The old saying goes “there are a lot of ways to skin a cat,” and the same can be said about execution for lenders in the secondary market.
Some lenders do not engage in mandatory loan sales and “best execution” is not on their radar, and some do best execution loan sales but without a loan trading platform. Some are fully hedged, others are not. Some do not take out TBA commitments, and some don’t know about mandatory pickup, or what a short side position is and how to manage it.
In short, lenders have found that, while execution varies greatly, a loan trading platform can help with any scenario. Furthermore, the use of a whole loan trading platform can very well differentiate a lender that succeeds in capital markets versus one that merely survives.
In this detailed article, we’ll discuss the history, process, and benefits of loan trading platforms, as the goal for any secondary marketing staff is to achieve the best execution while reducing risk for the company.
Table of Contents – Best Execution with a Loan Trading Platform
- History: How Digitization Has Revolutionized Loan Trading
- 2017 to Present: Whole Loan Trading Platforms Increase Lender Profits
- Functionality & Benefits of a Whole Loan Trading Platform
- What to Look for in a Whole Loan Trading Platform
- Whole Loan Trading Features Unique to MCT’s Bid Auction Manager (BAM)
- The Future of Whole Loan Trading Platforms
History: How Digitization has Revolutionized Loan Trading
The advent of loan trading platforms over the last decade has revolutionized the secondary market by sloughing off hours of time in process efficiencies while increasing clarity and visibility for lenders to make pricing and delivery decisions.
By highlighting the process before and after whole loan trading platforms were introduced to the secondary market, you will see how drastically this software continues to improve the day-to-day operations of lenders.
Before One-click Distribution, Collection & Analysis of Bid Tapes
Before loan trading platforms (or for those not yet using them), the process was (is) manual and tedious. Lenders would have to pull a bid tape together with all the loans they wished to sell and the associated characteristics of each file on a Microsoft Excel spreadsheet, send it out to investors, then pull it back via email, usually on another attached Excel spreadsheet with no way to see or compare loans in a true best execution without manipulating them.
They would then analyze the bids manually and decide which loan should go where, send out confirmations and update the systems of record keeping. Each investor would ask for different spreadsheet formats and little was standardized. Each step of the process left room for manual error and took much more time than today’s methods. Put another way, it was cumbersome and time-consuming
Before Rapid Market-Adjusted Pricing
By reviewing the antiquated process above, it’s easy to see that bid prices could easily move during the time it takes the staff to assimilate data, rendering the assimilation exercise useless and in fact costing the lender money if the market is moving in the wrong direction. Fortunately, the quick turnarounds of loan trading platforms reduce this challenge, and bids also may include market-level adjustments.
Regardless of methodology, the prices of individual loans are a function of where they can be sold. Sometimes this is investor-specific. Lenders would take the security price, and add in the g-fee, servicing value, and pass on any specified pool payups, doing everything internally and manually. Entire tapes of loans were bid by investors on weighted average price, and loans were sold as pools rather than individually, hurting pickup.
Secondary marketing staff would take out positions to cover pipeline and do TBA trades, maintain Excel models, make sure they were accurate, and the links to Bloomberg or the TBA screen kept current, as the model could be fed incorrect data. Reports would be done via manual upload maybe twice a day when every hour the position could be fluctuating. Data was assumed to be correct, and errors often went overlooked or weren’t caught until well after the loan package was shipped.
Before Valuable New Investors Were Identified with Shadow Bidding
Before best execution trading platforms, capital markets traders thought it was not worth sending bid tapes to supposed non-competitive investors individually over email. Copying the bid prices into a master Excel sheet and eyeballing them to see which investor had the winning rate used to take all day long.
Now, using a loan trading platform, bid tapes are easily sent to 20 or more investors, and pricing analysis can be done rapidly. An often-overlooked benefit of the new technology is the large pickup from individual loan commitments with investors that are normally shied away from due to a historic lack of business. And by sending pricing to multiple investors, it provides additional clarity into when a lender is priced better or worse throughout the month.
The granularity within the asset began accelerating, however. Lenders, led by MCT’s Bid Auction Manager (BAM) technology, became better at providing accurate and detailed data points and investors became better at assimilating all these data points into sharper pricing. Loan level bids became the norm, and lenders enjoyed the pickup they got by piecing out the cake, so to speak.
The bid tape was originally an evolution of other loan sale delivery methods, but as the origination process has moved towards a streamlined product, increasing digitization, loan trading platforms and live pricing have truly changed secondary markets. Additionally, there was also need for more security in bid tapes and to move away from emails.
2016 to Present: Whole Loan Trading Platforms Increase Lender Profits
In 2015, MCT saw a need to develop a technology solution that helped their traders work more easily with their lender clients and effortlessly exchange bulk bid tapes with investors. Thus, MCT’s Bid Auction Manager (BAM) was created.
