Note: I am not a financial expert, and while I have invested using the Mosaic platform, I do not get commissions of any kind for blogging about it

I was recently telling a friend that he should consider investing via the Mosaic platform, a sort of crowdfunding platform for solar installations. Similar to Lendingtree or Prosper, investors see vetted projects with varying rates of return based on the riskiness of the loan, as determined by Mosaic. Mosaic takes a 1% cut, as well as origination fees for the loans, while providing risk analysis, paperwork / regulatory help to the borrowers, and a snazzy web platform for investors to analyze possible investments.

When I was explaining this to my friend, he started asking more detailed questions about how it works – who actually is getting the checks, who is liable, what happens when a loan goes bad, etc. I then realized when I couldn’t answer all of his questions that I had forgotten to do proper due diligence! The social benefit of the investments and the positive mentions of the platform was enough for me to start investing, but if I was going to recommend it, I had better know what I was talking about. So here’s my analysis, after reading a few prospectuses and the fine print. Any corrections or clarifications are very welcome.

Pros:

• Higher rate of return than your bank account, between 4ish and 7ish percent compared to 1% in your savings account
• Positive social impact, which will come back to you as ‘dividends’ in a world in which we invade fewer oil-rich countries and fewer mountain tops are blasted off for coal. If you are looking very-long-term, climate change must be dealt with for human society to be prosperous in the future
• Stocks are likely overpriced currently, or at the very least expecting 8% returns YOY is optimistic
• Small investments down to $25 are possible, which is convenient especially when you want to reinvest your interest payments
• You probably have lots of stocks and lots of cash, but few bonds (if your portfolio looked like mine before investing in Mosaic-selected loans) – diversify a bit!
• Impress possible significant others with your commitment to the environment. Although maybe not the best thing to bring up at a party…
• Mint.com integration is on its way

Interesting and Important Risks:

• Mosaic is the middleman- it has no obligation to repay in a default situation
• That inflation will rise drastically from the ~2% now to over the return of the bond in the time before bond maturity. However, this is very unlikely especially given that such inflation is not desired by Wall Street
• There is little governmental oversight. From the prospectus:
  

  “We are not subject to the periodic examinations to which commercial banks and other thrift institutions are subject. Consequently, our financing decisions and our decisions regarding establishing loan loss reserves are not subject to period review by any governmental agency. Moreover, we are not subject to regulatory oversight relating to our capital, asset quality, management or compliance with laws”

  (how the hell do they get away with that? good job, sirs)

• In the case of a default, the things you can grab on the way out (aka as collateral) are very limited: only the solar capital equipment is allowed as collateral, which is something that probably quickly depreciates especially with new tech coming out all the time.
• Mosaic can charge max(35% of the recovered funds, lawyers fees) in an attempt to regain funds in a default situation
• Early repayment can happen without penalty by the borrower, however given the low interest rates currently, this does not seem like a big deal
• Mosaic itself could go bankrupt, and that could make things very complicated. However the funds are probably safe from seizure in that case as the loan is technically between you and the business, not with Mosaic. See Mosaic’s assertion.

Annoyances:

• Mosaic takes 1% of cash sitting around in the account more than a month as well as the 1% from the loan– as payments slowly trickle in from investments it is annoying to have to clear that cash out each month. My other investment account actually gives me interest on the cash stored there (a pittance, but it keeps you happy to have cash sitting in their system and is probably a smart move long-term).
• The terms of the loans are generally around 10 years, a very long time! However ultimately this may be a good thing- short term financial outlooks are part of the reason why the Global Financial Crisis happened, and I figure if I ever screw up too badly in the next 10 years I’ll at least have a little bit of income coming in that I can’t easily raid for beer money.
• The constraints on who can invest (set by the government) mean that you can’t really recommend it to people outside of CA or NY unless they’re a ‘qualified investor’. Even in CA and NY you can’t invest more than a small fraction of your wealth (although you shouldn’t put more in yet anyway!). Unfortunately Mosaic is not covered by the JOBS act, either, so smaller investors in other states probably won’t be able to contribute for a while.

Open Questions:

• There is one item in the prospectus that I am particularly confused by:
  

  “You will not receive any payments we may receive after the final maturity date of your Note.
  The Notes will mature on the initial maturity date, unless any installment payments in respect of the corresponding Loan Obligations remain due and payable upon the initial maturity date, in which case the maturity of the Notes will be automatically extended to the final maturity date. If we receive any payments from the Borrower after the final maturity date, we may retain 100% of these payments and will not be obligated to distribute those payments to you.”

It seems as though the extension of the maturity date would cover all cases in which you would have a claim on the funds paid by the borrower… perhaps this is just cover-your-ass-legalese?

• What happens if the solar panels get destroyed?

I invested in the solar panels on the Wildwood Convention center in New Jersey, and I can easily see Hurricane Sandy v2 coming by and knocking them out. Wildwood would still have to pay off the solar panels, but how easy would it be for them to declare bankruptcy and shed their responsibility in that case? I did see in the FAQ that Mosaic ensures that there is proper physical capital insurance to handle this, but perhaps in a catastrophic event that coverage would not be sufficient. This also seems like one of the first corner-cuts that Mosaic might do if they desperately needed the revenue. See Mosaic’s take on the issue.

Also there is one open question which can not be answered currently:

• What is the default rate of commercial loans for solar panel installs?

There is a very small default rate for residential installs, but since no one has done this kind of program for a long enough time or for commercial properties, there is very, very little historical data about default rates for the types of loans Mosaic is facilitating.

Analysis:

I’m still definitely pro-Mosaic, and will suggest it to anyone living in CA or NY who is looking for a long-term place to park their cash which will give better returns than a savings account or a CD. I would still advise the person to realize that the cash is locked up for a while, and that since these types of investments are somewhat experimental they should only invest < 10% of their wealth in them, if not less.

Essentially, I see it as a relatively safe investment for the benefits, particularly for California projects. Suppose a business installs solar panels on their roof and goes out of business. Likely the buyer of that commercial property will also undertake the loan on the solar panels- after all, the solar investment was a good one at the beginning of the loan term, halfway through the investment is just as good. This calculus would only change if the price of solar electricity decreased in CA, which I really don’t see happening – we love our green energy subsidies! Since the money coming in from PG&E is pretty steady in the next 10 years, and inflation is likely to stay within a percentage point of 2% in that time as well, I feel comfortable signing up for the long term.

The list of risks is long, but much of it comes down to trust in Mosaic and in the business that they are trying to create, which Mosaic seems to understand. In a not-well-developed and somewhat experimental market, they need to do what it takes to gain trust in both the company and the investments offered. As such, their diligence on credit-worthiness is probably going to be less motivated by the short term, and more focused towards building a trusted business and keeping the stinkers out.

Additionally, I think that overall the incentives are properly aligned. They do make a good amount from origination fees, which means that the company also does have an incentive to push less-than quality loans out the door, however the 1% loan lifetime cut of the loan means that Mosaic also has skin in the game. The returns from seeing a project to completion are more than the origination fee, and the ‘business-building’ incentive to keep the quality of loans high is a strong force.

TL;DR:

Mosaic is a good, experimental investment with a definite social good and a positive fiscal return. Since it is still experimental, only put a small fraction of your wealth into Mosaic. Given how much you’ve probably put into bitcoins, you probably can spare enough to test this out ; )