concentrated bet in one loan, do a lot of work. So, there’s kind of really…there’s just this niche market that always existed out there. So, with our whole concept of this, it’s like well, you got all these expert lenders out there that lend capital to borrowers and provide a service, but for the lenders, it’s very capital-intensive because they’re not a bank.

They don’t have deposits to take to go lend off of and lever up off of. So, this comes as a perfect storm that creates a marketplace like this that we’re doing. So, our whole model is, let’s go create a technology platform that these lenders can participate in: we provide them with technology, they go out and make loans in the ordinary course of their business and then, we connect those loans to investors who want yield effectively, is that a high-level way to look at it.

So, for lenders that operate in this space, they have access to liquidity, so they can make more loans to more qualified borrowers. And then for investors, there’s a huge benefit to investors, because they get access to this great-yielding asset class that they’ve never been able to access before. But in addition to being able to access the asset class, they can access it in a better way.

And so, the better way they can access it in is, they can get diversification across a lot of loans, because we’ve created a legal structure that allows investors to take fractional interest in many loans. So, the idea is that investors can not only access this asset class, but they can spread their risk and diversify and mitigate that risk by diversifying across in a way that never existed before.

So, we look at a platform like this as, you know…and one way to look at it is taking the benefits of the securitization market and the regular market industry and applying it to a more lucrative asset class, but also removing a lot of the negatives. There’s less middleman, there’s more transparency, there’s just a lot of positives to it, so…

Meb: So, let’s talk a little bit of just some general metrics that may help investors. What’s the sort of range on yields that you guys have on your platform, right now? And as an extension, like, how many active current deals are there, how many loans historically have you done? Give us a few kind of just top-down metrics that help illustrate what the broad picture looks like.

Brew: Sure. And just to kind of level set, you know, the…we are in a private kind of beta, basically, for the first year. We opened up the platform at the end of October in 2015, so we’ve really been operating, you know, broadly for about a year. But you know, metric-wise, we’ve done about $200 million of loans through the platform. High, high percentage of those were…most of those were in 2016.

Stats, if you’re looking at it from an investor’s point of view, is average net yield to investors of 8 and a half percent across the entire platform. That’s net of fees, expenses. Average duration of the loans that have come through has been 10 months and the average loan-to-value which, in real estate lending or real estate debt, is the number one risk to lender, meaning the, you know, ratio of the loan balance versus the property value. The average loan-to-value has been 65%.

So, the idea here of being able to invest across loans of this…with these kind of statistics to get eight and a half percent net yield on a 10-month firm, on a 65% average loan-to-value is just…

Brett: These are first-position liens against real estate, right? So, I guess the underlying asset of real estate. So, even if something were to go wrong, you’ve got the real estate that you know, you can work out a loan. And so, you’ve got that going versus, like you know, figure [SP] out statistics. So, if you look at them against other asset classes, like for example like lending club, it’s higher…Peer Street as higher yields, shorter term and backed by the underlying real estate. So, if something does goes wrong, you actually beyond [SP] principal loss are much, much lower, because you got an actual asset there.

Meb: And so, kind of thinking about the risk mitigation, you know, talk a little bit about, like, who’s vetting the deals. So, I think my understanding is that y’all… The deal originator also, you know, has a fair amount of skin in the game by vetting it. But as…do you guys vet each deal, too? What’s kind of the general process on picking out a good loan to at least present on your platform?

Brew: Great question. And so, Brett always likes to talk about how, like, you know, this asset class is so localized, like the [inaudible 00:24:59]…you want to get a nationwide platform, so investors can get as much broad diversification as possible. But this is such an idiosyncratic asset because it’s so localized that you really need boots on the ground to be able to scale nationally.

So, the way we structure this is the idea of, like…it’s almost like the combination of using science to inform the art, almost, you know, the combination of this. And so, the art is these local lenders out there and the science is what we layer on top of it. So, we’d look at it as the best of both worlds. But yeah, I mean, the lenders are the first level.

They go find borrowers, they underwrite the loans. They commit their capital to make the loans, which is an important piece. These lenders have to like the loan enough to commit their capital to it. So, they’re kind of the first level of underwriting. Then…

Brett: And if you stop right there, by the way, that’s the way their business always works. That’s basically how it’s always been. They make the loan, they…you know, they do all their underwriting, they decide if they’re going to do it and then they make the loan. And then, we act as a secondary market for them. And then, this is what’s kind of new about Peer Street and interesting about this asset group.

Brew: Yeah, that’s right. So you know, they make the loan, they may bring the loan to Peer Street. And what I… I guess I should qualify it first by, before we even allow lenders to participate in the platform, they have to apply to the marketplace and we run them through a vetting process where we go through their background, their track records and their credit quality, to get comfortable with them as an underwriter or an originator of loans.

