When Bank Assetpoint got under way in 2013, most of the commercial real estate loan trades it facilitated were distressed, and it usually didn’t charge for that service.
The firm, an affiliate of Promontory Interfinancial, thought it would be inappropriate to collect a fee when its clients were taking losses on the sales. “We don’t want to profit from them not making money,” said Richard Walter, who heads the Arlington, Va., outfit.
A year later, much has changed. Market participants have made progress in shedding distressed product and are more interested in performing-asset transactions that they can make money on. That’s a welcome development for Bank Assetpoint, which does get paid for sales of performing loans.
“We’re still dealing with some of the distressed assets but everybody now wants new loan growth,” Walter said.
Bank Assetpoint is among a handful of secondary-market platforms now under pressure to shift from loss-leader strategies to profitability as they enter their second year in a sector that is now more established and competitive.
These firms, which offer online listings for commercial and/or residential mortgages, also face new competition from the burgeoning field of online marketplace lending, formerly known as peer-to-peer lending.
Some of those platforms are also shifting away from start-up mode and aiming to sustain longer-term capital markets strategies, noted Craig Focardi, a senior director at The Corporate Executive Board Co., a business advisory firm.
The influx of competitors validates a new and different way of doing business and will improve customer acceptance of the model, incumbents say.
“Other entrants into the market are going to help frame the conversation about how to do business,” said James “Larry” Mullen, president of SecondaryWire, a website started in 2013 to help third-party originators price single-family loans through online auction pricing.
With that in mind, here are some key strategies vendors in this space are using to move past start-up mode and sustain or build long-term profitability.
Be Ready to Shift Gears
Above all else, secondary market platforms need to be flexible to survive.
One single-family mortgage platform from a previous market cycle, E-Loan, is a good example of some of the strategic challenges secondary market platforms that limit themselves to non-trade support tend to face as well as why adaptability is important.
Starting as an online brokerage, E-Loan matched buyers and sellers, collected some loan information up front, passed it on to the wholesale lender, and collected fees. But it found it could not operate on the thin margins. Only when the company became a mortgage banker did it become profitable. (It was eventually acquired by Popular Inc., the parent of Banco Popular in Puerto Rico.)
This raises the question of whether today’s concerns can find enough profit in remaining simply platforms. Here’s how they are coping with that question.
Have the Resources to Contend with Thinner Margins
If companies are not acting as brokers or traders, their profit margins per transaction tend to be thinner. So it is important that companies not only specialize in order to maximize margins, but also to make sure their financial resources are sufficient in line with that reality.
In addition to handling more profitable assets for its users now, Bank Assetpoint benefits from Promontory Interfinancial’s considerable resources.
The lack of additional regulatory responsibility costs resulting from the fact SecondaryWire doesn’t take on direct loan trading or brokering responsibility help it manage costs, Mullen said.
SecondaryWire has some investors pleased with its performance so far it could tap for more cash, but it hasn’t had to yet. In the past year, the company has covered its startup costs and is getting closer to becoming profitable day-to-day, he said.
Make Sure the Value-Add Is Strong Enough
Platforms that don’t get directly involved in trades or brokering have a more peripheral role in their users’ business. So they better have something else really compelling to add beyond initial matchmaking to keep users engaged.
Bank Assetpoint, for example, provides value as its name suggests in part through its bank expertise.
“Historically, we always did business with the guy across the street or in our footprint and we all shared loans. Ownership of banks is different now. There are more private equity firms that run banks,” said Walter. “The Great Recession kind of cleared out a lot of institutions. It broke some of those participation networks. One bank went under, one bank was good and they fought over what to do with the loans. But now that we’re past that, we can be a conduit to help rebuild that network.”
Walter is a “third generation banker” and he heads a business concern that got started because affiliate Promontory Interfinancial found that the bank clients it was helping with the sharing of deposits wanted some help on the asset side, too.
“Our goal is to match up the players and they can decide how they want to transact,” said Walter. “We don’t really take the place of a broker because we don’t do valuations and we’re not going to get involved in the underwriting of that asset.”
Bank Assetpoint also adds value in some cases by making available a “virtual data room” that users can load with information to share with trading partners if they want.
SecondaryWire stresses efficiency in pricing through a live auction and lower rates for users, origination system integration, a user-friendly interface and an eBay-like user rating system, Mullen said.
Identify Distinct Markets with Needs
Well-established areas are tough to break into unless some changes are coming to them that create a need, such as the disruption of established trading networks the downturn caused. So players should move into markets where opportunities and needs exist.
SecondaryWire has expanded beyond government and agency loans in the past year into jumbo, nonprime and miscellaneous commercial product, Mullen said.
Platforms rely on participants having some common ground, so players are being careful not to dilute their strategies.