In today’s competitive landscape, the secondary market provides a prime opportunity to pursue better margins, more competitive rates and increased profitability. For America’s local lenders, though, this area also presents challenges. While small and midsize lenders play a vital role in American home-buying, originating almost 50% of loans for the $4 trillion U.S. mortgage market, they often lack the scale and access they need to execute to their full potential in the secondary market.
To complicate matters, technology-forward secondary market solutions tend to cater exclusively to large players offering outsized loan volume on a regular basis. This dynamic leads to a feedback cycle that benefits large, well-funded lenders: With expanded secondary market access, they gain better pricing, margins and profitability—and in turn, they offer the most competitive rates to borrowers, growing their market share. The result is an increasing deficit between local players and the largest lenders.
New solutions in the secondary market
Luckily, new secondary market solutions geared towards local lenders are beginning to arise in the marketplace. These offerings exist specifically to offer small and midsize players the kind of scale, access and execution that the industry’s largest lenders have enjoyed for years. Maxwell Capital, for instance, works as a technology-backed partner to decrease trading time, streamline the process and create a more consistent experience for lenders and their borrowers. By leveraging this solution, smaller lenders gain access to economic scale, competitive rates and an accelerated loan purchase.
In general, technology-powered secondary market solutions benefit local lenders in a few important ways:
When it comes to the secondary market, accuracy is non-negotiable. All loan buyers want to know exactly what’s going to be in the loan file—that specific data will be contained and that the data contained will be precise. To achieve that kind of consistency, automation and technology are vital.
By leveraging a secondary market solution like Maxwell Capital, smaller lenders gain a more standardized experience. In turn, this reduces the risk that loan files are inconsistent or inaccurate, creating trust in their data and allowing them to sell their loans for higher prices.
Technology also ensures that lenders are pursuing the most profitable secondary market strategy. By performing a comprehensive best execution analysis, technology-powered solutions help to ensure loans aren’t left on the table. For example, some lenders may benefit dramatically by switching from best efforts to a mandatory basis. Although not understating what is needed to move to a mandatory basis, lenders could see a lift of 20-25 bps.
In most cases, in-depth analysis is prohibitive to perform manually. When driven by technology, though, this kind of study can be transformative in determining the outlet and method of delivery that will yield the best economic outcome for each lender.
Pipeline management is a crucial piece of the secondary market process to control risk and ensure profitability. Here, hedging strategies can be helpful in offsetting risk and increasing efficiency, giving lenders more selling flexibility and the ability to hold loans on the balance sheet longer, leading to higher returns.
Still, hedging can be daunting since it involves complex computations and the use of models to manage risk and determine pricing. Because of its complexity, selling loans on a mandatory basis to a trusted partner will allow you to achieve better results.
A major reason smaller lenders lack access to secondary markets is simply because of their size in the eyes of loan buyers. With overall lower production volume, they lack interest and trust from buyers and investors.
By partnering with a dedicated investor like Maxwell Capital, local lenders tap into the collective power of a lender network, giving them access to economic scale. In turn, they can pass more competitive rates on to their borrowers, enabling them to increase topline revenue.
Enhanced profitability through secondary market access
Now more than ever, lenders need to think towards creative ways to buoy their viability. Technology that supports increased scale and better execution is a prime method to boost profitability, maintain an edge and offset margin compression.
With innovative solutions in the marketplace, local lenders serving America’s communities have access to powerful secondary market tools to compete against the industry’s largest players.