Launched in 2016, MAXEX aims to create a more efficient secondary market, making the buying and selling of residential mortgage loans more profitable and efficient. Its subsidiary, MAXEX Clearing LLC acts as the single counterparty and clearinghouse to each side of the transaction — both buyers and sellers transact with a wide spectrum of market players but only deal with one legal counterparty, MAXEX Clearing.
“Put most plainly,” says CEO Tom Pearce, “MAXEX is the buyer of the loan from the seller, and the seller of the loan to the buyer.”
“It’s a pretty exciting opportunity — and, I think, people have thought about exchanges before and they think of marketplaces that just simply introduce buyers and sellers,” Pearce said in a conversation with Mortgage Media’s Dave Stevens. “I think we’re really actually one of the first, what I would call a true exchange, that has actually become operational. … We are in the middle, in facilitating transactions, although we never principal anything for our own account with the intent to hold the loan and resell it at a higher price. We’re just facilitating the buyers and sellers and trying to make it significantly more efficient for them to transact with one another.”
“Whether you’re a big guy or a small guy, it makes it very easy to buy and sell loans on MAXEX, all while signing one standardized legal contract with us, facing one counterparty, one delivery, one settlement — and we’re the hub out to the spokes of a number of different sellers, and the hub out to the spokes of a number of different marquee buyers.”
It’s catching on. Stevens noted in 2018, MAXEX was the fifth largest seller of jumbo loans sold to others in the marketplace, with more than $3.0 billion in mortgages traded since 2016. HousingWire recognized it as among its Tech 100 for 2019. It largely services best-efforts flow, with a non-bank to bank ratio of around 60/40.
Some key points about MAXEX from their conversation:
The focus: MAXEX works exclusively with residential loans, with no commercial element, Pearce said. It started out primarily dealing with jumbo loans, because that’s where the most fragmentation was seen, but these days conforming loans make up a good portion of the business (though jumbo is still represented). It’s predominately where the GSEs, Fannie Mae and Freddie Mac, aren’t playing, he noted. There are some non-QM transactions, some Community Reinvestment Act loans; there’s a jumbo express program allowing people to use an automated underwriting system (AUS) to underwrite the loan but sell through the MAXEX platform to jumbo buyers. But the common ground: Everything’s done through one contract and one counterparty.
“It makes it wildly efficient for sellers to have a one-stop shopping, if you will, where they can get good liquidity and execution by just coming in to deal with MAXEX,” Pearce said.
Single standardized contract: More than 100 different counterparties have all signed the identical standardized contract, one that applies to buyers and sellers alike — if you’re a buyer on the platform, you can also be a seller. Any reps and warranties MAXEX gives to the buyer are the same as it got from the seller — it’s all matched, with the company never taking the gap risk, Pearce said.
If a buyer does have a problem with a loan and thinks there is a valid repurchase claim, they come back to MAXEX, as all parties have agreed to a binding, loser-pays arbitration progress. If the claim is valid, the seller is obligated to repurchase; if the seller is insolvent and otherwise can’t meet that obligation, MAXEX will make good on it. “Then the buyer doesn’t have to worry about it, and we’ll pursue the seller,” Pearce said.
Due diligence: The company’s underwriting standards for sellers are about double what they would typically be for the GSEs, Pearce said — $5 million capital, $2 million liquidity. MAXEX is very conscious of what kind of loan products the sellers are originating and their ability to repurchase, and there’s a very robust counterparty risk management infrastructure in place for approving and monitoring all the counterparties.
It helps that this is hardly the first rodeo for Pearce and his business partners — many of whom were the senior management team from Lydian Data Services, a big loan review and underwriting business prior to the financial crisis, utilized by the majority of the top 10 Wall Street dealers, he said. MAXEX president and COO Bill Decker was Lydian’s CEO and founder.
