Harnessing the Full Potential of the Mortgage Capital Markets–Rocktop’s Brett Benson

Brett Benson is Co-President and Chief Investment Officer, Rocktop, a leading Solutions-as-a-Service company empowering institutional investors, asset managers and other holders of risk in the fixed-income and mortgage markets to improve yields.

Imagine a day when the mortgage and other fixed-income markets operate like transparent and seamless exchanges. That’s the vision of Brett Benson, Co-President and Chief Investment Officer of Rocktop. MBA NewsLink asked him why this would be consequential for the mortgage industry and the broader economy.

MBA NewsLink: Tell us more about Rocktop’s vision of mortgage/fixed-income markets that operate as transparent and seamless exchanges.

Brett Benson: It’s an exciting prospect for our clients who would like to harness the true potential of the mortgage capital markets in the secondary markets by investing in complex residential mortgage asset classes like Ginnie Mae early buyouts, HECM reverse mortgages, residential transition loans (RTLs), or scratch and dent loans. These types of assets and the servicing of them are not well understood, creating risks for the investor. Appropriately addressing these risks requires validated data and documents with transparency into the historical data and servicing processes.

When we have fully reached the milestone of ongoing fully diligenced assets, then the transparency of risks will always allow for more accurate pricing, and transactions will be effortless and cost less. This will not only create liquidity for the broader assets, but further add relative cost savings for lower-balance loans. This could have some important societal benefits, such as making affordable housing a reality for more people.

Two challenges get in the way of this vision, though. They are: 1) a lack of trust in underlying loan data and 2) an abundance of errors and operational inefficiencies that drive up costs and risks.

MBA NewsLink: How can the capital markets help solve these challenges?

Brett Benson: Investors should expect what’s called strong form efficiency from these markets–where every asset is a known quantity, all underlying data has been validated, and all risks and costs are transparent. That’s the threshold for making these assets more tradable and helping investors achieve best execution. Capital markets players shouldn’t accept the status quo given the advances in technology and data management solutions that are removing much of the opacity from the investment process and driving up potential yields.

MBA NewsLink: Could you elaborate on where this opacity comes from?

Brett Benson: It’s a consequence of our industry’s highly inefficient processes and continued reliance on manual data and collateral documents. A few of the major issues include:

Continued reliance on manual spreadsheets in disparate formats as the repository for loan data. The information they contain is frequently wrong, not to mention incomplete, and has to be corrected and normalized. That’s a major reason that investors routinely “re-underwrite” portions of any loans they plan to buy.

The holdups and friction-ridden processes associated with ensuring reconveyability of property ownership—from checking that collateral documents are with custodians and that servicing information is complete, to reconciling reps, warrants and payment histories.

Disagreements between buyers and servicers about servicing and P&I advances, and more specifically, whether or not they are recoverable.

MBA NewsLink: What’s the collective impact of these factors?

Brett Benson: Each of them creates uncertainty, which can lead to liquidity discounts and higher spreads if hanging items are not properly addressed and resolved. That’s why institutional investors often take more time than usual for diligence on these portfolios. The proportionate impact of liquidity discounts on lower-balance loans is also on their minds.

MBA NewsLink: How is technology helping to resolve this?

Brett Benson: Solutions harnessing digital ledger technology (blockchain) and AI are both playing a significant role here.

AI, for instance, is improving and speeding up the industry’s loan-level data collection, analysis, validation, and defect resolution capabilities to help turn every asset into a best asset.

Here is just one example of how it is helping: Normally, accessing and evaluating two years of servicing comments for one asset can take hours. AI-based solutions can surface borrowers’ sentiment, stated intentions, hardship information, costs, and missing/incorrect data in minutes.

Once requisite diligence is complete, enhanced by AI, the data and documents related to these assets are going up on the blockchain as a “digital and immutable source of truth” to empower investors to act with more confidence.

The result, we believe, will be an era of strong form efficiency where the mortgage market’s value as an economic wealth engine will reach new heights, and lower-balance assets will be in demand.

(Views expressed in this article do not necessarily reflect policies of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Editor Michael Tucker or Editorial Manager Anneliese Mahoney.)