What drives trade success for whole loans in the secondary market?

There is a transparent market for newly originated residential mortgages conforming to the guidelines set by Fannie Mae, Freddie Mac, Ginnie Mae and loan aggregators. There is also a very active but much less transparent secondary market for loans that didn’t meet those guidelines and for seasoned loans that are performing, re-performing or non-performing.

Elements that drive successful trades in the secondary market are the focus of a session at the Whole Loan Trading Workshop of the Mortgage Bankers Association. The workshop takes place November 7-8 in Houston. Mike Kelleher, Vice President of Business Development at MountainView Financial Solutions, a Situs company, is a panelist in the session on November 8.

In his session, Kelleher will share market color on what MountainView has observed in the trading of scratch and dent loans (those that nearly missed or fell outside investor or GSE guidelines), re-performing loans and non-performing loans. He will also share insights on why certain pools of loans trade at levels above or below a seller’s price expectations and the key activities sellers can do before coming to market to help maximize their execution.

According to Kelleher, the universe of buyers is constantly evolving and encompasses small, large, new and experienced investors, including some large buyers with very detailed due diligence processes and very sophisticated pricing models. He adds that even in the midst of a very robust market, as we have now, buyers tend to be very selective about which opportunities to evaluate and bid.

“Distressed loan trading is very much a niche market, and the importance of knowing the relevant parties and understanding the dynamics of the trade itself cannot be understated,” said Kelleher.

On the session panel, Kelleher will also highlight three important points in the minds of buyers: having confidence that the loan data is complete and accurate; trusting that the seller understands the transaction and can fulfill its obligations; and believing that the seller has reasonable price expectations for the loans.

For loan sellers, this translates into many detailed areas of work across the life cycle of a trade: pool stratification, analysis and valuation; preparation of the pool data and materials; and sales, marketing and transaction execution. These elements have sub-component activities requiring professionals with very specific expertise, including individuals who know the buyer universe and can identify which buyers specialize in specific product types.

“Product type, pool size and collateral quality are just a few of the factors that will materially impact the pricing of the assets and ultimately the ideal investor for any given pool,” said Kelleher. “An ability to interpret the entire picture and strategize effectively will dramatically improve the odds of a smooth and successful transaction.”

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