BAM was a first of its kind technology, adding significant value to lenders and investors and establishing newfound efficiencies for bid tape AOT executions to allow lenders to fully capitalize on mandatory to best efforts spread.
By October 2017, BAM had achieved 100% investor adoption with investors citing BAM as the most robust, easy-to-use, scalable, and secure bid tape management technology on the market. In April 2018, PROGRESS in Lending Association, the industry’s premier mortgage technology-focused organization, presented the MCT with its Annual Innovation Award for the rapid adoption and impact of its Bid Auction Manager™ (BAM) within the whole loan trading market.
Then, in August 2018, MCT released a first-of-its-kind technology to automate the Tri-Party Agreement required between lenders, investors, and broker-dealers during AOT transactions in the secondary market. BAM continues to set the tone for the future of loan sales, continuing with innovations that will better serve the entire secondary market.
“BAM is truly industry-altering fintech that has changed the way loans are exchanged between lenders and investors,” said Phil Rasori, COO at MCT and Chief Architect of BAM. “As we continue to add functionality and make the solution more robust, ultimately, what BAM is achieving is helping move the mortgage industry toward completely digital loan trading on the secondary market.”
For those not harnessing the technology of a trading platform, whole loan trading has become exponentially harder, or less profitable. Lenders not taking advantage of all the delivery methods available are likely leaving some profit on the table. For example, lenders with Fannie and/or Freddie approvals that take out an open position and fill it along the way aren’t going to realize value in the mandatory spread, nor is the process scalable with more volume as it is time-consuming.
Functionality & Benefits of a Whole Loan Trading Platform
For those of you who are not yet utilizing a whole loan trading platform, you may be wondering how you are leaving some profit on the table. In this section, we’ll review the functionality and benefits of whole loan trading platforms including retrieving pricing data, prioritizing execution, security, and ease of use.
Seamless Pricing Data Retrieval
In whole loan trading platforms, pricing data is retrieved through two-way LOS integrations, making it accurate and easy to set up, and all investors participating in the bulk bid tape channel have adopted the technology, with some investors even managing all their seller bid tapes and associated pricing through Bid Auction Manager (BAM).
Bid tapes are managed by our clients through one-click secure distribution, collection, and analysis of bid tapes with approved bid tape investors. Additionally, anonymized shadow bidding functionality, dubbed BAM AutoShadow, helps lenders explore potential pickup with unapproved investors, and determine whether to start a conversation.
Prioritizing Execution for Increased Pickup
Whole loan trading platforms allow secondary staff to review or export a prioritized list of possible executions, commit to investors, and receive confirmations. Most importantly, rapid market-adjusted pricing increases speed and organization of the entire pricing process, especially for large bulk bid tapes.
Market timed data means there is no delay in information, and both the position and the pipeline are live. Every spec payup is captured thanks to CRA eligibility scrubbing and the trade desk’s watchful eye. Once the loan is committed, commitment data write-back automates commitment information back into your LOS, saving time and avoiding data entry errors.
Greater Information Security
Nonpublic Personal Information (NPI) found in bid tapes is secured in transit and at rest, and never transmitted via email. Communication is centralized and bid tapes are encrypted so that they can be securely, seamlessly, and efficiently passed to investors for pricing and received back.
To ensure data integrity, the whole loan trading platform accesses lender data via integrations that were developed with their loan origination systems (LOS), the core system of record for lending entities. Each of the transfer methods are data encrypted to ensure security at all times.
A historical repository exists in a central, organized location for counterparties to access bid tapes so there is no discrepancy in price upon delivery. The amount of time saved more than pays for the cost of the service or software, not to mention the protection of margins and the possibility to identify valuable new investors.
The result is a much quicker pricing process for bulk bid tapes, greater data security, better communication between counterparties, process consistency for investors within their existing platform, and newfound efficiencies for traders.
Ease of Use Saves Time
Bid tapes can be generated by lenders with the click of a button, sent to multiple investors with another, compared apples-to-apples upon submission, committed and recorded in the system of record automatically, all with up-to-the-minute pricing and an encyclopedia of live reports providing color for the pricing and execution of the files and the overall position to go with it.
Live pricing means lenders can see bids coming in the moment an investor submits, can see their position, and can add coverage or sell loans accordingly right in the system with instant feedback.
In addition, bid tape mark-to-markets (aka, AutoMark) allow MCT to obtain live bid tape pricing from key investors to improve the accuracy of MTM’s. Without this, there has been an increasing divergence between the rate sheet pricing typically used for MTM and the more granular bid tape execution lenders actually achieve, often causing accounting issues.
