The goal, according to the president/founder and director of institutional accounts, is to streamline that process and return liquidity to the market for loan sales and purchases.
Goodman and Hodes sat down with HousingWire for this edition of In This Corner to explain how this technology could reshape the face of mortgage lending.
HousingWire: Please explain this online exchange concept. It sounds a little bit like a forum.
Robert Hodes: The way that we operate is really from an arms-length. What we do is give people the opportunity to connect people that have individual notes or pools of notes they would like to sell. They have the opportunity to post those on the site. The members on the site are able to see the listings that have been posted. And if they're interested in the listing based on what they see, they can make an inquiry directly to the entity that posted the listing. And that's how the conversation begins.
HW: You're running your whole business online. Where do you see the mortgage finance industry headed relative to online usage?
Martin Goodman: In the old model a lot of people got a warehouse line and then they would have different people they send their loans through, different channels. And they'd almost table fund deals so they could put it on their warehouse line and then service it for a month then figure out who to sell it to. This model you're almost creating the channel tailored for the specific loans. You can either completely bypass the channel and go directly to an investor, which many of our clients do, or you can work with other brokers and create participating loans. It's creating a new animal if you would, a new product that's really a new way to finance loans.
HW: What are the biggest changes you're seeing in the functionality of the industry as a whole because of this type online capability?
MG: There are many parallels between this system and the Realtor MLS system. Before, agents used to have things in little books and the Realtors didn't talk to each other much, but now there's a true market for homes. While you might not get the price you want, I don't think anybody doubts they can put their home "on the market" and sell it. But the same is not true with loans. Loans have typically been transacted either in very large pools to hedge funds or large commercial buyers, or on a buddy system, a little black book that's still in use today — I'll take your pool and send it out to a handful of people. It's just terribly inefficient. So this creates almost the Facebook of lenders. The lenders are able to get on, interact with each other and create their own market.
There's huge disparity between private money financing and traditional bank financing. If you want to get a commercial loan on an office building in today's market maybe you'll pay 5% to 6%. But if you have the same credit and just step outside and say "I want to privately finance this either with a company that provides private financing or individuals that do private financing," you're looking at 9% to 11%. And the reason for that is a lack of liquidity in the loan.
HW: What do you think an online exchange such as this one could mean for securitization in the future?
RH: The short answer is yes securitization could be done. Let's say for a second there's a given entity that is licensed in all the states and they need a platform to be able to run their notes through, this can be completely setup to bear their name. It can be put on their site as a widget, and things like that. But that is going to depend on the need of the individual entity.
MG: We're about to see an increase in the number of private lenders again. And I don't know that it will impact necessarily securitization, but I think lenders might find they have an avenue that doesn't involve securitization. Before the name of the game was: "We have to do enough volume, we have to have a warehouse line big enough to put all the loans out there to aggregate them so that we can securitize them." With LoanMLS you don't have that issue because if you can find all your investors before you fund the loans, you already have the funds committed. That doesn’t mean we're going to replace securitization.
HW: Where would you say the majority of demand is? What is a hot buy right now?
MG: Right now anything that's discounted that gives a higher than 12% yield to maturity, you can't keep it on the shelf if it's decent. Investors are hungry for yield. Where else are you going to get that kind of yield?
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