Freddie Mac / Wednesday, May 5, 2021
By: The Single-Family Team, Freddie Mac
How did Legend Lending, a Texas-based lender, realize greater pricing benefits and gain operational efficiencies that ended up changing the way they do business? It took a bit of trial and error and – most importantly – strong partnerships.
Legend Lending has been a Freddie Mac Seller/Servicer since 2019. Their first transactions with us were through our Co-Issue XChange® execution, in which Sellers can transfer mortgage servicing rights to their preferred Servicer at the same time they sell their loans to Freddie Mac. It’s one of three executions under Freddie Mac’s Servicing-Released XChange®.
“It’s not easy to create relationships with servicers on a co-issue transaction,” says Nich Hughes, CEO, Legend Lending. “You’re selling loans to one agency at the same time you’re selling servicing to a third party. It takes a lot of effort. And over time, we saw that our co-issue grid prices from servicing buyers, when combined with the GSE base price, made the agency price pale in comparison to aggregators.”
Legend Lending determined that aligning themselves with only one servicing buyer presented too much risk. “Our servicer’s price just wasn’t there,” adds Nich.
The challenges of a co-issue execution showed that not all executions suit all Seller/Servicers. That was the trial and error part; but when Rory Benz, their dedicated Freddie Mac representative, told the Legend Lending team about Cash-Released XChange® – another execution under Servicing-Released XChange – it seemed like the better fit.
Rory explained that Cash-Released XChange is ideal for lenders that may not have the bargaining power of larger originators or the resources to negotiate multiple competitive individual co-issue or aggregator contracts. Freddie Mac’s relationships with servicing buyers provides easy access to market-level servicing-released premiums (SRP) values for lenders of all sizes.
The Power of Partnership
To ensure Cash-Released XChange would be a preferable program, Legend Lending first wanted the execution analysis of Vice Capital Markets, Inc., whose hedging platform, HedgePro, Legend Lending was already using.
As one of the secondary market advisors (SMAs) Freddie Mac works with to provide a conduit to help our Sellers do business with us more simply, Vice Capital was poised to provide the insight to help determine if Cash-Released XChange was a better option.
Cash-Released XChange enables any number of fixed-rate loans to be sold for cash, with servicing transferred in the same transaction. Legend Lending wasn’t interested in retaining servicing, so to be able to transfer servicing to any of eight participating buyers would afford greater flexibility – a big selling point.
Freddie Mac’s Hakan Beygo, Senior Director of Secondary Execution Strategies, puts it this way: “With Cash-Released XChange, there’s no need to have individual contracts with all the participating servicing buyers, so there are no variations to keep track of. The time savings there is obvious. It’s a lot less to manage, because everything is consistent.”
Nich agrees. “The folks at Vice Capital educated us on what Cash-Released XChange could do for us. You don’t have to have a tremendous amount of volume to participate in the program. You can sell any number of loans and get the best pricing to maximize gain on sale. We saw right away that it levels the playing field.”
The API Back Story
In 2019, Vice Capital and Freddie Mac began building out an application programming interface (API) that enables cash pricing and committing transactions to be conducted between their HedgePro and Loan Selling Advisor®. As Freddie Mac’s tool that integrates all secondary marketing functions (including pricing, contracting, funding and loan delivery), Loan Selling Advisor is what participating Cash-Released XChange Servicers use to acquire mortgage servicing rights.
API integration gives Legend Lending instant access to Cash-Released XChange. SRPs are disclosed up front, so Legend Lending can get a quick view into the price being offered. Because Freddie Mac has identified and approved multiple servicing buyers who can bid on servicing contract rights for the loans for sale, Legend Lending (or any Seller) will always get the best price.
“Working with Freddie Mac to create the API allowed us to have instant and accurate information to deliver topflight service to Legend Lending – and any other client who’s leveraging the API,” says Troy Baars, President, Vice Capital. “Our API integration speeds up everything – price retrieval, best execution analysis and loan commitment – while simultaneously reducing data input errors.”
Nich adds, “The API integration is what made it possible for us to use Cash-Released XChange, because Vice Capital does all the hard pricing work. We deliver the data file to them, and that enables us to do direct selling. We don’t have to do it manually in Loan Selling Advisor. The connection to Loan Selling Advisor is in the background. It’s seamless for us.”