“Loan reviews is something that we fully understand. We do use, and work with, almost as a transaction manager — or as a transaction manager, rather — for our buyers,” Pearce said. Loans get reviewed by a third-party firm — but “at the end of the day we’re on the hook for the reps, so the process has to be very rigid in order to allow us to feel comfortable taking that risk,” he said. “But it is a complete re-underwrite of loan file that we’re doing on a highly automated electronic basis, where we’re extracting out about 2,200 date elements out of the loan file on the front end, and cross data validating all of those data elements across all the different loan documents to make sure we flag any discrepancies. And then we take that data, and look at it, and see if we can reconcile, and see where there are different errors.” It’s a process designed to reduce risks for both buyers and sellers while bringing costs down, he noted.
Efficiency and trust: The buyers — which include major Wall Street dealers, large money center banks, regional banks, large U.S. insurance companies — don’t have to go through the hassle of monitoring and surveilling a lot of different counterparties — “they can just face us,” said Pearce. As for the sellers, they — by virtue of signing a single contract with MAXEX — get access to many buyers to whom they otherwise wouldn’t get access. And that’s pretty significant — post-crisis, it’s not easy to get counterparties onboarded and approved. As Stevens puts is, through the crisis, the trust breakdown was pretty strong — consistency and standardization of the sort MAXEX provides can go toward reinvigorating the private-label securities market. MAXEX, Pearce noted, loans aggregated through the exchange have been securitized in 21 different private transactions. Which is another “market-first” to successfully securitize residential loans purchased through an exchange.
“We look at ourselves as just shared plumbing, if you will,” Pearce said, “that allows the buy side very efficiently to leverage on our infrastructure in order to get access to a broader range of investors and push products that they want through us to those originators.”
He said MAXEX’s role is in dealing confidence and trust back into the private market, where people feel they can trust the integrity of the data, with appropriate checks and balances.
“The way that I think about us, it’s a genesis of having lived through the financial crisis and, like a lot of people who were involved in credit, and certainly lost a few fingers and toes along the way. Looking at the lessons of that, what was it that the market really needed post-crisis?” Pearce said. “That’s what we’ve created in terms of an independent market utility that is free of conflicts.” Before anything moves, before ownership is transferred from MAXEX in the secondary market, everything is re-underwritten to mitigate fraud and keep toxic mortgages from getting into the system.
Nor does the company hold loans and execute later — Pearce said they would be in conflict with their buyers if MAXEX were to position anything for its own account, and it prides itself on providing a conflict-free process.
“It is riskless principal trading if you will,” he said. “Before anything ever goes on our balance sheet, the trade’s been locked with both the buyer and the seller, all of the conditions have been cleared, it’s cleared for settlement. … Our sellers, they’re in the moving business. Our buyers are in the storage business. We provide inventory financing, so we do have a couple hundred million dollars’ worth of credit lines, where we can take down the loans for the seller, let them have daily liquidity.”
Relationship with the industry: Pearce and MAXEX, like everyone else in the industry, have their eyes on what’s going on with the GSEs — there’s a lot of activity in the private market, swarming around the GSE beehive in Pearce’s metaphor, looking for what opportunities arise if there is an agency pullback. Pearce wants to be complementary to the agencies and what they offer, and also anticipate what shape GSE reform may take and what its implications are. Pearce and Decker met with FHFA director Mark Calabria a few days before he was nominated for the position, and have also been in contact with Craig Phillips, counselor to the Secretary of the Treasury.
Whatever happens with the GSEs, Pearce said MAXEX is positioned to make it very efficient for lenders and originators to simply have one contract with the company and still get access to liquidity for whatever loans for which they can’t sell to the agencies.
How to access MAXEX: The company hasn’t done a lot of marketing and advertising, at least initially, Pearce noted — mostly to “make sure that everything is firing on all cylinders” first, to make sure they “get it right,” in Pearce’s words. This Mortgage Media interview is in fact the first broadly disseminated interview, he said — they feel comfortable now about MAXEX’s standing, with a robust pipeline of buyers.