Our CEO’s recent analysis of the market and the potential impact it will have on real estate going forward can be viewed here. This will provide more insight into why we recently launched discounted loans on the platform.
Why is PeerStreet introducing this to the marketplace?
Pricing for loans in the financial markets can change very quickly. The new feature that we have built enables PeerStreet to quickly adjust pricing to reflect market demand.
How does a discount work?
A discounted loan investment means that the owner of the loan is selling that loan for less than the actual loan amount owed by the borrower. The loan to the borrower remains unchanged and the borrower will be responsible for paying monthly payments based upon the original loan amount. When a borrower makes a payment on a loan investment that was sold at a discount, the investor will earn a yield that was greater than the stated interest rate on the loan.
What is Yield to Maturity?
Yield to Maturity (YTM) is the expected annualized return that investors will receive from the time that they invest in a loan through the current stated maturity of the loan, provided the loan performs and pays off as expected. The YTM is made up of both monthly interest payments expected to be collected during the term of the loan and the repayment of the full loan amount at maturity. If the loan performs and pays off, the investor who bought the loan would collect interest during the term of the loan, plus the amount of the discount upon payoff of the loan. The actual annualized YTM received by investors may differ from the initially anticipated YTM and can be impacted by a variety of things, including:
- Loan performance: like any loan investment, if a loan goes into default, does not perform, the annualized yields to investors may be lower or negative
- Extended payoff: if a loan is extended beyond the actual maturity date, the annualized return to investors would be lower than the YTM
- Early payoff: if a loan pays off early, the annualized return to investors would be higher than the YTM originally calculated
Using the example loan from above, here are different payoff scenarios:
What are the changes to these loans?
The underlying loans have not changed, but rather the pricing has changed. Volatility in the market has created a need for loan holders to adjust the prices of previously originated loans in order to meet current demand. Discounted loans allow investors the opportunity to continue to invest in an asset class they are familiar with while offering the potential for higher yields on their investment. This is also the first step in PeerStreet becoming a more active, dynamic marketplace, that allows investors to invest in more loan types like distressed or non-performing loans and, in the future, to dynamically price and trade loans.
Why invest now and not just wait until the market stabilizes?
We recommend that you only invest in loans if the investment meets your personal risk tolerance. This applies in any market environment. These changes to how loans are priced will give investors more options to invest at rates that reflect current market conditions. However, the decision to invest is yours and many investors will feel more comfortable waiting until the market stabilizes.
Why is PeerStreet now launching this investment type?
PeerStreet has been working on this concept for several months. The ability to price investments in real time according to market conditions is a feature that we will continue to build out and offer to our investors on a go-forward basis.
Do these loans carry more risk at a time like this?
With current volatility in the economy and COVID-19 related measures resulting in uncertainty around things like evictions, foreclosures, etc., the likely result is higher delinquencies and/or extended foreclosure timelines. Discounted investments reflect the higher yield demanded by investors given current market-wide conditions.
Can I invest in these through Automated Investing (AI)?
Yes, investors can invest in these via Automated Investing. These loans are treated as standard bridge investments.
Can I cancel out of an Automated Investment?
Yes, investors can cancel out of all automated investments within 24 hours of their initial investment.
Do my yield bumps work against these investments?
No, yield bumps do not apply to discounted loans.
What’s dynamic pricing?
Loans will continue to be published at 12:00 pm PST most days. PeerStreet reviews the loans daily and may adjust prices depending on current market demand.
What happens if I invest before the rates change?
All investors who were previously invested at the former yields will be updated to the new and final discount at the time of adjustment.