While the Internet has sparked frenzied movements in the financial world such as online banking and online stock trading, the mortgage industry has been a bit of a laggard in the digital world. Only recently have institutions begun using the World Wide Web for potential borrowers to apply for mortgages, and the trading of mortgage pools has been virtually non-existent.

Then along come companies such as Pedestal Capital and Ultraprise.com, which are competing for the title of the best online secondary market outlet. And Ultraprise.com just may have an advantage.

Ultraprise.com Chief Executive Officer David Levine has said that three of the largest mortgage buyers in the market, GE Capital, Citibank and First Union, closed a deal with Ultraprise.com on a $20 million investment, giving them a minority stake in the company. "That suggests everybody really wants to use this," said Levine, who co-founded the company.

Shepherdstown, W.Va.-based Ultraprise was founded in 1994 as an e-commerce solution provider. By February 1999, Ultraprise.com was launched, and it specialized in the buying and selling of nonconforming pools of mortgages.

Its first deal consisted of a $500,000 pool of equity loans. By the end of 1999, Ultraprise.com will have had $2.01 billion in loans posted to the system, on which $1 billion has been bid. What's more, almost all of that activity has taken place since October, Levine said.

He credits Ultraprise with having sparked new competition within the secondary market. "We have the volume, we have the activity, and people are fighting for the loans, and it shows that there really is real competition in the secondary market and people are willing to compete head to head instead of trying to get loans through the pure sales effort," he said.

Ultraprise.com lets buyers and sellers of mortgage pools directly interact with one another through its Web site. Buyers create purchasing criteria sets based on attributes such as coupon, credit score, pool type and loan-to-value ratio, while a seller posts loans. Then Ultraprise.com checks to see if it matches any criteria sets. If a bid is accepted, the system notifies the buyer through e-mail or by pager.

By posting these pools on the Internet, they also receive increased liquidity. "They become more liquid because you have more buyers looking at them and you standardize what people are looking at so they can compare one pool to another, so it increases liquidity and velocity," Levine said.

Pedestal's pedestal.com outlet operates more as a traditional broker/dealer that keeps the two parties separate until the deal is closed. The company takes a basis-point commission, whereas Ultraprise.com uses a low transaction fee. The Web site has been operating since early 1998, and has posted $2.4 billion in loans in 1999.

Yung Lim, founder, chairman and chief executive officer of Pedestal, says Pedestal's success has been based on leadership and personal interaction. "Our principals have a lot of industry experience. And we are combining a very advanced technological platform with a high level of personal service to provide the most effective solution to our customers," he said. "Over time things are going to get more and more automated, but I don't think the market is able to take that full step right away. I think that's going to happen more in stages. It's more effective in a combined solution for the players in this market."

Furthermore, Pedestal offers buyers the opportunity to run analytics right on its system, ranging from simple price yields to more sophisticated options analyses.

What's Taken So Long?

With the success that Ultraprise.com and Pedestal are having with their services, why has the secondary market trailed behind other financial services in moving online? Many experts are claiming the focus on the retail market as the primary reason.

"You have to consider the market; the market is very different," said Douglas Robinson, spokesman for Freddie Mac. "It's an institutional market versus a retail market that has institutional strength like the stock market."

"Most of the mortgage market is still a story product that takes research," added Michael Hoeh, MBS portfolio manager at Dreyfus Corp. "It is not as much of a commodity as the Treasury or agency-type markets are, and it is just going to take a much longer time for this to be a real electronic trading environment. I don't think it will happen in the year 2000."

Robinson added that mortgage-backed securities are not easy to value, making them more difficult to trade in an online market. "So I don't think any of the fixed income markets are online like the equity markets are because of the retail nature of the equity market and the difficulty, particularly for mortgage-backed securities, of valuing mortgages," he said.

Levine agreed. "Everyone is retail-focused, and I think it's just because it's sexier to deal with the end borrower, so everyone's thinking about how can we reach the borrower as the lender," he said. "And so that's just where all the attention's been and all the money's been spent."

Another problem has been the format in which pools had been placed for online sale. Each institution has its own system for delivery of an auction. "The big problem there is the correspondents need to go to all these multiple Web sites, they're all in different formats," Levine said.

Deutsche Bank's MBS Autobahn program, which launched in October, was one of the first major banks to offer online MBS trading, but the service only deals with 15- and 30-year Freddie Mac, Fannie Mae and Ginnie Mae passthroughs. Bank One and GE Capital, meanwhile, also have Web sites selling loans. And Merrill Lynch & Co. is currently working on a similar system.

"We're a big factor in goosing everyone's thinking about the Internet." Levine said. "All of a sudden you can go to one place and get all of your loans."

Where To From Here?

The future of Ultraprise.com is headed into buying and selling other asset classes, such as commercial mortgages. "We actually have a commercial package up on our system now," said Levine.

Pedestal also is planning on exploring other asset classes, with a recent focus on mortgage-backed securities. "A growing percentage of the securities are going to be traded over our type of platform as well, and we actually are planning on launching a separate screen within our platform to trade certain types of mortgage securities," said Lim. The MBS sector will be ready to launch in February.

And down the road, Levine sees the Internet as a major player in helping out the performance of mortgage-backed securities. "I think you'll see way down the road a straight-through transaction between the retail originator and the holder of that loan," he said. "A lot more velocity, and a lot more possibilities in terms of exit strategy for whole loans."

Lim added that the players who get into mortgage e-commerce early would be the ultimate beneficiaries of the industry. "I think that early players in this market are definitely going to have an advantage with the leadership roles. It's a huge market, where there's a lot of tremendous amount of opportunities," he said.

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