Mortgage trading platforms prepare for lower volume

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

The companies behind these platforms – ranging from stalwarts like Black Knight and MCTsto startups such as Maxx and Maxwell – essentially connect lenders and investors, and also link them to essential services such as paper standardization and due diligence. On these platforms, originators can get the best loan price from various buyers, usually asset managers and institutional investors.

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

Maxex says an average of $1 billion per month is traded on its platform, which primarily focuses on non-agency residential jumbo loans. Loans traded through the exchange accounted for about 10% of all jumbo securitizations over the past 12 months, the company said.

About 60% of mortgages are bundled and sold to investors, while the rest is held in customer portfolios. Since 2016, loans traded through the platform have been involved in 94 securitization transactions.

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

Here’s the catch: Lending trading platforms rely heavily on origination activity to keep their business growing. But the Federal Reserve has signaled it could cut monthly purchases of $120 billion of US Treasuries and mortgage-backed securities as early as November.

Once tapering begins, interest rates will in turn rise. As a result, total mortgages, at least according to Freddie Mac’s latest forecast, are expected to drop to $2.6 trillion in 2022, down sharply from the $3.9 trillion projected for 2021.

“Our volume would be affected if rates go up and mortgage volume goes down,” Scott Happ, president of Black Knight’s secondary marketing technology division, told HousingWire. Black Knight says it connects 200 investors who buy mostly new residential mortgages to about 3,000 originators. Its platform facilitates more than $1 trillion in transactions annually, and the system is used to price about 40% of mortgages nationwide, the company claims.

Philip Rasori, Chief Operating Officer at Mortgage Capital Negotiation (MCT)also said the company’s volumes had “skyrocketed” during the pandemic. The MCT platform, called BAM (Bid Auction Manager), provides one-click distribution, collection and analysis of bid bands, reducing loan delivery, in some cases, from 15 to 7 days. On average, the platform trades $51 billion per month, mostly agency and government loans. There are 300 sellers on the platform, 70% of which are independent mortgage banks.

Rasori also expects creatives to cool “mostly due to refi activity.” the Mortgage Bankers Association recently projected refinancing issuance to slow again next year, shrinking 62% to $860 billion in 2022.

In addition to the tapering of Fed assets, some platforms will also be impacted by the suspension of the 7% cap for Fannie Mae and Freddie Mac‘s investor-property purchase and second home loans. These loans have a higher risk but also a higher return.

The Treasury suspended the Trump-era restriction in September, just months after…FHFA Chief Mark Calabria and then-Treasury Secretary Steven Mnuchin included the cap in Preferred Share 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, took advantage. But many of these loans to real estate investors and second homes are likely, once again, to return to the portfolios of Fannie Mae and Freddie Mac, which will benefit some but hurt others.

Technical support

Even though executives expect overall volumes to slow, 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 long and expensive process of contacting each investor to enter into bilateral contracts. The transaction may take 15 to 45 days to complete. But across platforms, it may take less than 10 days.

According to Pearce, loans purchased on the Maxex platform have been included in most of JPM’s jumbo securitizations. During the third quarter, the MDD subsidiary of the investment bank, JP Morgan Mortgage Trustdelivered a total of 16 private label deals to market, backed by loan pools with an average outstanding principal balance of nearly $13 billion, according to Kroll bond rating agency. According to data from Kroll, JP Morgan Mortgage Trust accounted for 19% of the $67 billion in private label volume between January and September 30.

Neither JPMorgan’s high level of activity nor its status as an investor in the electronic clearinghouse means the bank has no particular advantage, Pearce said. “There is no more influence of an investor in the company,” he said. “We don’t want to compete with our customers. We try to be independent and free from conflict.

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

Maxwell takes risks: The startup will use its own capital to buy loans, focusing on lenders that come from the Maxwell platform and have an average total volume of between $200 million and $2 billion per year.

The idea is to try to sell the loans to investors and earn a margin. It stands out from other competitors who only allow transactions with pre-sold loans.

“We want to use our balance sheet because we may have more capital than some of our customers,” said industry veteran Sadie Gurley, chief executive and vice president of Maxwell.

The idea is to buy a small share of the loans from the platform because it is very capital intensive.

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

Clarification: the jumbo credits purchased by JPMorgan on the Maxex platform were included in most of its securitization; an earlier version of this story stated that most of the jumbo loans purchased by the bank were acquired through the Maxex platform and then securitized.

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