PERSON OF THE WEEK: In case you haven’t noticed, technology is completely changing how the secondary market operates – particularly with regard to speed and compliance. Today, online platforms are replacing spreadsheets and accelerating data exchange, thus creating unprecedented efficiencies in how loan sales are executed.
In many respects, the secondary trading side of the mortgage business is being transformed by technology much the same way the origination side has been transformed.
To learn more about how technology is speeding loan sales and improving compliance, MortgageOrb recently interviewed John Ardy, president and CEO of Resitrader, an online mortgage trading platform.
Q: How is technology impacting the secondary market?
Ardy: Technology platforms that enable the buying and selling of bulk and mini-bulk transactions are gaining strength. Technology may finally be overwhelming the longtime standard practice of emailing spreadsheets between loan buyers and sellers to identify a suitable transaction.
Technology platforms speed up the data-processing aspect of the loan sale and, at the same time, enable sellers to match each buyer’s investment characteristics to offered loan pools more strategically.
This same technology is also helping with compliance. We have confirmed there is a lot of interest in moving away from e-mailed spreadsheets in the bulk market due to personally identifiable information (PII). Several of our newest customers, regulated entities and even some aggregators and hedge/advisors tell us that this is a strong trend.
Q: What are the main benefits that a digital platform provides with loan trades and pricing over the previous process?
Ardy: There are several reasons a digital platform is better than emailing spreadsheets: standardized data, an efficient process, market color and access to new relationships.
Managing data through “tape-cracking” can be time-consuming for both sides. It’s best to utilize a platform that creates a full translation of data for both buyer and seller, while standardizing it during the transaction. This makes the process more efficient, as each party can review standardized data and download it in their preferred format.
With online trading tools, buyers and sellers also have access to what we refer to as “color,” which is the range of prices that a seller is receiving for a loan, along with the second highest bid or “cover.” Our platform provides instant color – “High,” “Low,” and “Cover”- immediately on all loan trades, plus it allows the sellers to show the color to their buyer before the trade is completed to support re-bids and adjustments.
We also believe that being on a platform improves relationships. Some people have the misperception that online trading may negatively impact relationships between buyers and sellers. In practice, the opposite is true. We see online trading bringing buyers and sellers closer together as they communicate in real time during the trade, while sharing extended conversations between buyer representatives and sellers regarding trade color before and after the trade.
Q: How does security and compliance factor in with digital platforms?
Ardy: I mentioned the concern among secondary market players regarding personally identifiable information (PII). We’re hearing it more and more. While some may believe encrypted e-mail is sufficient, online platforms provide a much higher layer of security.
Most institutions gain stronger levels of data security through data encryption protocols in an online platform. Data is encrypted in transit and at rest, making online trading much safer than email. Security is combined with automated audit trails notating who is accessing information. Compliance becomes a manageable activity for users and oversight groups due to the activity recorded by the platform.
Q: Since some buyers and sellers use different technology, what’s being done to remedy connectivity issues, and how can everyone connect through a trading platform?
Ardy: The biggest issue facing the market when players are using different technology is data standardization. Spreadsheets come in many formats which drives a great deal of data conversion processes, and data integrations among software platforms are frequently the most valuable and most difficult aspects of using systems.
The standardization of data (tape cracking and data normalization) will allow people to use whichever software they feel best suits their needs. In the secondary market, multiple software providers will continue to provide their services, but only one efficient marketplace will emerge.
That will be the primary system that people will use to offer loans and evaluate bids, and this is where data will become standardized across all platforms. The marketplace will be the central hub that creates standardized data. If we use the cell phone industry as an example, there are a multitude of cell phones – but only a very few carriers – and across their networks, the data is in a standardized format.
Q: What are your thoughts on the future of technology in secondary market trading?
Ardy: Secondary market trading is getting faster and more granular, which means that technology’s presence is growing in the secondary market. The trades are happening very quickly now, with bids returned in minutes, not hours. And the pricing models are becoming hyper-granular based on loan characteristics. Precision and the need for speed will only increase the demands placed on trading and pricing systems, and create greater reliance on technology to support the process. Just as we head toward a digital mortgage on the origination side, we’re heading to online whole loan pricing and trading.