With a click of a mouse, Thomas Marano can bypass what used to be a time-consuming paper chase, and rummage through the data on many of the loans backing mortgage-backed securities.
Mr. Marano, senior managing director of Bear, Stearns & Co.'s mortgage trading operation, credits the firm's high-tech approach with protecting profits in a tough year.
Welcome to mortgage-backed bond trading 21st century style, in which flat computer screens have long shared tight desk space with traders' framed photographs of their families, and where e-mail has turned the fax machine into a dinosaur.
"Point-and-click is the whole goal," Mr. Marano explained after giving a visitor a tour of the high-tech facilities at Bear Stearns' midtown Manhattan offices. Bear Stearns rolled out a computer model this year that he says gives investors loan-level detail beyond what has been offered by Fannie Mae or Freddie Mac or any other Wall Street firm. And this year, he said, a second model, focused on credit analysis, is due.
For 15 years Mr. Marano, 38, has traded bonds from many of the mortgage desks he now supervises, including asset-backed securities, commercial mortgage-backed securities, and securities backed by nonagency whole loans.
As a trader, Mr. Marano was an innovator. He priced the first agency real estate mortgage investment conduit, or Remic, in 1987 with Fannie Mae. Just four months ago he became part of Bear Stearns' management team.
He is also a partner in Bear's EMC Mortgage, a special servicer that focuses on sub-performing or nonperforming loans.
Mr. Marano, who came to the firm with an undergraduate degree in history, is part of a new generation of technologically savvy fixed-income executives on Wall Street who are using computer modeling to identify new markets and wring profits from old ones.
Some things technology cannot overcome. In 1999 rising interest rates led to a dramatic reduction in the volume of mortgage-related securities. Bear Stearns underwrote $25.9 billion in mortgage-backed securities in 1999 through Dec. 16 and was ranked fifth, a slip from 1998, when it was ranked third with $34.9 billion, according to Thomson Financial Securities Data, a sister company of American Banker.
But despite the rise in interest rates and the resulting decrease in volume, Mr. Marano said, Bear Stearns was more profitable in 1999 than in 1998. "The model enabled us to hedge our portfolio more effectively as rates went up," he said, adding that Bear's customers also benefited from the models' prepayment analysis.
Lehman Brothers, the No. 1 mortgage-backed dealer in 1999 and 1998, underwrote $37.6 billion in 1999, through Dec. 16, down from $63.5 billion in 1998.
Ted Janilus, managing director for Lehman's mortgage unit, said the big theme for the mortgage market next year will be "credit stories and analytics."
Mr. Marano said 1999 has been "a story of recovery," from the credit crunch that occurred in the fall of 1998. Of all the sectors Mr. Marano watches, he said the home equity or asset-backed securities sector has been the "slowest to recover," but he does expect a rebound to occur in 2000, prompted by market participants' better understanding of the credit risk for these bonds.
Mr. Marano said he focuses on three areas for continued growth: originations, secondary trading, and structuring.
Since Bear Stearns does not originate mortgages, it relies on lenders to create business. But it can control its destiny by how it performs secondary trading of mortgage securities and how it structures its bond deals.
Bear Stearns prides itself on its FAST unit, short for Financial Analytics and Structured Transactions, which Mr. Marano described as an internal think tank of bond analysts, mathematical experts, and computer programmers.
This unit helped Bear create the mortgage valuation model launched in March that gives investors detailed loan-level information about securities backed by nonagency mortgages, including jumbo loans, alternative-A loans, A-minus, and subprime loans, as well as mortgages with a 125% loan-to-value ratio.
The model, which took two years to develop, uses home price data sorted by Zip code to update loan-to-value information for more than 350,000 home loans in the company's nonagency data base.
Recently, in an effort to establish a standard for nonagency analytics, Bear made its model available to Bloomberg subscribers. Making the data more widely available could lead to "standardization of prepayment assumptions," said Dale Westhoff, a senior managing director of mortgage researchat Bear.
Another way Bear used its analytical team was to structure securities backed by excess servicing from Countrywide Home Loans. In a year when origination volume was down, Countrywide decided to raise revenue by securitizing the excess servicing on a $30 billion portfolio of home loans in November.
Excess servicing is servicing fees less servicing costs. Countrywide securitized the excess on loans it sold to Fannie Mae but still services.
Bear brought interest-only bonds to market as collateralized mortgage obligations with a Fannie guarantee, a product valued by investors in a climate of high interest rates and slower prepayments.
Again, Bear provided investors with data on each loan in the servicing portfolio. Fannie and Freddie provide only aggregated data on loans backing their securities.
The Countrywide deal is an example of a deal that benefited all parties - a government-sponsored enterprise, fixed-income investors, the originator, and Bear Stearns, Mr. Marano said.
The GSEs are "going to use every piece of technology that is available to them and all of their advantages to include as many products as possible within their menu," he said citing the success of the Countrywide deal.
Using loan-level data in their models has put Bear on the cutting edge, said Andrew Davidson, president of Andrew Davidson & Co. in New York, a developer of risk measurement and trading models for financial institutions and regional Wall Street dealers. Loan-level data and analysis will be one of the big areas of growth, he said.
Though the "Y2K freeze" slowed development of new modeling technology in 1999, Mr. Davidson said he expects a "pretty rapid growth in the use of technology in the mortgage market" in 2000.
Nevertheless, Mr. Davidson said, traders don't have to fear that computers will replace them. "Individual trader or portfolio manager judgement is still a crucial factor," especially since the mortgage market is "very dynamic," and no model is perfect, he said.
In addition to its technology focus, Bear Stearns is also looking to continue to build its business in commercial mortgage-backed securities. So far in 1999, the firm has securitized $4 billion of commercial real estate debt, with a focus on "high quality loans with pretty good margins," Mr. Marano said.
Another area of growth is in collateralized bond obligations and collateralized loan obligations, both products that entail the re-securitization of existing bonds. These deals require an active manager of the assets behind the deal.
"In a high rate environment, the areas that will make the most money are the secondary trading desks and the re-securitization efforts which means that we're going to rely very heavily on our FAST people to develop opportunities in the secondary market," he said.