So first step is, we vet these guys thoroughly. But then, when they make their loans, they bring them to us and then Peer Street does a second layer of underwriting. So the underwriting includes, you know, data analytics, while we’re analyzing what’s going on in the sub-market where the properties are located on. You know, very…I mean, Brett was the founder of Google Analytics, background in analytics.

So, the idea of us kind of using data science is like a high-level overlay to kind of verify what’s happening in the sub-markets is important. So, our opinion is…you know, historically, people got in trouble in this asset class when, A) they make too risky of loans. So, you want to be conservative. But also, when there’s an inflection point in the market, then people don’t identify those.

So, you know, first step is, we look at the sub-market where the loans are located to say, what’s it look like here? And we run a bunch of algorithms against…with a bunch of data and points to look at things and try to figure out, you know, what we think the forecast is there. We also stress-test the loans using historical data for the ZIP code or census track where the property’s located in. So, if they say, “Hey, what was the worst case scenario for this loan and…?”

Meb: Let me interrupt you there for a second, because being a historical qaunt [SP]…you know, that argument obviously is very interesting to me, because I’m sure the first question you guys always get will be, “This is great,” the last two years. “What would have happened in the 2007, 2008, 2009, you know, real estate Armageddon?” So, is this something that you guys have been able to simulate at all or have been able to look back historically and kind of..?

What’s your answer to that question? Because I’m sure that’s almost every investor’s first fear.

Brew: Yeah. Yeah. And that’s a great question. Well, there’s a couple of things. first, I mean, there’s so many things about real estate that make it idiosyncratic that you’ll never have a pure apples-to-apples comparison, right, because the properties are different, what…how it’s…so, the idea is like, let’s use as much data as possible to make the most…the best informed decision, or at least to add that other layer of comfort, right?

So, I mean, the one things we can eventually look at is like okay, what’s the…? And these are 10-month very short-term loans. So, when you’re in this very short-term asset, it’s…I think for you to lose money on one of these deals, there are a couple of things that have to happen. One, the borrower has to stop making payments, right? And then, the value of the property has to decrease by, on average, 35% because our average loan-to-value is 65%.

So, that’s kind of your bogey in terms of, like, all right, on a loan-by-loan basis, that’s what has to happen, okay? And that can happen on a loan-by-loan basis, right? So, the whole thing is like all right, if it’s a rising real estate market or the market where that property is located in is healthy and trending up, well, that’s a big risk made again, because if we’ve done our work right in terms of valuing the property correctly or establishing a reasonable valuation on that property and the market is trending up, well, that’s a huge risk made again, right?

So, the data we look at there is a huge amount of inputs on, you know, sales prices, velocity of sales, REO saturation, the data market of REO sales versus… You know, REOs are foreclosures, basically…versus regular sales. We look at macro data and crime statistics and job growth and affordability. So, we look at all these things and basically say, “Okay, what’s the current…? Like, what’s the snapshot of that will help a certain market?” Because if it’s trending up and looks very healthy, well, that’s a very big risk made again, in itself.

Second step we look at is…and then, we also run these algorithms that basically simulate…run all these calculations that simulate all these inputs and then comparing them to the previous cycles and say, “All right, in other markets in other areas, what happened when affordability ticked it up and school building permits went down?” You know, all the data that [inaudible 00:30:09] looks at, we try to create this forecast.

Now, the forecast is that. It’s a forecast. We think it’s useful, but you know…we think our simulations are good, but you never know until it goes through. But it does give you this idea of like, if there’s red flags coming up, our forecast will indicate that things are slowing down, but that there could be one of these inflection points. So, that’s just the first level.

So, there’s a lot that goes into that, obviously. And the next one is like, hey, look, what was the worst price decline in this sub-market? And so, you know, a lot of times in a lot of markets, we’re over the previous peak of the previous cycle, right? But if I’m looking at a 70% LTV loan and the worst price decline in that sub-market was 15% and the data of the sub-market is showing that it looks pretty healthy right now, well, from a starting point that feels pretty good, right?

Now, on a flip side, if you were in a market like Stockton, California where, if you get really granular on areas, you know, prices might have been down 60% in a certain ZIP code or census area. And your data is showing that not only is the market slowing, we’re forecasting it to go down by 5%. All right, well, red flags are going up all over the place, right? So, that’s just kind of the first layer and that’s kind of like the…that’s the data analytics that we use right now. And that will just continue to get better and better the more we grow, so they just have more data inputs, right?

But then, the second step, which is also important, is like well, every loan on real estate and property is a little different. So, we actually…then, we actually go through a manual underwrite of the loan, like you would if you were doing a loan. So, we go through the loan file [SP],you make sure that all the legal’s in place, insurance is in place, there’s a deed recorded, so you foreclose if the buyer stops paying.

And then, the last step of it that is important in terms of the underwriting, we send somebody out to the property, a third-party independent appraiser, to value…somebody to value the property, set eyes on the property and say, “Hey, we think this property is worth X.” And that’s an important thing, because…so, all of these things kind of go in and they’re established as the idea of like, okay, with all of these things kind of cleaning up and looking good, we feel pretty good about that.

