If dot-com lenders are dropping like flies, is there much hope for the online mortgage loan exchanges Ultraprise Corp., Pedestal Inc., and IMX Exchange?
These ventures have been resilient in tough times, but for all their promise and boasts of the money they say they save traders, they may not be able to make enough money to save themselves. Executives at the exchanges, of course, say otherwise, and some lenders give the services high marks.
IMX, Ultraprise, and Pedestal auction loans. They promise to save loan originators and traders time and expense by taking their traditional fax- and phone-based operations online.
Pedestal and Ultraprise, which are based respectively in Washington and Dulles, Va., deal in secondary-market trading - or trading on loans that have already been closed - while IMX, of San Ramon, Calif., lets mortgage brokers put up loans on its site for bidding by wholesale lenders. Pedestal was founded in 1997 and has been operating since TK, Ultraprise since February 2000, and IMX since 1997. Observers say the three have yet to gain broad acceptance from brokers and lenders and may not gain it in time.
Richard Beidl, a director at TowerGroup, a research firm in Needham, Mass., said the exchanges "have been slow to take off" because mortgage lenders "do not want to compete solely on a price basis."
Jay Fredlund, vice president of correspondent lending at First Union Mortgage Corp., in Waterbury, Conn., said big lenders such as Chase Manhattan Mortgage Corp. and Countrywide Credit Industries Inc. think their own market shares are so large that they have no need for the exchanges.
Furthermore, adopting the sites forces lenders to change the way they do business, and that's asking a lot, said Scott Cooley, president and chief executive of Contour Software Inc., a loan origination software company in TK.
Mr. Cooley said IMX, which links brokers and lenders, hampers a lender's ability to deal with brokers individually basis and to sell its ancillary services. The site, which promotes more competitive, open bidding on broker loans, also threatens to trim lenders' margins, he said.
Nonetheless, some lenders say they like the efficiencies the exchanges offer.
Danny J. Thomas, vice president at First Horizon Home Loan Corp. in Dallas a subsidiary of First Tennessee National Corp., said sending out his rate sheet through IMX once a day by computer is a lot better than faxing repeatedly to interested brokers.
For their part, the exchanges say tailoring their products to the way lenders and brokers are used to doing business has helped them attract converts. IMX has partnered with loan origination system developers to allow brokers to send borrower data directly to its exchange by computer and receive alerts when bids are placed.
In a nod to the mortgage industry's tradition of relationship-building by providing personal contact whenever necessary, Pedestal offers a sales force that facilitates loan trades between buyers and sellers. For instance, the company tries to ensure that sellers maintain reasonable price expectations for loans they want to sell and advises on whether loans should be sold singly or in pools. It also helps sellers structure loan pools to make them attractive to the marketplace, the company said.
Pedestal's knowledge of the players on both sides of the transaction, who remain unknown to each other until the bid is accepted, helps it match traders quickly, making the trades as efficient as possible, the company says. "We know our buyers and sellers quite well, and we say if we think the fit might not work," said Stuart McFarland, Pedestal president and chief executive officer.
Ultraprise also helps its clients make their best pitch. John Bourne, president and chief executive officer of the company, recommends that sellers pool loans according to product type.
"Buyers don't like to crawl through a bag and say, 'I want this one, I don't want that one,' " he said. "People like to deal with a similar product in one go."
Of the three exchanges, only IMX planned an initial public offering last year; but it withdrew in June, citing "general market conditions."
Richard Wilkes, president and chief executive officer of IMX Exchange, said the company is overcoming brokers' and lenders' reluctance to do business with new parties on the site. It is adding 10 to 15 brokers a day and three to five new lenders every month, he said.
But Mr. Cooley said that while some brokers love IMX because open bidding on their loans brings them more competitive pricing, the exchange faces real hurdles with wholesalers because it threatens to squeeze their margins on loans.
Also, he said, wholesale lenders' often offer brokers "value-added" services such as fast underwriting decisions on the loans shipped to them. By becoming mere bidders on the exchange, he said, wholesale lenders do not get the opportunity to distinguish themselves from competitors by adding value.
What's more, Ultraprise and Pedestal must contend with a well-financed newcomer to online secondary-market trading: HanoverTrade.com, a unit of the New York real estate investment trust Hanover Capital Mortgage Holdings Inc. that started doing business in October and completed its first trade in December. Irma Tavares, president of HanoverTrade.com, said the company was created to establish a trading market for clients of its sister company, Hanover Capital Partners, which has brokered trades of loan pools in the secondary mortgage market for 11 years.
Meanwhile, Ultraprise, IMX, and Pedestal are looking for new and better ways to do business, and wholesale lenders may soon offer them another option. Wholesale lenders have been taking the mortgage exchange concept and running with it to create private, closed systems for themselves for select lenders and brokers.
"We think that model will do quite well," Mr. Beidl said. "They allow lenders to provide a high level of service to their trading partners rather than making lenders go out and bid and be a low-cost provider to anyone who wants to submit loans to them."
Mr. Cooley said the exchanges "make sense. They are viable and have some real opportunities in front of them." But at the same time, he cautioned that the challenges before them are significant.
"It's almost like playing the clock," he said. "Do you have enough money to get through the cycle?"
For now wholesale mortgage dot-coms proudly take claim for leveling the playing field for everyone. In the secondary market, any seller has an opportunity to transact with the buying heavyweights such as Fannie Mae and Freddie Mac, said Ultraprise's Mr. Bourne. Offline, he said, "it may be hard for a small lender to capture attention."