Incenter plans to soon put their new mortgage servicing rights platform to work, adding to the increased attention technology in this space has gotten as higher interest rates have raised the business line’s profile.
Incenter aims for the eMSR Exchange to have its first loans committed for co-issue transactions by Sept. 1.
The venture adds to other examples of investment in MSR technology from the past year, which also include Mortgage Capital Trading’s launch of functionality for co-issue sales and Voxtur’s purchase of the Blue Water Financial Technologies’ loan/servicing platform.
The rights to handle cash-flows from mortgages aren’t completely standardized assets, which added to the challenge of setting up an exchange for them, said Tom Piercy, president of national enterprise development.
“We feel we have come as close as we can to commoditizing this asset, which will never be commoditized entirely,” said Piercy, who also is a managing director at Incenter Mortgage Advisors, the company’s capital markets and trading subsidiary.
The eMSR Exchange, which was announced alongside a new Incenter due diligence and document management affiliate in May, aims to both help match buyers and sellers based on price and relieve operational burdens involved in co-issue servicing transactions.
Incenter is starting with a focus on co-issue deals, which typically involve splitting off servicing from loans sold to the GSEs so that a separate investor can buy the MSRs.
Its technology is primarily aimed at small- to medium-sized originators. Bigger ones may have their own proprietary technology.
Freedom Mortgage, for example, has its own co-issue platform.
“We have a large network of correspondent lenders, and we have a platform capable of acquiring large quantities of MSRs,” said David Sheeler, president of residential servicing and correspondent lending at Freedom Mortgage.
“We’ve been able to use that platform to assist other investors interested in owning MSRs,” he added. “We basically take care of all the sales, marketing and the operations for the loans, and then transfer the MSRs to a partner or investor of ours.”
In contrast to Freedom, more moderate-sized companies don’t often have the secondary trading units that bigger players do. As a result, they may find platforms like Incenter’s appealing — with some caveats.
“Tools like that are great in terms of facilitating a more efficient diligence process for buyers,” said Toby Wells, president at Cornerstone Servicing. “I would tell you the counter to that, though, is that while MSR trading sometimes is as simple as the best price, buyers and sellers still need to know one another.
“You need to know what one another’s capable of, making sure you have an efficient process to transition the consumer from one platform to another,” he added.
And consumer data in servicing also has proved sensitive to data breaches.
Incenter limits which parties handle borrower information and heavily outfitting its system with cybersecurity, said Jessica Pejka, vice president, transaction management, when asked about this risk.
“We don’t take in borrower data at Incenter proper. Our system houses the information needed to price loans to track delivery of them, but the actual borrower information goes to our subservicer directly,” she said.
Piercy declined to identify the subservicer involved.
“Right now, we’re dedicated to one and they’re absolutely a partner in managing and supporting standardization,” he said.
Incenter’s system can take in MSR data and documents from multiple sellers through the subservicer. That information then gets circulated through the exchange entity, due diligence and Incenter Mortgage Advisors. After that, the MSRs are matched with buyers.
“This would be very difficult to do without the technology on all sides, especially this pricing/ recording piece that is inherent to MSR, which is proprietary for us,” said Pejka.
The platform consists of a mix of time-tested technology and newer automation, and was primarily developed in-house with the exception of the subservicing functions.
“The base technology has been used by us for over 10 years in managing our co-issue transactions,” said Piercy. “It’s all technical development by our in-house programming.”
The pricing component in particular requires finesse, Piercy said.
“When you have underwriting guides for a loan, you go to the screen, you can get the [to-be-announced securities] price. That’s all commoditized. Servicing is never that way because you have a different approach by every buyer with regard to how they service loans and how they perceive certain characteristics of loans,” said Piercy.
The pricing in the system is customized by investors to address differences between buyers, and is live so that it can be changed at any time as the market shifts, he said.
“It is not disclosed to any other party, so that there is no competitive disadvantage. There is no disclosure of how you’re pricing to other buyers,” added Piercy.
And the due diligence done as part of the eMSR exchange also is specialized, said Pamela Hamrick, president of the Incenter affiliate focused on this area. That affiliate, Incenter Diligence Solutions, was built following the company’s acquisition of EdgeMac last year.
“The elements of the review are important for an MSR buyer, which are different from the elements that are important to rating agencies review, for example,” Hamrick said.
The big picture
The Incenter platform acknowledges the broader existence of technology developed in the market to handle mortgage servicing rights and seeks to improve on it, according to Pejka.
“We have selected vendor partners both in our subservicer and Incenter Diligence Solutions who are doing innovative work in their spaces, to help us move those forward,” she said.
The Incenter affiliate has collaborated with other technology providers in the space such as LauraMac and LoanLogics.
Due diligence for MSR deals has been a space ripe for automation that’s been evolving in recent years, said Bob Fulton, CEO of LauraMac.
“There really wasn’t a tool that I could find that allowed the user to create workflow, create tasks, and standardize the work,” Fulton said.
Artificial intelligence and other technology have reached a point where providers feel they can produce offerings that fulfill both goals.
“We’ve implemented document AI so that documents can be read automatically,” Fulton said.
Buyers also have increasingly been using technology to identify where document shortfalls exist, noted Craig Sylvestre, senior vice president, sales, at LoanLogics.
“What we’re automating is the review of that loan file to make sure that everything is present and that loan is ready to on-board to servicing,” Sylvestre said.
Technology also helps buyers remedy any lapses, said Terrell Cassada, executive vice president, digital operations, architecture and innovation at LoanLogics.
“They can see the results of what documents may be missing on those loans, and facilitate the collection of those missing documents from their seller,” Cassada said.
And the industry has been responding to the need not just to have effective automation for this purpose but to have technology available at the right price point, other players in the market said.
“Clients are trying to understand the risks on a given pool with minimal investment and without materially destroying the economics,” said Mike Margolf, managing director, secondary market technology at SitusAMC, in a video blog.
The MSR valuation component also has been a key part of the value proposition when it comes to technology efforts in this space, said Al Qureshi, managing partner at Blue Water Financial Technologies.
“We have a patent pending around our key core technology, where we can take anybody’s valuation and deliver it in real time,” he said.
“We provide investors with a machine-learning driven approach to understanding how they can be more competitive,” he added. “We never shop other investors’ prices, we would never do that, but we use machine learning to understand preferences vis-a-vis win/loss, and we’re able to help them price better, and drive towards more volume or less volume, depending upon what they’re trying to solve for.”
Meanwhile, on the other side of the trade, “we’ve got all the different pieces in place for that seller to slot their loans from a price perspective and a transfer perspective,” Qureshi said. “Because we digitized all this, the lift that’s required is very democratized.”
The GSEs, Fannie Mae and Freddie Mac, also have co-issue platforms.
“The agency exchanges are very good, and what they’ve created is a great efficiency, but it requires each individual buyer and seller to create their relationship, and then they’re utilizing the platform to run that relationship,” said Piercy. “What we have is much different in the sense that any seller has the ability to look into the exchange, look at pricing, get a sense of what it is. And if they’re interested, they go through an application process, same with buyers.”
Incenter also has designed its reporting capabilities on things like portfolio performance to be a competitive edge, he said.
“That, in turn, is generating much more interest to where I feel we will have, based on not formal commitments but preliminary indications, a far greater number of buyers that could create greater opportunities for sellers than other platforms,” said Piercy.
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