And then, it’s got to meet our underwriting guidelines, which we think are pretty conservative. And we think we can be conservative, because we cast this wide net of getting loans from all these lenders around the country. So, those are kind of the overall big picture steps. Lender, the originator who makes the loan, they commit their capital to make that loan, they bring it to Peer Street, we run the data analytics.

We stress-test the loan, but we do a manual underwrite. We send somebody at the property to do a valuation. And then, it’s got to…if it meets our underwriting guidelines, then we make it available to investors.

Meb: I’m just trying to think from a portfolio manager perspective, where an investor is looking at this and saying, “All right, 7%, 8%, 9% returns, that’s pretty awesome in a world of 2%.” Treasuries, you know, stock return’s probably pretty low. But I’m trying to think of like worst-case scenario, ’08, ’09. Do you guys mentally stimulate sort of…in any sort of way what, you know, the worst-case scenario would be on this basket of loans?

I know you guys have a very high track record so far, of not having any foreclosures…very little, yet. But like in an ’08 environment, is that something people could expect if they had a diversified portfolio, maybe losing 10% of their principal on a year, or is it something that you could even foresee higher, lower? Is it hard to say? Like, just kind of ballpark, 10,000-foot view, do you have any thoughts on that? Or is that just a little too…?

Brett: First on a loan-by-loan basis, every time we look at any loan, we’re basically running that historical data on that loan in that sub-market, right? So, that’s step one, to your questions. And so, we…and we post that. We tell you, you know, when we…what the metrics look like on each loan. So, each loan has a detailed page, every investment has a detailed page, so you can see what the forecast looks like, what the worst-case scenario looks like.

In the different areas, you know, ’08 was the worst-case scenario across a lot of the country. But other places had worst-case scenarios in ’08, like you know, dot com bust in San Francisco. And some areas might have been worse than ’08, etcetera, like you know, areas of Texas run, oil busts and things like that, etcetera. So, looking at it granularly, it’s very important on a loan-by-loan basis.

But if you look at portfolio-wide…and I know [inaudible 00:34:27] I don’t know if you want to talk about this one. But yeah, that’s…then, we look across our entire portfolio about what would happen.

Brew: Yeah. But on a loan-by-loan basis, like, you know, we recommend to everybody that diversification is important. That’s a huge thing. We try to push diversification as much as possible. Some people, though, will…might find a loan that they really like and kind of put more money into a particular loan. But even in a good market, there could be something that happens with the property that actually, you know, you can lose money on, right?

So, kind of taking too concentrated of a bet on any loan, we don’t look as good. But if you’re thinking about like, “All right, let’s simulate another 2009, 2008 Armageddon scenario,” We do that. And I want to caveat this, that we are not financial advisors. We’re not supposed to give advice on what people should invest in, but we do definitely say like, “Hey, big picture diversification is better.” So yeah, we run simulations across our portfolio.

And when we talk about why we believe that this is like incredibly misprice risk, you know, we should actually…I’d be happy to actually share some…like our portfolio now that we run. But like, if you were diversified across our portfolio and you assume like a massive foreclosure rate, like 20%…so, if you look at…like, the Census Bureau says that foreclosures topped that like 4.6% during the crisis, but that’s totally wrong.

I mean, there was so much shadow inventory that would have been foreclosed if the banks had to kind of move things through the system. But really, we think the real foreclosure rate was about…if you looked at it on a normalized basis, was about 17% during the financial crisis. That was like the worst kind of case scenario.

So, if you take that kind of…you know, if we look at like a 20% foreclosure rate across our portfolio and assume every single property that forecloses re-traces its worse price decline, you’re still looking at a situation where principal loss is unlikely across the portfolio, on the current basis. So, when I talk about like relative…

When you think about relative risk as a portfolio manager, well, if we retrace 2008, even if we’re looking at a 5%, 10% loss on a portfolio, you know, assuming somebody really top ticked things and sold out at the bottom, if you assume that type of loss, well, you’re still relatively a lot better than the SMP, almost any other asset class, right? But…

Meb: Reed’s Well, the list at Reed’s went down something like 70%, I think, in ’08.

Brew: Oh, yeah. That’s right.

Meb: …in the ’08. So, that’s…

Brew: Exactly. That’s a great point. So, people always ask like, “Well, what’s the…? Why is this better than Reed’s?” And I say, “Well, Reed’s is completely correlated to the stock market. And not only that, they underperformed in the crisis.” So you know, in a crisis scenario, that could be duration risk. If we need to foreclose on a big portfolio and we have to do that on behalf of investors, well, duration could get pushed out.

But the reality is, you know, if you’re…these simulations that we run assume like top-ticking the market and bottom-ticking the market, right, over like a certain time period. And if you look at like the current of how things went, well, you know, if you were either investing through the cycle, you would have made out fine, because things come back over time.

