Enjoy access to a free NMLS renewal class when you attend an in-person event.
Does anyone remember the ‘dot-bombs’ from the late 1990s and early 2000s? CEOs right out of college with an MBA in their hand offered to revolutionize mortgage loan origination processes only to see their bubbles burst not long after the turn of the century.
With the explosive growth of originations and securitization markets in the early 2000s followed by the Great Mortgage Recession, whole loan trading technology remained an “uninvested” area, continuing as a back-office function dominated by “tape crackers” and personal relationships.
We learned some lessons about dot-com technology in the mortgage space, but despite the fallout in online technology, some of the tools, policies and procedures behind online mortgage origination, servicing and secondary market trading remain relevant to this day. MISMO data standards, for example, are a constant presence in online mortgage technology not only for loan originations and mortgage servicers but for tomorrow’s secondary market technology.
We continue to make progress with data standardization because industry players recognized early the necessity for different systems and software to speak the same language.
Thanks to recent technology innovations, the time has finally arrived for online automated whole loan and bulk mortgage trading. And it’s not a minute too soon, given the greater volume and complexity of loans and the need for greater compliance. Several organizations are beginning to think so, as new trading platforms are being launched and pilot programs are underway with multiple associations and banking groups.
Standardizing loan data “tapes”
Before whole loan trading goes mainstream and online, however, some basic things need to be established. We need a standard process and a standard set of data. If the names of the data fields on a loan are different from one company to the next, there is no way for parties to effectively share information via a common platform.
In the mortgage business, we “crack tapes” to map column headers and data formats, with the most common difficulty around loan program names. Technology can certainly facilitate loan trading, but the industry will have to adopt a common data standard first.
What about the fields that are required to trade loans? It would seem that we need a slightly different set of data depending on what type of loan is being traded, whether it be a plain-vanilla agency loan or a non-performing mortgage. While those different standards are generally understood by market participants, they’re not published or enforced. Newcomers need to learn them, and everyone is translating (“mapping”) data to get things into their individual format.
This less than optimal situation is being magnified by the growth in whole loan trading relative to other delivery options. Not only is trading volume rising and expected to keep growing, but the variety and complexity of loan types is also expanding. While pay-option loans may not make a comeback soon, non-QM lending, expanded criteria loans, and the growth of the second-lien market all suggest product innovation is increasing. The secondary market will grow along with them, but only if the technology is in place to keep pace.
It seems, then, that for technology to facilitate loan trading, standardized data sets by loan product will be necessary, along with common formatting of particular data fields. And if the data does become standardized, what else do we need for technology to streamline loan trading?
The MLPA offers a starting point for commonality
There have been numerous efforts, by both industry trade groups and large financial institutions, to take this task on by themselves, by standardizing a single version of the Mortgage Loan Purchase Agreement (MLPA). Loan sellers would love for this to happen, as it would open up more trading options with less time spent in obtaining counterparty approval. But buyers, not surprisingly, aren’t as enthusiastic, since it could mean increased risk on their part. Buyers may also look at this as driving towards common fee schedules, reducing their flexibility in negotiating with potential counterparties.
After reviewing many MLPAs, it seems obvious that there is some level of commonality. Buyers and sellers frequently talk about creating a single standard document that would simplify the legal process and increase liquidity for both large and small participants. There seem to be enough common areas that, if structured broadly, might lead to a consensus to a standard document.
Importantly, however, the MLPA will still need to be a one-to-one relationship, meaning each buyer to each seller. There is consensus that a multi-party agreement will not work, but a common document for each counterparty pairing might.
So, then, if we are getting closer to a standard MLPA, what’s the next step? How will technology facilitate online whole loan mortgage trading as a result?
Here are six benefits we can expect from a technology-driven mortgage loan trading platform made possible by standardized data:
1. Greater efficiency: Standardized data and a common MLPA would dramatically increase the efficiency of the loan trading process. Technology would support this with embedded code for “tape cracking,” and document signing would become a function of the trading process.
2. Enhanced security: E-mailing spreadsheets is not a secure way to trade whole loans, yet many still do it. In a trading platform, that risk is largely removed by encryption technology. Data and documents are stored in a secure, password-protected environment. Just like any other financial system, it removes the unknowns and dangers in transferring data and documents via unsecure e-mail.
3. Improved communication: Rather than communicating via e-mail or telephone, buyers and sellers communicate in real-time directly through the platform, facilitating safe and transparent communication. Traders on both the buy and sell sides view the same data at the same time, and can notify each other of loans and pools they wish to trade via “chat” functionality. They can exchange loan data, documents and pricing information and settle transactions, all without exiting the platform.
4. Wider search options: Sellers will be able to create pools from their inventory by searching multiple criteria to create offered pools. Buyers can search by loan criteria, seller or pools and create their own pool reflecting their investment criteria. If they choose to do so, they can ignore the seller’s pool and focus on an investment strategy across pools. Buyers can also create an “axe,” which is a defined search criteria that continually looks for any of the loans posted on the platform that match what the buyer wants.
5. Automated best execution in real-time: Best execution will help the seller determine the best delivery for every loan, whether that is standard delivery options or a bulk bid. One buyer might want the entire pool, another might want just a portion, while yet another might want to pick and choose. Calculating which results in the best return for the seller in a spreadsheet is tedious. A platform provides best execution automatically and in real time so traders spend more time making good decisions rather than running math scenarios.
6. More system integration: Online trading platforms enable users to directly integrate their pricing engines, loan origination systems and service providers.
Secondary market trading technology, like the technology widely in use in mortgage loan origination and servicing, has finally arrived. Its widespread adoption by the industry is not a matter of “if,” but of “when.” In order to get where we need to be, we need to adopt proper procedures for standardizing data. Eventually, we’ll be able to increase transactional speeds so that buyers and sellers can continue to increase liquidity in the marketplace.
Trading platforms will soon become an important intersection for everyone in the secondary market. Already, dozens of major players—banks, servicers, investors, hedge funds and others—are trading thousands of loans through a platform. The day of inefficiently using an Excel spreadsheet to track whole loan trading will soon be long gone. Two cheers to that.
John Ardy is chief executive officer of Resitrader Inc., a Calabasas, Calif.-based provider of whole loan mortgage trade management software. He can be reached by phone at (310) 469-1640 or by e-mail at [email protected].
This article originally appeared in the October 2016 print edition of National Mortgage Professional Magazine.