Pricing exceptions are widespread in mortgage — and so are the regulatory risks

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Mortgage loan-trading platforms prepare for fall in volume

Still much upside for digital exchanges in the paper-heavy secondary market


The historic mortgage boom spurred by the pandemic hasn’t just been a blessing for lenders – the slew of mortgage loan-trading platforms have also reaped the rewards of historic origination volume. But new regulatory actions and rising interest rates threaten to cut the party short if they can’t adapt.

The companies behind these platforms – ranging from stalwarts like Black Knight and MCT, to startups such as Maxex and Maxwell – essentially connect lenders and investors, and also match them with critical services such as paper standardization and due diligence. On these platforms, originators can lock down the best loan price from various buyers, typically asset managers and institutional investors.

“In 2021, we’ve had a record volume. The last 12 months have been great,” said Tom Pearce, CEO of Maxex, an Atlanta-based fintech company founded in 2016.

Maxex claims an average of $1 billion per month is traded on its platform, which is focused primarily on residential non-agency jumbo loans. Loans traded through the exchange comprised approximately 10% of all jumbo securitization over the past 12 months, the company said.

Roughly 60% of mortgages are packaged and sold to investors, while the remaining is held in clients’ portfolios. Since 2016, the loans traded through the platform have been involved in 94 securitization deals.

Despite the strong performance, Pearce is cautious about the future. “For sellers, volumes will inevitably slow down,” he said.

Here is the rub: loan-trading platforms heavily depend on origination activity to keep their business growing. But the Federal Reserve signaled it may reduce the monthly purchases of $120 billion in U.S. Treasury bonds and mortgage-backed securities as soon as November.

Once the tapering begins, interest rates will rise in turn. As a result, total mortgage originations, at least per Freddie Mac’s latest forecast, are expected to decline to $2.6 trillion in 2022, a sharp decline from the $3.9 trillion forecast for 2021.

“Our volume would be impacted if rates rise and mortgage volume falls,” Scott Happ, president of Black Knight’s secondary marketing technologies division, told HousingWire. Black Knight says it connects 200 investors who buy primarily new residential mortgages to roughly 3,000 originators. Its platform facilitates over $1 trillion of transactions annually, and the system is used to price roughly 40% of mortgage loans nationwide, the company claims.

Philip Rasori, chief operating officer at Mortgage Capital Trading (MCT), also said the company’s volumes “skyrocketed” during the pandemic. MCT’s platform, called BAM (Bid Auction Manager), provides a one-click distribution, collection, and analysis of bid tapes, reducing loan delivery, in some cases, from 15 to 7 days. On average, the platform trades $51 billion monthly of mainly agency and government loans. There are 300 sellers in the platform, 70% of them being independent mortgage banks.

Rasori too expects originations to cool down “mainly because of the refi activity.” The Mortgage Bankers Association recently forecast refinance originations to slow again next year, decreasing 62% to $860 billion in 2022.

Besides the Fed’s asset tapering, some platforms will also be impacted by the suspension of the 7% cap for Fannie Mae and Freddie Mac‘s purchase investor-property and second-home loans. These loans have a higher risk but also higher return.
The Treasury suspended the Trump-era restriction in September, just months after then-FHFA head Mark Calabria and then-Treasury Secretary Steven Mnuchin included the cap in the Preferred Stock Purchase Agreements (PSPAs) between the Treasury Department and Fannie Mae and Freddie Mac.  

When the cap was in place, private-label electronic clearinghouses with Wall Street investors, like Maxex, benefited. But many of those investor-property and second-home loans are expected to, again, return to Fannie Mae and Freddie Mac portfolios, which will benefit some but hurt others.

Tech support

Even though executives expect overall volumes to slow down, they still see huge upside in the secondary mortgage space, which has lagged technologically and is often criticized as being too paper-heavy.

Traditionally, lenders go through the expensive and time-consuming process of contacting each investor to close bilateral contracts. The transaction can take 15 to 45 days to close. But through the platforms, it can take less than 10 days.

According to Pearce, loans bought on the Maxex platform were included in most of JPM’s jumbo securitizations. Through the third quarter, the investment bank’s private label subsidiary, J.P. Morgan Mortgage Trust, delivered a total of 16 private label deals to the market backed by loan pools with an average unpaid principal balance of nearly $13 billion, according to Kroll Bond Rating Agency. Per Kroll data, J.P. Morgan Mortgage Trust accounted for 19% of the $67 billion in private label volume between January and Sept. 30.

Neither JPMorgan’s high level of activity nor its status as an investor in the electronic clearinghouse means the bank receives any special benefits, Pearce said. “There is no larger influence by one investor in the company,” he said. “We don’t want to compete with our customers. We’re trying to be independent and free of conflict.”

In March, Fin VC and TTV Capital led a Series B funding round of $16.3 million in Maxwell, another digital mortgage startup. The company used part of the money to develop a mortgage loan-trading platform, launched in September, to provide community lenders access to the secondary market.

Maxwell is taking risks: the startup will use its own capital to purchase loans, focusing on lenders that originate on the Maxwell platform and have an average total volume between $200 million and $2 billion a year.

The idea is to try to sell the loans to investors and gain a spread. It is different from other competitors that only authorize transactions with loans pre-sold. 

“We want to use our balance sheet because we may have more capital than some of our clients,” said the industry veteran Sadie Gurley, Maxwell’s general manager and vice president.

The idea is to buy a small share of the loans in the platform since it is highly capital intensive.

“We can transform the way mortgages are bought and sold in this country,” Gurley said. “But it does take a while to do that.”

Clarification: Jumbo loans bought by JPMorgan on the Maxex platform were included in most of its securitization; a prior version of this story said that most of the jumbo loans bought by the bank were acquired through the Maxex platform and later securitized.

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