So, I think if people diversify broadly and then kind of are reinvesting into this asset class, my personal belief…and this is an investment advice for people, but my personal belief is like, you have a security portfolio of assets at a 65%, 70% loan-to-value. If you’re diversified broadly and we and our originators did the right job of how we valued the property and underwrote it, I think, you know, the risk of large principal loss is very, very muted.

Brett: I was just going to say, you had asked before about what the experience is for investors. I just thought I’d point out…and if you want to get back to this later, we can. But you know, when you come to the platform, you sign up, you create an account, you fund your account and then you can pick and choose the individual deals you want to get into. Typically, there will be between 3 to 15 investments available at any given time and we keep adding new ones throughout the week.

And the idea is that…we don’t like to have a whole bunch up at once that are open and open for a long time. What we like to do is kind of keep trickling them out, getting them invested in and closed, so that people’s money…you know, investor money isn’t sitting in any particular deal for too long.

But that’s the idea, is that you can pick and choose the deals, you can go deep on any particular investment, or you can use what we call Automated Investing. And we’ll help…well, basically, you set up your parameters for the types of investments you’re looking for and how much you want to invest for yield that matches those parameters.

And we’ll match you with those as they come up on the platform for those investments to work for you, but with the caveat that you have 24 hours to back out of any investment that we put you in. So, it just makes it a lot easier for people to do. And then, the idea is, they can kind of keep rolling investments as they go.

Meb: And the average…so, let’s say somebody’s got 100 grand, they come to your site. Do you have a recommended number of deals that they should participate in, is…? Do you say, “All right, you should put at a minimum, 10% of your portfolio, max in each deal?” Or is it 5%, or…? Obviously, it depends on the criteria, but for diversification, is there a recommended sort of percentage diversification you guys think is prudent?

Brew: I mean, this is kind of where it kind of gets into like we’re not supposed to give investment advice. My personal opinion is 10 loans as like a minimum, kind of where you start to feel like…I think, kind of like, that’s where…if you start kind of looking like running simulations is where that starts by creating some level of diversification, 20’s better, 100 is better…you know? I mean, more is better, obviously.

Meb: And the minimum, is it…

Brew: But there was a…

Meb: …1000?

Brew: Yeah. Minimum is $1000. So, what we, like…for instance, my brother, my mom, my grandpa, they all have money on our platform. And I tell Mom like, “You should probably just invest in every…a little piece of every single loan that comes up on the platform.” To me, that’s really better off.

Now, people are natural, where it’s fun for them to look at deals and kind of choose and pick. So, what tends to happen is, you know, people will have this automated investing on, but then when they see deals that they really like, then they’ll put more in. And so, we have people that will…like, if a deal comes up, they’ll be like, “Oh, this is my…this is down the street from me. I know this well. This is a great deal,” And then, they might kind of make a larger investment there.

But yeah. I mean, I think like when you get 10-plus, that starts getting diversification, in my opinion. But yeah, more is better. And then…but there…and then, there’s another kind of interesting aspect of, the way the platform is structured is that…you know, historically, you’re going to invest in these loans, you have to make a bet. And you get your interest payments at the end of the loan, you get this [inaudible 00:41:07] payment, then, you have to go find another deal if you want to go do a deal, which is time-consuming and it might not be available. But because we have deals coming up all the time, there’s this interesting ability for investors to reinvest interest payments in a new loan to create a compounding effect and also kind of risk mitigation on that front.

But just the idea of like being able to…you know, let’s say you’re like, “Hey, I’ve got my $100,000 and I want to put this across 50 loans. I want to put two grand in each loan,” Well, it’s going to take a little bit of time to build up that portfolio to do that. But while you’re doing that, you’re also laddering, right?

So, in these interest…this potentially rising rate environment, potentially smoothing out valuation cycles, or if there is a downturn in the real estate market, well, if you’re kind of consistently investing over it, you’re almost creating this incredibly short-term bond ladder that’s just very, very unique, that’s never really…you know, it’s just a before [SP]

So, there’s just a lot of things that we really…we get excited about and I could talk for hours. So, I’ll stop.

Brett: Yeah. And I would add that…and not only are you diversifying across loans…and I think this is a particularly interesting and important thing that we’re bringing to market here. I mean, in my view, we’ve taken this great asset class and almost reinvented a new asset class on top of it. But you’re getting diversification across loans, but you’re also getting it across lenders, which is important, as well as geographic diversification.

And so you know, maybe there’s some sort of situation that only affects kind of the West Coast or certain areas of the country more than others. Being diversified, not constrained in a single area, it’s important. And another example is, we have a lot of investors out in the Bay area who, you know, they’re like, “Hey, I want to invest anywhere but the Bay area,” Because they already have their home there. And they’re like, “I want to really diversify in international real estate. I love it, but I need to be diversified outside of this area,” Right? So, it just gives you this incredible ability to kind of like spread out risk across the table in a way you’ve really never been able to before.

