Electronic Intermediaries in Secondary Mortgage Industry
History
The secondary mortgage market is a thriving industry. Of all the mortgages originated last year, roughly 62 percent were sold on the secondary mortgage market. Of that percentage, it is estimated that 50 percent of the sale transactions went through traditional brokers and dealers. The business of secondary mortgage is a long and often arduous manual process. The process takes scores of account executives, daily faxed sheet rates or daily email of rates, tons of time spent on the phone playing phone tags, and tons of office support just to move loan data from originators to aggregators to prospective investors. The whole process is very inefficient and labor intensive, which could lead to errors.
Because the opportunity exists to streamline the secondary mortgage market and make it more efficient, two electronic intermediaries have stepped up to that challenge. These new intermediaries are Ultraprise.com and Pedestal.com. Both founders of these organizations see the potential of an electronic medium to streamline the process and bring about efficiency in the secondary mortgage market. They see the Internet as the tool that will revolutionize the mortgage industry. Ultraprise.com and Pedestal.com automate the transfer of pools of loans between financial institutions, those who wish to sell pools of loans and those who wish to purchase them. The immediate goal of these two new intermediaries is to provide a new avenue for account executives in secondary mortgage to communicate and trade their loans with one another. The future goal of Ultraprise and Pedestal is to become the industry standard in the secondary market.
Financial Backers
Without capital investments from the investors, Ultraprise and Pedestal could not have been launched as electronic intermediaries for the secondary mortgage market. Following are the names of the financial backers of Ultraprise and Pedestal.
Ultraprise
On October 1998, Ultraprise secured an initial amount $1.125 million from WestVen LP and Walker Investment Fund for its first round of funding. Roughly ten months after the initial funding, Ultraprise closed a $9 million venture led by FBR Technology Venture Partners and FBR Financial Fund II LP. This second round of funding also included the investors from the first round. To date, Ultraprise Corporation has $10.5 million in total funding. The success of Ultraprise to secure investments is due in part to the foresight the investors. They believe that the Internet will be the way of the future for the mortgage industry. According to George McCabe, managing director of FBR Financial Fund, "Ultraprise.com brings more than efficiency and cost-savings to the mortgage industry, it has the power to change the way mortgage professionals conduct business."
Pedestal
On April 1999, Battery Ventures, a national capital firm that focuses exclusively on the software and communications industries, invested $5 million in Pedestal Capital. According to Oliver Curme, a General Partner of Battery Ventures, stated "Pedestal’s management has successfully combined their extensive experience in the mortgage banking industry with leading Internet technologies to develop a unique trading platform …". Mr. Curme adds, "We [Battery Ventures] believe Pedestal is well positioned to take advantage of this unique opportunity and become the leading online trading platform for whole loan mortgages." To date, Battery Ventures is the only investor in Pedestal.com.
Classification
Vertical or Functional Hub?
Ultraprise.com and Pedestal.com are both vertical hubs specializing in the exchange of closed pools of loans in the secondary mortgage market. The function of these two intermediaries is to provide an exchange where mortgage originators could communicate and sell their pools of loans to financial institutions that wish to purchase them. The immediate goals of the new intermediaries are: (1) to bring efficiency to the process of the secondary mortgage market; (2) to bring more liquidity to the players of the market; (3) to become the industry leaders in the mortgage industry.
What is the business model of each intermediary?
Ultraprise.com and Pedestal.com have a similar business model. Both organizations focus on bringing more liquidity to the "non-conforming"(loans exceeding $240,000 mark), sub-prime (loans offer to people with bad credit ratings), and jumbo loans in the secondary market. Their focus is to increase the number of players for the non-conforming market so that there are more choices available for both sellers and buyers. Ultraprise.com and Pedestal.com essentially act as information provider and match-makers in this new trading platform for the secondary market.
How do Ultraprise and Pedestal make markets?: catalogs, auction, or match-making?
Ultraprise and Pedestal are a member only organization. Secondary financial institutions wishing to use the service of these organizations would apply for membership. Ultraprise and Pedestal are match-makers in the thriving secondary mortgage market. They facilitate the flow and transfer of data about pools of loans from the sellers to the potential buyer. Once the matches are made, the loan pools are sold on an auction platform.
Benefits and Marketing
What do Ultraprise and Pedestal offer the buyers and sellers
Ultraprise
Ultraprise.com brings efficiency, liquidity and value to the players in the secondary mortgage market by facilitating the exchange of loans and capital through an auction platform. It automates and standardizes the secondary market process by instantly matching available loan pools with the purchasing criteria of the buyers. The system has a pool matching function that alerts buyers through email of a pool of loans that fits their purchasing criteria. Therefore, sellers can find the right buyer quickly and efficiently. For the buyers, the value lies in the growing trading volume and having data in a standardized format that can be imported into their internal systems. Ultraprise also provides technology consulting services for those big players in the industry who wish to integrate data from Ultraprise into their many internal systems. Essentially, Ultraprise provides a secure Web-based trading environment for loans and powerful tools to help secondary market executives make smart, informed decisions to meet production goals and execute capital market strategies. Because of the efficiencies Ultraprise brings to the market, it reduces the expensive cost of maintaining multiple relationships for both buyers and sellers.
