Novaprime, a technology firm that provides a data intelligence platform for mortgage lenders, has partnered with Tradeweb to enhance the Novaprime hedging solution. Tradeweb is a major player in the fixed income sector, with one of its biggest areas being the TBA mortgage backed securities (MBS) market, where it saw average daily volumes of $248 billion last year. Both use the Canton blockchain network, which enables automated workflows for hedging for mutual clients of the two platforms. Hence, this partnership helps to automate mortgage risk management.
To understand what’s involved takes a little bit of explaining.
Mortgage lenders and hedging
As background, Agency MBS are mortgage backed securities issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. Their issuances have scheduled release dates, and the TBA (To be advised) market involves the trading of issuances before anyone knows precisely which mortgages will be included. Despite the apparent lack of information, it works because the MBS issuances are very standardized. Hence, the TBA market is a kind of forward market for mortgages that’s used for hedging.
So when a mortgage lender enters into a contract with a home buyer, they potentially can hedge that lending immediately. That would usually involve selling a TBA contract that locks in the interest rate. Typically that requires some relatively manual, repetitive tasks, which get automated using this blockchain-based solution.
Say a bank entered into a handful of mortgages totalling $5 million for 30 years at 7%. If rates rise to 7.5%, then the lender is sitting on a mortgage that is now worth almost $250,000 less. If they sell it forward, then that risk is covered and instead borne by the investor. The key point is that the bank wants to originate mortgages and not take on the entire interest rate risk.
How it works
Novaprime creates a smart contract for every mortgage originated. It aggregates all the loan data on its Loan Intelligence platform and combines that with trading data from the Tradeweb platform. Novaprime smart contracts interact with those from Tradeweb, for data modelling purposes and then the smart contract executes certain steps automatically.
“We believe loans should be committed and delivered the day of closing, and automating risk management including hedging is as essential to our goals as the loan commitments themselves,” said Linus Petrén, CEO of Novaprime. “This collaboration seamlessly integrates Tradeweb’s best-in-class electronic trade execution technology with our Loan Intelligence platform, a major step forward in increasing efficiencies and cost savings for lenders, and ultimately making homeownership more affordable.”
The blockchain approach for MBS extends beyond just these two companies. Figure Technologies set up a consumer facing mortgage origination firm to prove the benefits of using blockchain as part of the origination process. It has created an alternative blockchain registry for mortgages, which is trying to break the monopoly of MERS in the United States. The company has been involved in multiple asset backed securities issuances. Plus, Figure wants to create a TBA-style market, but for non qualifying mortgages.
