The PLS market hits a bump in the road
“The company recently completed a modest reduction in its workforce, consistent with workforce reductions in the mortgage lending industry in response to declining lending volumes,” the letter said. “MAXEX does not expect this to impact its operations, and no further staff reductions are expected.”
MAXEX — in which JP Morgan is a major investor – declined to comment on the number of laid-off employees at the company. MAXEX officials also did not disclose the company’s total number of employees – although its LinkedIn account shows it has less than 150 employees.
Clearly, a small downsizing at MAXEX isn’t a game-changer in a mortgage industry that employs 130,000 people by some estimates, but it’s significant that the loan trading platform is getting its workforce on board.
“MAXEX experienced record growth in 2021, with year-over-year revenue growing more than fivefold and the number of exchange participants more than doubling,” the company says in the letter to its shareholders. clients. The MAXEX exchange now supports some 300 loan originators/sellers and over 20 active loan buyers.
MAXEX’s recent downsizing news also follows a strong first quarter performance for the entire PLS market, compared to the same period in 2021. In the first three months of this year, some 60 deals PLS transactions valued at $31 billion hit the market, compared to 35 PLS transactions valued at $14 billion over the same period in 2021, according to transactions tracked by the Kroll bond rating agency — and the rating firm’s net does not even capture all PLS transactions over the period.
Similar to last year, JP Morgan, through its house brand, JP Morgan Mortgage Trustcontinues to be the 800-pound gorilla in the PLS market, accounting for approximately 20% of the market by volume year-to-date to March 30, 2022. The New York-based bank holding company’s investment bank JP Morgan Chase & Co.., sponsored seven private label securitization deals in the first three months of this year, collectively valued at $6.5 billion. This includes a $2 billion PLS offering in January, a $1.2 billion deal in February, and a $1 billion deal in March. JP Morgan’s PLS offerings include three transactions backed by investment property and four backed by jumbo loans.
However, a good portion of the PLS transactions in the first quarter were for lower rate loans from 2021, many of which were refinanced loans, which finally made their way into transactions at the start of the new year. Once this pool of loans is exhausted, it will be replenished with new loans at much higher rates.
The problem, for now, is that mortgages are down on the refinance front and purchase loan volume is essentially flat – a byproduct, to a large extent, of the rate environment. volatility and tight housing stock.
“The volume of refinancing requests is now 60% below last year’s levels, in line with MBA’s forecast for 2022,” said Mortgage Bankers Association Chief Economist Mike Fratantoni in a public statement released earlier this week. “Even with the continued rise in prices, purchase request volumes have changed little in the past week.
“This is particularly auspicious as we are now at the start of spring home buying season, and home buyers are grappling not only with higher and more volatile mortgage rates, but also with a continued shortage. of houses on the market.
The private label securitization market ultimately reflects, in part, mortgage production trends in the origination market, and the current trend line is marked by uncertainty, volatility and production levels weaker.
David Pelka, Head of RMBS and Principle Business in Minneapolis Investors CarValwhich is active in both the residential whole loan and RMBS markets, said it is currently difficult to predict with certainty where the light is at the end of the tunnel that the PLS market now finds itself crossing.
“Overall mortgage volume will be under pressure as long as rates are high, rising and/or volatile,” he said. “…It is currently quite difficult to see material certainty in new production volumes at higher rates (e.g. demand from borrowers) as well as in the execution of corresponding securitization.”
John Toohig, Managing Director of Whole Loan Trading at Raymond James in Memphis, explains the situation as follows:
“Yesterday’s Newspaper [at lower rates] is underwater… [but] new loans coming in now are starting to get better priced [at higher rates],” he said. “When you have a 100 basis point move [or more] in three or four months, it is difficult for this pipeline to catch up.
Toohig added that from the perspective of a non-bank lender who does not hold deposits and has not hedged properly, the recent rise in interest rates and accompanying market contraction offer few good choices. .
“They can’t just park the loans on the balance sheet because they have a warehouse line, and that warehouse is getting old, and they have to sell those loans at some point,” he said. “And that’s what’s driving the securitization system right now, … and those loans are now worth 95 [cents on the dollar].
“They are trying to find the best way out, it is possible.”
In other words, the PLS market until March this year was still digesting a large volume of low rate PLS trades which in many cases lost value and became more difficult to execute as rates rose. were going up. Yet industry experts who spoke with housing cable about the current market conundrum expressed confidence that the market will recover once a rate plateau is reached and new PLS offerings backed by higher rate loans hit the market.
Toohig said he too was confident that “we will start to see prices normalize as [new mortgages are originated] at current market rates.
“It’s going to take time, though,” he added. “That’s why you’re starting to see the layoffs [in the industry] and it’s also because [overall mortgage] production has slowed down [too]. It’s a very fluid situation.
MAXEX is also betting on the future. The company recently completed a Series C preferred stock offering that was co-led by its existing institutional investors. The capital raised, the company said, will be used to develop the MAXEX platform, including its loan programs.
“The current disruption in the mortgage market due to rising interest rates, rapidly declining volumes and economic uncertainty has created a unique opportunity for MAXEX to meet the growing needs of lenders and investors by offering a broader range of lending products while helping them reduce infrastructure and costs,” said Tom Pearce, CEO of MAXEX, in the letter to the company’s customers.
Andy Payment, head of marketing at MAXEX, said the company was not disclosing the terms of the recent stock offering. The payment indicated that MAXEX continues to pursue the expansion of its sales force, which the company announced last December.
“While we expect this expansion to slow somewhat given current market conditions, we remain committed to building a world-class sales organization to serve our rapidly growing user network,” Payment said.
Additionally, he said MAXEX plans to expand its non-QM program offerings and services, “both through the traditional exchange as well as through our platform-as-a-service offering that leverages of our infrastructure – multiple vendors to a single institutional investor.”
The non-QM market, which tends to do well in a buy market cycle, focuses on borrowers who are not in traditional salaried jobs or who are not eligible for in-box mortgages. agencies. These borrowers include the growing number of self-employed people as well as real estate investors, foreign buyers, business owners and people with credit problems.
“There are a number of factors facing the current market,” MAXEX’s letter to customers said. “However, MAXEX is optimistic about the industry’s long-term growth and our growing relevance to market players.”