Meb: And so, I assume…what’s the breakdown for your investors? Is it mostly individuals, is there a mix of institutions? Can investment advisors allocate for their clients? What’s the breakdown?

Brew: Yes. Well, all of those are investors on the platform…invest on the platform. The vast…to date, the vast majority had been direct…what we call retail investors. So, people that…like you that come onto the platform, sign up and create an account. So…you know, buy these fractional interests. So, I mean, we have the individuals, family offices, we have wealth managers that allocate their clients’ capital onto the platform.

And then, we have a whole institutional program that is slightly different than the fractional platform. A lot of institutions want to buy a whole loans. So, they have a whole-loan program for institutions. So, it’s both. And you know, the idea here is, the name Peer Street…you were talking about the double meaning, with us being on the actual pier street in Manhattan Beach.

You know, our idea for this business…the name “Peer Street” was always about, you know, leveling the playing field. But it’s like allowing any investor to access the same type of assets that you know, Goldman Sachs or a large financial institution would be able to access, kind of leveling that playing field between Main Street and Wall Street, right? But throughout…

Brett: And by the way, the further we’ve gone is the more we’ve realized that a lot of institutions, while they could access this asset class in a certain way, haven’t been able to access it in a very good way before. And so, a lot of them are very, very interested in what we’re doing. So…

Brew: Yeah. So I mean, a lot of for our growth going forward is with institutions that are coming on to buy. And you know, the institutions buy differently. They’ll say, “Hey, I’d like to buy $100 million over the next 12 months,” Or, “$200 million over the next 12 months.” And so, that’s typically what our…and they basically say, “Hey, I’ll buy a box,” like, “Whenever the loans come through, I’ll buy.” And we allocate loans to a retail platform and we allocate loans to institutions. And so, everybody’s getting access to the same loans. But it’s one of these things, like we want to kind of…I have a little bit of a populous stance on this stuff. But the idea is like, we want to give everybody as much direct access as possible, they’d want it. But having more institution and more capital coming onto the platform is important, because it means that we can scale more.

And scale’s very important in this business, because scale means more diversification for all investors. It also allows us to collect more data, so we can refine the credit model and the analytics. So, it’s just…you know, it’s…you know, it doesn’t sound so Pollyanna-ish, I guess. But I mean, when you think about creating a centralized hub that just, it’s this classic kind of business where more participation by investors means more loans, which means more diversification and better credit analysis for those investors.

It means more data that we can share with investors. It’s really this thing that like more is better. More is better [inaudible 00:45:49].

Meb: And what’s the capacity kind of logjam for…the biggest challenge for you guys? Is it new investors coming to the platform and finding out about it, or is it actually sourcing the deals and expanding, you know, across more states or different geographies? What’s kind of the main growth initiatives or challenges, going forward?

Brew: I mean, you know, it’s early stage. So, it’s like, any…Brett loves to do this little scale thing with his hands when he talks about a marketplace. And this is a true marketplace, you know it’s like we’re always balancing supply and demand. And so…I mean…and so, there are periods where, we might have more supply up and there’s like a temporary…like a one or two-week period where we actually need…we’re short on investment demand, because the supply has gotten bigger.

But for the most part, it seems like the biggest demand for…investment demand is going to continually outpace supply because it’s such a good asset. So, you know, going forward, I don’t think it’s…it’s the idea of like onboarding…you know, I think it’s more for us…it’s almost like we can scale almost as fast as we need to, over the next 12, 24 months. It’s more an operational thing.

It’s like…and for us, it’s like, you want to be able to scale while maintaining quality, right? You don’t want to adjust your underwriting, you don’t want to be pressured to reduce your underwriting standards or cut corners. We want to make sure that the process is pristine and that the underwriting is correct. So, for us, it’s more about…I think that…I think the…it’s really more about like, “Hey, how do we scale as much as possible while maintaining that high degree of quality?” And that’s going to be the trick.

But you know, I think over the short term right now, we’re probably…I think like last week was one of our…we had 15 loans up. And the previous two months, loans would go up and fill within hours, but when we had 15 loans up, it took like over a week to fill. So, there was like this weird little low for a minute. Now, that’s flipped back the other way. So, capital’s flowing…

Brett: Yeah. Then, all of a sudden, we have [inaudible 00:47:48].

Brew: Capital’s flowing back on the platform. So, there’s a little bit of a balancing act, but I think if we’re reading the tea leaves correctly, investment demand is going to outpace supply for the kind of foreseeable future.
Meb: Yeah, we’ve seen that a lot with our side as well. We’ve had a ton of investors that said…over the last few months, they said, “Meb, you know, I’m just going to wait to…after the election to invest, when things are more certain,” To which our response was, after the election, of course, “Do things feel more certain now?” And there’s always geo-political events and everything else going on.