Empowering Staff for Greater Performance
While the speed of execution has drastically increased, best execution trading platforms enable a small secondary staff to do more, freeing up team members for more impactful analysis and strategy. The platform provides a “soup to nuts” solution on the secondary side with short position and long position, adding a lot of transparency and increasing the speed of the selling process.
Turning over routine tasks to a trading platform allows existing staff to be utilized in other areas such as analyzing new investors, working with originators, further improving capital markets functions and/or improving inter-department communication by creating customized management reports. Additionally, special, executive-tailored reporting allows owners or executives to easily track interest areas without digging through a myriad of reports.
Secondary Managers Love the Technology
Secondary Marketing Managers using whole loan trading technology love it because they are now able to send bid tapes to dozens of places easily, truly creating a best execution marketplace instead of dealing with the usual four or five investors. By connecting lenders and investors in real-time, and automating what used to be a manual, email-based trading process, the operation becomes incredibly scalable while also increasing transparency.
Originators can connect with new investors almost instantly and accelerate the traditionally protracted, difficult shadow bidding process, so what used to take weeks is now accomplished in seconds by clicking on someone’s name to view their pricing, and all latency that occurs with the manual process is eliminated. Lenders can now work around multiple inconvenient investor formats and processes.
Investors Love the Technology
Investors love the technology because tape formats are homogeneous and friction from miscommunication or data entry errors is eliminated. They can parse out data and price loans quickly, and loans are delivered with ease as the solution automates the process of packaging and transferring bulk loan bids.
Data is also more accurate, benefiting everyone because it saves time and also prevents “no bids” coming back. In some cases, automating the commitment process allows post-closers to pull the report and ship files faster, allowing lenders to bid out on a 7-day delivery instead of a 15-day delivery.
What to Look for in a Whole Loan Trading Platform
In this section, we’ll discuss some special functionality that you want to look for in a whole loan trading platform.
Whole loan trading platform automation and integrations continue to improve. The integration to seamlessly acquire Fannie Mae’s Pricing and Execution – Whole Loan Application / Freddie Mac’s Loan Selling Advisor pricing data and compare against alternative executions, such as bulk bids, is continuing. Some loan trading platforms offer automated commitment of loans by returning trade confirmations to the platform, so clients don’t have to use multiple systems to conduct a single transaction.
The cash pricing and commitment process is also integrated to include cash pay-ups for fixed-rate mortgages across all specified loan attributes. Prior to this integration, sellers would have to download and print a PDF from Freddie Mac and calculate these loan details. Now, that data pull takes seconds. Once buyers and sellers see the ability to interact at such a fast rate, the platform quickly becomes indispensable to their business model.
Lenders should realize that APIs (Application Program Interface) are proliferating beyond the Agencies and investors (such as Fannie Mae, Freddie Mac, Wells Fargo, PennyMac, and so on). MCT believes that this trend is likely to continue with support from MCT’s InvestorMatic Software.
Tri-party Agreements and Bid Tape AOT
Lenders will want to find a whole loan trading platform that automates Tri-party agreements and bid tape AOT executions. Tri-party agreements are executed between the lender (assigner), investor (assignee), and broker/dealer.
The loans are then delivered with the corresponding coupon or product into that trade and then the original price of the initially executed trade (the TBA) that were assigning becomes the basis of the trade price for the loan.
Assignment of Trade (AOT)
The original AOT process was to manually enter the trade information into the Schedule A of the tri-party agreement, then enter the trade blotter info to the corresponding dealer before sending it. This bid tape AOT process is beginning to truly dominate the market. MCT expects somewhere between 40 percent and 60 percent of our client’s production to be assigned in the coming six months.
With the new bid tape AOT programs, you can assign multiple TBA positions against the total volume to get a weighted-average price. It used to be clients would be told to hold off making a trade, in order to make a larger trade and assign it down the road to make the tolerances; no longer necessary. Clients don’t have to pair off the corresponding security, providing savings on the bid-ask spread. The security is assigned to the investor and loans are delivered against that trade. When there is a pair off on a trade and the trade is assigned, remember, that pair off is actually wrapped into the purchase price.
Legacy AOT programs normally required trade tolerances of 1% to 2%, which was virtually impossible for smaller lenders. With the new bid tape AOT programs, there’s an automatic blending that allows us to assign a trade against a population of loans with the price based off a weighted-average AOT strike differential. At the point commitments are requested and subsequently confirms loans are committed, the tri-party is now transmitted.
E-signatures now automate the process, providing a big efficiency boost. While efficiency is important, the removal of human error is even more impactful. There’s no question that putting the wrong price, volume, or coupon into a tri-party agreement is extremely problematic.