Click
on the button for the demo
Pedestal
Like Ultraprise.com, Pedestal also brings efficiency to the secondary market through the auction exchange platform. However, the organization distinguishes itself from its competitor by offering the traditional client services that one would find with the traditional intermediaries. That is to say, Pedestal foster a client relationship at each step in the process, from posting available loans to purchasing. Pedestal starts the sale process by taking the loan file from the seller and scrubbing the information into a standardize format and then uploading the information onto the website, unlike Ultraprise which sends a spreadsheet template that the clients would then fill the necessary information onto before submitting to the organization. Once the data have been scrubbed and uploaded to the website, Pedestal informs sellers of the possible bid for the pools of loans. After a bid is excepted, Pedestal monitors the diligence and settlement process to ensure timely funding of the sale.
Click
on the mouse to see the demo
How do Ultraprise and Pedestal create community?
It seems that in today's business environment creating a sense of community is an essential component to the success of any business. With this urgency, how then do Ultraprise and Pedestal create an online community to facilitate the trade, beyond the membership only community of organizations?
Ultraprise
Because exchanging pools of loans is a relationship-driven business, executives at Ultraprise realize the importance of the need for buyers and sellers to know as much information as possible who they are dealing with. Therefore, the chief executive officer feels that disclosing the necessary information to both buyers and sellers is critical to building a community as well as critical to the success of Ultraprise. The Ultraprise system allows buyers and sellers to know who they are doing business with before any transaction is completed. Each member that takes part in the trading of the loans is provided with corporate information and individual profiles, as well as the company's loan products and loan volume.
Pedestal
Pedestal is a strong believer in community. This is evident by the push of creating a long lasting client relationship. As mentioned, Pedestal sees both the buyer and seller in each step of the process from posting loan pools, to bidding, to finalizing the bids. The clients are provided with information and help along the way. Moreover, by monitoring the diligence and settlement process to ensure timely funding of the sale creates a sense of trust for the members of Pedestal, which in turn will create the community.
How do they sell to new customers?
Because the traditional process of selling loan pools on the secondary mortgage market is a time-consuming and long process, Ultraprise and Pedestal have streamlined that antiquated process. Essentially the streamlining of the process have shortened the cycle time by which sellers and buyers conduct business. Traditionally, the process of closing a sale of a pool of loans would have take several days to a week, now it can be accomplished in a matter of a few hours. By using Web-based technology, Ultraprise and Pedestal allow account executives to have access to the information and conduct business 24 hours a day, 7 days a week. The streamlined process will also free up the account executives to work on other matters such as formulating market strategies. Essentially, Ultraprise and Pedestal offer members a competitive advantage in the secondary market with potential for higher volumes, lower costs and shortened cycle time.
Overcoming e-intermediary obstacles
How does it overcome problems of asset specificity, product rating, product descriptions?
Since the products offered in the secondary market are standardized, problems of assets specificity and product descriptions do not exist. The players in this market know the features of the product offered. Moreover, both Ultraprise and Pedestal have a matching component in their system that would match the criteria of the buyers to the loan pools available for sale. Therefore, this ensures that buyers are getting the product that they want.
How does it handle payment issues?
Ultraprise
Ultraprise.com charges a fixed per-loan transaction fee paid by the buyer. It had until recently (October 6,1999) charged an initial membership fee as well as an annual fee. Because Ultraprise matches the seller to buyers, it does not participate in the payment process.
Pedestal
Pedestal charges a flat fee for each sale transaction. Pedestal will monitor the diligence and settlement process to insure that payment is made in a timely manner once the sale transaction is completed.
How does it build trust between buyers/sellers?
Ultraprise
As mentioned in the building community section, Ultraprise discloses all relevant information pertaining to the sellers and buyers. Each participating members have access to the information before any transaction is completed. As an extra measure of security, Ultraprise does not accept anonymous bidding. This will ensure that all members are legitimate. All these precautions are taken to ensure that there is trust among the members and to ensure that a strong sense of community is achieved.
Pedestal
Pedestal build trust between the buyers and sellers by forming a relationship with each. Pedestal is there at every step of the process for both the sellers and the buyers. Moreover, it monitors that timely payments of the transaction. This build trust for both parties because it ensures that no one is being cheated and that the buyers and sellers are legitimate.
Attaining critical mass
How does the intermediary bring a critical mass of users? Is it targeting buyers or sellers first?
Attaining critical mass is not a problem for these two organizations. It targets both the sellers and buyers at the same time by offering to reduce the cycle time that business has been conducting in the pass. By offering the shortened cycle time to conduct business, Ultraprise and Pedestal provides members with the potential for higher volumes and lower costs. This is a selling point for account executives who traditionally spend most of the time playing phone tags before a sale can be finalized. Moreover, the standardization and automation of data flow mean that sellers no longer needs to have buyers' proprietary software in order sell to those particular buyers. Because the internet is not bound by geographic regions, it allows both buyers and sellers to increase the potential market base. Finally, Ultraprise and Pedestal can reduce the cost for maintaining multiple relationships between buyers and sellers.
Technologies
What are the current leading edge electronic commerce technologies employed in this niche?
As industry leaders in the secondary market, state of the art technologies are used to enable the smooth exchange of data. Technologies such as Web browser interface, XML, DCOM (Distributed Component Object Model), and relational and object databases such as Oracle are used. The latest allows both to revolutionize the mortgage industry.