So, you guys just had some big news. You raised your series A, $15 million from Top VC and Andreessen Horowitz. One, maybe any comments on that? And two, what’s the expansion plans? What are you going to spend all that doing? Is it global sort of aspirations, as far as asset…you know, loans in different countries? Is it different offerings? What’s the 5, 10-year plan?

Brett: Thank you, by the way. That was a…it was a huge thing and we’re super excited about having Andreessen Horowitz involved. So yeah, we are super excited about that. And to your point previously that Brew was answering, really, you know, it’s about scaling the business and this investment is going to help us to continue to scale the business. Like, our biggest bottleneck is ourselves, being in the…acting as a gatekeeper for investors in making sure that the investments are high quality.

And we do a lot of steps to make sure that operational efficiency continues to be built upon and get better and better. But we have to keep hiring analysts, etcetera to go through loans and do all that. So really, we’re the bottleneck. But that’s a necessary bottleneck, because you know, that’s our job for investors.

But we couldn’t be more excited about the investment from Andreessen. And the people that we’re working with there are fantastic, Alex Rampell, Angela Strange. Alex has this incredible background in, you know, real estate businesses and technology points firm. He’s just…he really understands the space incredibly well. Angela does…by the way, I worked with Angela at Google on a couple of different projects, so I know her very well. She’s incredibly bright.

And then, Brew and I both have a just incredible respect for the firm. And Mark Andreessen and Ben Horowitz in particular, I mean, they’re…you know, Mark Andreessen invented the browser, which is just, you know, an incredible thing to say. And Ben Horowitz obviously has incredible operating experience. And in fact, I worked with them at my previous company, Urchin, when they were doing Lab [SP] Cloud and Opps Ware.

So, this is like, for us, you know, basically kind of a dream investment. So, we’re super excited about it.

Brew: Yeah. Yeah, we’re very excited. So, after…once all the gold chains and jet skis we ordered come in, then we’ll start working on building the business…no, I’m kidding.

Meb: Do you stay in the same office space? You do kind of have some…what’s the right word to describe this…? Value-conscious office space, currently.

Brew: Yeah. I mean, the…so, for people that are listening, our office location…well, I tell people, “We’re right in downtown Manhattan Beach.” It’s a great area to be. So, our office location’s about a…it’s a 12 on a scale of 1 to 10. The office quality’s about two. But we’d love…I mean, Brett and I are biased. We don’t just stay here, because we walk to work and ride our bikes. But you know, sometimes…

Meb: Well, do you guys appreciate…? The huge irony… so listeners, I have a pretty…we have a pretty normal office space here in El Segundo. But this beautiful office space opened up right across the street from these guys with a huge deck, overlooks the peer, most beautiful possible…I probably wouldn’t get anything done, so it’s probably a great thing we never got it. But triple the cost of what of what we pay now.

So, y’all know me. I’m a cheap bastard, I would never spring for that, but just kept putting in lowball offers in the same way as I do for almost anything on Craigslist that’s in my garage currently. And one of my buddies who’s a bond trader texted me the other day. I was in New York. And he said, “Meb, congrats. When’s the move-in party?” And I said, “What do you mean?” And he sent me a photo of the office space. And so, it had been empty for a year. So, not only did someone take my dream office, the name of the company’s also Cambria, which is the most preposterous…

Brew: Oh, yeah.

Brett: They’re such a…

Meb: And it’s like…

Brew: We were doing this interview at [inaudible 00:52:15], actually there. And they were our…the other tenant in our space. And then, they moved to this space, the new one there, by the way.

Meb: I’m well aware. I’m still just as furious. So, the…it’s like a glass top or a quartz top counter company. And so, I just said, “The only silver lining is that when they move out, we won’t have to change the signage.” So, when the prices come down, potentially…I don’t know when…hopefully, you guys aren’t doing a loan on that building, because I’d imagine it’s expensive.

But when they come down when they move in, we can keep the same signage. I don’t know. In the meantime, we’re still in our…we have quite a sterile, low-cost office as well. So, I can sympathize in many ways.

Brew: Well, when you do the hostile takeover, maybe we can sublet some space from you, because that is some fantastic space.

Brett: Yeah, that’s probably the nicest office in LA, its soo good. so it’s…but yeah, it’s not cheap.

Meb: Thanks for depressing me for the rest of the day. I’m going to go over to Simmzy’s and have a beer and probably, you know, go throw eggs on the door.

Brew: But by the way, by the way, there’s a blind pig on staff at Simmzy’s, I was just told by somebody. So, you know, if you head over there, there’s some good beer for you. It’s a good idea.

Meb: So, I’m going to ask a couple more quick questions and then, we’ll move on to kind of the…closer to the end. But 1) business model, how do you guys make money? Is it a…is it fee origination? What’s the business model here?