The AOT/tri-party process and the transmission of the trade are resource-intensive in addition to error-prone when done manually, but each of the following steps in the process now causes an automatic transfer of data:
- When a bid tape is posted to the platform
- When an investor uploads their bid levels on that bid tape and best execution analysis is performed
- When the request for commitments on loans the corresponding investor won comes through
- Upon confirmation of commitments coming back from the investor
Whole Loan Trading Features Unique to MCT’s BAM
When searching for a competitive edge in the digitized secondary market, it’s important to realize that there are features that are unique to BAM not offered by other competitors. This is due to MCT’s role as the innovator of the whole loan trading process. The following characteristics make all the difference in a platform.
Only BAM offers:
- new executions quickly and conveniently (including bid tape AOT’s)
- automated tri-party agreements for AOT transactions
- all agency API’s as soon as they are available
- accurate MTM’s through bid tape indicative pricing through AutoMark program
- AutoShadow automated investor pricing exploration tool
- investor set optimization via iMarket Monthly Reviews
- peer benchmarking through the iMarket report set
- geocoding of borrower addresses in bid tapes for increased security
- no external/email NPI data transfer
Lenders using BAM find that bid tapes are more easily sent to a full set of investors more often rather than just the top tier, resulting in a surprising pickup in some cases. 2+ hours are saved by lenders on average per loan sale.
With the automation of bid tape AOT, it is more about efficiency gains making these formerly cumbersome executions more practical, allowing lenders to achieve the approximate 5 bps savings on the bid-ask spread. MCT assigned over 26,000 trades in 2019 resulting in an average savings of $80k per client!
As the secondary market continues the pathway to complete automation, it’s clear to see that MCT’s trailblazing team will continue to lead the conversation about what is to be expected in the next stage of our industry’s advancement.
“Using BAM saves us 2 to 4 hours every time we do loan sales. The convenience of communication and analysis has encouraged us to send bid tapes to our full set of investors more often rather than just the top-tier, resulting in a surprising pickup in some cases,” said Timothy Ieyoub, SVP of Capital Markets at Eustis Mortgage. “We used to bid out on a 15-day delivery, but now we’ve reduced that to 7-days. Working with MCT, I feel like we’re in this together —reducing risk and achieving best execution.”
The Future of Whole Loan Trading Platforms
After the huge shift to bid tape execution which brought granularity of pricing, and the digitizing of the secondary markets taking place in the present that MCT was instrumental in rolling out, where do secondary markets evolve from here?
Thoughts around the industry vary, but there are some common themes:
- The vertical structure will become much more consolidated and there will be process coverage from beginning to end of the pipeline.
- Another possibility is moving toward a stock exchange level of shared adoption in the format and process for trading, possibly through blockchain. Or an eBay-style application that provides a format with search criteria for buyers and tools for sellers.
- Others believe the bulk bid process will evolve to so lenders won’t wait to stack up a bulk set of loans before bidding them but will instead be listed for bid as soon as they enter the pipeline, allowing buyers to sort and filter for criteria they are looking for and engender transparent nonconforming markets.
- Many believe the digitization of the loan process will move the pricing and knowledge about spec payups to the point of origination, reducing the need for a traditional rate sheet.
- Finally, pricing granularity is constantly advancing, and one example we could see in the future would be pricing by MSA rather than by state.
Get Ahead of the Competition with BAM
For both lenders and investors, a best execution trading platform is a win for all involved. Accuracy and reliability are increased with less time spent, pricing and execution are more timely, and the staff can dedicate their resources to strategy and analysis.
As the digitization of the mortgage marketplace continues, the case for making the transition to a digital whole loan trading platform has intensified. The increased efficiency, autonomy, reduction of risk, and pickup to the bottom line all justify making the switch. Maybe you are starting to explore the topic, or maybe are at the stage you are considering which platform to select.
As you continue your exploration of whole loan trading, remember that only BAM can offer the seamlessness of agency API’s, geocoding, AutoMark, and Autoshadow which achieve better execution without sacrificing efficiency, as bid-ask savings and cash flow advantages are provided while preserving the pricing granularity and accuracy.
Interested in reaping the benefits of a loan trading platform? Contact us for a demonstration of MCT’s Bid Auction Manager.
Lenders seeking to learn more can view the following related articles:
- Case Study: Mountain West Financial Increases Efficiency & Improves Margins with MCTlive!
- Case Study: Eustis Mortgage Upgrades Loan Sales Process with BAM
- Bid Auction Manager Webinar
- New Bid Tape AOT Executions Explained (Webinar Recap)
- MCT Wins PROGRESS in Lending Association’s 2018 Innovation Award for its New Bid Auction Manager™ (BAM) Whole Loan Trading Technology
- MCT Whitepaper: 15 Strategies for Lenders to Improve Profitability