The FAST Way to Efficiency
According to Nich, the greatest efficiency Legend Lending has experienced with using Cash-Released XChange has been Freddie Automated Servicing Transfer (FAST®), Freddie Mac’s proprietary portal that standardizes the transfer of servicing documents and data. It’s an integral part of Cash-Released XChange.
Cash-Released XChange removes the impact of different data and document requirements of servicing buyers, and FAST does the heavy lifting. Nich knows the value of making data and document delivery simple and consistent.
“If each servicer we work with has a different process and timeline to deliver to, that’s time-consuming – and it puts us right back into aggregator world,” he explains. “Through Cash-Released XChange, we upload files to FAST in the same format every time, regardless of a servicer’s requirements.”
Hakan agrees. “When it comes to data and document delivery, we don’t want our lenders to have to do anything. We let the technology accommodate servicing buyers’ individual requirements. Cash-Released XChange and FAST make the process faster and smoother.” By contrast, a co-issue transaction may require that the lender customize delivery to each servicing buyer.
For Legend Lending’s part, it took about a month to start realizing the benefits of Cash-Released XChange. “With any new platform or process, there are bound to be a few bumps here and there,” explains Nich. “But the participating servicers have understood that we’re still coming up to speed. They’ve been really responsive and great to work with.”
The Benefits Are Clear
“With aggregators, you’re often dealing with hold-backs, where they might fund only 90% at first and fund the rest when they get everything set up,” explains Nich. “If we sell a loan and get paid only 90% of it, then we have to follow up for the other 10%. That’s two transactions, and that means we have to wait.
“The longer we wait, the longer it stays on our books. With Cash-Released XChange, a single transaction keeps us from having receivables sitting out there. That’s huge for us.”
Because Cash-Released XChange is so fast, Legend Lending can do a transaction in a single day. In fact, warehouse dwell time has gone down from about two weeks with aggregators to seven to eight days with Freddie Mac.“That’s not because we’re taking our time,” explains Nich. “It’s generally because we’re waiting for certification on the paper note. Once we move to eNotes – which we plan to do soon – we’ll slash dwell time even more.” (Read about Legend Lending’s plans for eNotes.)
API integration has also yielded operational improvements. By eliminating the manual aspects of pricing and committing, Legend Lending has cut related business costs. For example, they’ve been able to reallocate some post-closing staff, who had been tasked with creating data tapes and stacking loans, to other important initiatives. “We’re reducing our costs of doing business while getting a good price and a better execution,” says Nich.
“And because of that better execution, we’re at about 20-25% greater volume going to Freddie Mac,” he adds. “It had been zero with co-issue transactions we were doing previously. That’s a big difference.
“Execution is number one. Efficiency is the cherry on top.”
It’s About More Than Technology
“Having partners like Freddie Mac and Vice Capital to help you through the technology piece is why Cash-Released XChange works for us. That partnership is invaluable,” says Nich.
“Being able to pull all the information from HedgePro and Loan Selling Advisor via the API enables us to spend more time analyzing our options than pulling that information together ourselves. The mechanics are much faster now to give us the best execution. It made pricing and contract committing easier.”
But the Freddie Mac-Vice Capital partnership – and how it benefits Legend Lending – is not just about API integration. It also reflects Freddie Mac’s approach to SMAs and our mutual clients.
“It’s a people partnership and a technology partnership,” clarifies Amy Creason, Director, Secondary Market Advisors, within Freddie Mac’s Client and Community Engagement division. “We take a holistic approach to forge strong relationships with vendors that support our mutual clients. It’s one thing to have the technology, but you have to operationalize it for the lender so they can mitigate risk, confidently price and commit and achieve meaningful efficiencies.
“In addition, we recognize that the hedge advisory services provided by Vice Capital and others are influential in Freddie Mac’s relationship with lenders,” she adds. “We’re all in it together.”
Troy at Vice Capital underscores the value of strong partnership. “Having a single point of contact at Freddie Mac gives us a direct line of communication, and paves the way to enabling us both to deliver the best possible service to the clients we serve.”
Nich appreciates that selling to Freddie Mac affords an advantage to smaller lenders. “We can reap the same benefits as large lenders by participating in a program like Cash-Released XChange,” he says. “All lenders are treated the same, regardless of size.
“Cash-Released XChange, FAST, the API integration – they’ve all exceeded our expectations,” he adds. “In fact, it’s been a breath of fresh air.”
This article originally appeared on the Freddie Mac Single Family website.