Brew: Yeah. So, I mean, we take some fees on both sides of the marketplace. We participate in fees that are charged to the borrower. That’s a minor piece of it. But like stuff like extension fees and things like that that are charged to the borrower, we share with the originator of the loan. And then, we charge investors a 1% servicing fee, servicing spread to service the loan.

So, what that means is, if a loan is coming in… you know, if a borrower is paying 10% on a loan, the end investor gets it at 9% and Peer Street takes 1% of it off of those interest payments. And for that, you know, we did the aggregation, the underwriting, we serviced the loan for the asset manager that the loan goes bad, we’ll foreclose on behalf of the investors.

So, the whole goal for the end investor’s basically, get them…give them all the benefits of being a lender without doing any of the work.

Meb: And what’s that like? So hypothetically, let’s say you’re an investor, you’ve got 20 loans out. And let’s say one does go south, is that a huge pain in the butt, or what…? What’s the processes? Do y’all take care of it, or…? How does that work?

Brew: Yeah. I mean, we manage that whole process. We actually…we’ve done about 400 loans, we’ve had…we just did our first foreclosure on a loan. You know, that’s the normal course of things. And even in great markets, loans go bad. But yeah, we handle that all. And so, perhaps one thing that’s a part of the team we’ve been able to build internally is great. I mean, our head of asset management, you know, Mark King, is just a spectacular guy.

He worked out $1 billion of, you know…of the Indy Mac portfolio at One West Bank previously and… you know? So, we’ve got a lot of this workout experience internally. But yeah, I mean…so, the pain for us is, it’s not an easy process. There’s a lot of legal involved, there’s a lot of process involved. But that’s something that is like, you know, in terms of a pain point for investors. You know, historically in getting these loans, you got to handle that stuff yourself and it’s just…most people are just unequipped to do it.

So, the idea is like, we can do that more efficiently, we can do that better. So, when that comes up, we foreclose, we distribute the proceeds to investors. And ideally, everybody gets all their money back plus interest, if they are owed. So, that’s what’s happened today.

Meb: I know you guys can’t talk specifically to it, but from a research perspective, if you’re an investor listening to this, where do you see this chunk really fitting into their asset allocation? Is it a substitute for Reed exposure?

Do you think it’s a treasury alternative, do you think it’s a broad mortgage pack alternative, or do you think it’s a total satellite that doesn’t really plug into any of those allocations, but was rather a totally different asset class? How do you think about it, just kind of broadly speaking?

Brew: That’s a great question. I mean, obviously, for every investor, it’s a little different. I mean, for me, personally…I mean, I look at it as like a cash and treasury type alternative, like that kind of…to me, that’s what it looks like. And if not like that, then like a fixed-income alternative, is the way I personally look at it. I mean, you know…

Brett: But what you think, Meb? I’m curious on your opinion.

Brew: Yeah. [Inaudible 00:56:45].

Meb: So obviously, I think a lot about these things to the extent that it…yeah, I think it’s a fixed-income substitute and frankly, for a lot of the volatile listed fixed-income substitutes. So, a lot of the ones that people historically get exposure to that don’t really diversify our portfolio. I think this has, probably in my mind, a decent home for that.

But yeah, most people, what they miss about a lot of these publicly listed asset classes: they are very, very, very volatile…reed’s in particular…that saw major losses in ’08. So yeah, I would see it as sort of a fixed-income substitute. And in a world of…look, our last white paper was on this topic. In a world of not just low-yielding treasuries, but the rest of the world [inaudible 00:57:35] yielding, I think GDP weighted as about 50 basis points and two or three of them were negative.

You know, something that potentially yields 7% to 9% is more attractive. Like I mentioned before we started the podcast, listeners, I actually signed up for an account today, so I’d soon…I may be applying as well, eventually.

Brew: Yeah, pile in. Back the truck up. You can’t do a white paper on Peer Street unless you have a lot of exposure, you know? So, it’s really [inaudible 00:58:00]…

Meb: I will fund my entire account with one $1000 loan, just so that you guys can buy happy hour. All right. Well, look, we…I’m sure this could go on for two hours. This has actually been a really interesting deep dive. I’m sure readers will fire in a bunch of questions, so we may actually have to do a follow-up show at some point. I like to ask everyone at the end, recurring feature, something that they may know that’s useful, beautiful or magical. Do you guys have any ideas for us?

Brew: No. I want you to televise this podcast. We’ve got plenty of ideas and could talk for hours. But yeah, I got a couple off the top of my head that are, like, useful. I mean, my favorite app of all time by far is Hotel Tonight. I don’t know if anybody uses Hotel Tonight, if you’ve used it, but like I’m a huge promoter.

Sam Shank, the founder, is a friend of ours. But I mean, last-minute hotel bookings, they curate hotels for you. I mean, when I travel, I don’t even book hotels in advance. I just…when I land in the airport in New York or San Fran, I pull up the app and I see what’s available and I book hotels. And it’s like just…I don’t know if you use it, but to me, it’s really like it’s [inaudible 00:59:11]…

Brett: [Inaudible 00:59:12]…

Meb: It is arguably…it’s definitely my top five. I love it.

