Market access

How new solutions are reinventing secondary market access for local lenders

In today’s competitive landscape, the secondary market offers an excellent opportunity to pursue better margins, more competitive rates and increased profitability. For local U.S. lenders, however, this area also presents challenges. While small and medium-sized lenders play a vital role in buying a home in the United States, originating nearly 50% of loans for the $4 trillion U.S. mortgage market, they often lack the scale and access they need to realize their full potential in the secondary market.

To complicate matters, state-of-the-art secondary market solutions tend to cater exclusively to large players who regularly offer an inordinate volume of loans. This dynamic leads to a feedback cycle that benefits large, well-funded lenders: with expanded access to the secondary market, they achieve better prices, margins and profitability and, in turn, they offer the most competitive rates to borrowers, increasing their market share as well. The result is a growing deficit between local players and the biggest lenders.

New solutions on the secondary market

Fortunately, new aftermarket solutions for local lenders are beginning to appear on the market. These offerings exist specifically to provide small and medium players with the kind of scale, access and execution that the biggest lenders in the industry have enjoyed for years. Capital Maxwell, for example, works as a technology-supported partner to reduce negotiation time, streamline the process, and create a more consistent experience for lenders and their borrowers. By leveraging this solution, small lenders gain access to economical scale, competitive rates, and accelerated loan purchase.

In general, technology-enabled aftermarket solutions benefit local lenders in several important ways:

Execution

When it comes to the secondary market, precision is non-negotiable. All loan buyers want to know exactly what is going to be in the loan file – that specific data will be contained and that the data contained will be accurate. To achieve this kind of consistency, automation and technology are key.

By leveraging a secondary market solution such as Maxwell Capital, small lenders benefit from a more standardized experience. This, in turn, reduces the risk of loan records being inconsistent or inaccurate, thereby creating trust in their data and allowing them to sell their loans at higher prices.

To analyse

The technology also ensures that lenders pursue the most profitable secondary market strategy. By performing a comprehensive analysis of best execution, technology solutions help ensure that loans do not sit on the table. For example, some lenders can benefit significantly by switching from best efforts to a mandatory basis. Without underestimating what is needed to move to a mandatory basis, lenders could see an increase of 20 to 25 basis points.

In most cases, a deep scan is prohibitively expensive to perform manually. However, when guided by technology, this type of study can be transformative in determining which point of sale and delivery method will yield the best economic outcome for each lender.

Pipeline management

Pipeline management is a crucial part of the aftermarket process to control risk and ensure profitability. Here, hedging strategies can be useful in offsetting risk and increasing efficiency, giving lenders greater selling flexibility and the ability to keep loans on balance sheet longer, leading to higher returns.

Yet hedging can be daunting because it involves complex calculations and the use of models to manage risk and determine prices. Due to its complexity, selling loans on a mandatory basis to a trusted partner will get you better results.

Climb

One of the main reasons small lenders don’t have access to secondary markets is simply their size in the eyes of loan buyers. With an overall lower production volume, they lack interest and confidence from buyers and investors.

By partnering with a dedicated investor like Maxwell Capital, local lenders tap into the collective power of a network of lenders, giving them access to economic scale. In turn, they can pass on more competitive rates to their borrowers, allowing them to increase their income.

Increased profitability through access to the secondary market

Now more than ever, lenders need to think of creative ways to ensure their viability. Technology that supports increased scale and better execution is a method of choice to increase profitability, maintain an edge, and offset margin squeeze.

With innovative solutions to market, local lenders serving US communities have access to powerful aftermarket tools to compete with the biggest players in the industry.