Brew: Yeah.

Brett: We’ve never been skunked.

Brew: Yeah. What’s your useful, beautiful thing?

Brett: My beautiful, useful thing…this is Brett. And I don’t know if this counts, but for me, one of my… And Brew will probably say the same thing. Both of us had this really interesting life experience, this thing…this beautiful, beautiful, wonderful thing called “Semester At Sea” in our lives. And it’s not an app, it’s not a shiny thing that you can just go grab. It’s an experience you can have and you can only have it one time in your life and that’s when you’re a college student.

And you could only go on it once, although Brew sometimes snuck in and did it twice, but the reality is that for me, it has been, like, probably one of the most impactful things that changed the trajectory of my life and the way I perceive the world and my place in it. And Brew and I both went on Semester At Sea. We went on different semesters, but basically what it is, you are on a large ship.

It’s a floating campus, you’re on it with 400 or 500 other students and you literally travel around the world. You take your course while you’re at sea and you visit all these countries. On, you know, my trip, we went to 14 different countries.

Meb: it sounds like a wonderful, long, giant Spring Break.

Brett: Yeah, it is sort of like that, but it’s like this…they call it “Voyage of Discovery,” which it is, because you…not only do you learn so much about the world and everything, you know, to all these places, you also get to reflect on your place in the world. And then, it’s a great entrepreneurial journey, because you’re basically placed in situations…every time you pull into a country, you don’t hold the currency, you don’t know the language and you’ve never been there before and you’re trying to go figure something out.

And it’s like rinse and repeat, do it over and over and over again. And you get pretty darn good at it and you’re going to build your confidence to be able to handle just about any situation that life throws at you. You know, this includes like people get robbed and you know, there’s…the normal course of life happens when you’re in these places. But it’s really amazing.

Meb: That’s probably my biggest regret is as an undergrad, was snot studying abroad. And in my thinking…idiotic thinking at the time…I was an engineer, I was like, “Well, it’s going to be too hard to go study, you know, differential equations in Spain,” or something. And I don’t speak the language, so I said, “Well, the next best thing for me would just be to go take summer school in Boulder,” which some people, depending, would say that might be like a different country. But love that as well.

My quick one is…a lot of people don’t know this, but if you’re a skier, some of the best skiing in the world is in Japan. And so, in addition to the wonderful…they get some of the best and most and driest snow in the world and some of the best cultural experience, as well. So, we got three travel-focused ideas. And one of the best domains and curated writing about skiing in Japan is called…a website called Powder Hounds. And it’s written by…

Brew: That’s enough.

Meb: …a guy that basically skis 300 days a year and lives the good life. So, check it out. It’s a wonderful experience. Crew, this was a lot of fun. We’re over the hour mark, so we’re going to wind it down. So, where do people find more information? If they want to find more information on your company, as well as research and writing and Twitter, where do they go?

Brew: Yeah. I mean, peerstreet.com obviously is the easiest place to go. We’re always tweeting on interesting stuff on our Twitter account. There has been some bloggers that have kind of picked up some interesting articles about us. “Mr. Money Mustache” is…actually, it’s another very useful guide that…you know, it’s a blog about kind of this hard-core savings and investing. I don’t know if you know it. It is a fantastic…

Meb: Yeah.

Brew: For him covering us, I’ve become like a total fan of his. That’s another useful thing for a lot of people. And that’s…it’s really kind of like I’m [inaudible 01:03:04] to kind of look at like your consumption and what you spend money on. And then, it’s really…Keith, the guy who runs it, I think he’s like a really, really inspiring guy. So, it’s another useful thing to add in on there. But there’s been a lot of…they got a lot of conversation on there in the Q&A, the forums and stuff. He’s written a couple of articles.

There’s a place…he rarely comes on the website. And if they have questions people can email in through our kind of app. We can [inaudible 01:03:27] to get the FAQ section that has a lot of information, but…

Meb: If you find yourself on Manhattan Beach, go knock on their door on the pier across from The Kettle.

Brew: Yeah, we love visiting.

Meb: Great French onion soup. Look, it’s been a lot of fun. Thanks for taking the time out, listeners, today. We always welcome feedback and questions in the mailbag at Feedback@themebfabershow.com. As a reminder, you can always find the show notes and other episodes at mebfaber.com/podcast.

You could subscribe to the show on iTunes and if you’re enjoying the podcast, please leave a review. Brett and Brew, thanks for joining us today, thanks for listening, friends and good investing.

Sponsor: Today’s podcast is sponsored by the ride-sharing app Lift. While I only live about 3 miles from work, my favorite means of getting around traffic-clogged Los Angeles is to use the various ride-sharing apps and Lift is my favorite. Today, if you go to lift.com/invite/meb, you get a free $50 credit to your first rides. Again, that’s lift.com.