Maxex CEO: Tradeweb deal creates a ‘one-stop shop’ for MBS trading

Tradeweb is looking to expand its footprint into the residential private credit sector. But it didn’t have to build from scratch since it found a partner: Maxex.

Tradeweb, an operator of electronic trading platforms, moves over $3 trillion a day across the fixed-income landscape and commands roughly 80% of the agency mortgage-backed securities (MBS) market. However, the platform lacked exposure to non-agency loans.

Enter Maxex, a digital mortgage exchange built for this market. In early February, Tradeweb announced a strategic investment in and finalized a commercial partnership with Maxex. Financial terms of the transaction were not disclosed.

“Today, the top mortgage originators in the United States are directly connected to Tradeweb – that’s where they’re going every day to sell their agency, TBA, spec pool business, on a forward basis.,” Tom Pearce, Maxex CEO and founder, said in an exclusive interview with HousingWire. “We’ll be able to have on that same landing page where they’re selling their agency, the Maxex icon right there for non-agency.”

The integration is already underway, starting with what Pearce calls the “lowest-hanging fruit”: bulk trading capabilities. Slated to roll out in the second or third quarter, the integration provides an easier technological bridge before the companies tackle the greater complexities of flow execution.

For Tradeweb, the partnership unlocks a highly sought-after asset class for its 3,200 global institutional clients across 85 countries, offering them an efficient way to acquire loans and express a view on credit through the Maxex platform. Furthermore, the partnership will extend Tradeweb’s direct pricing down to roughly 1,500 smaller mortgage originators who previously had to rely on intermediaries and regional broker-dealers to access the market.

Pearce said the ultimate goal is for Maxex, which is tracking to hit $10 billion in trading volume, to compress the time it takes to move a loan from the closing table to an investor. In the interview below, Pearce also discusses the origins of the deal, the ongoing integration process and what this alliance means for the future of the private credit market.

Flávia Nunes: What does the Tradeweb deal mean for Maxex?

Tom Pearce: First of all, we weren’t looking for them. They came to us. When I founded the company 10 years-plus ago, the thesis was to build this independent market utility for the mortgage industry. But a lot of people would say: ‘What do you really want to be when you grow up?’ And it was: ‘We want to be the Tradeweb 3.0 for the residential loan marketplace.’ We’ve always thought about Tradeweb or MarketAxess as interesting models that we wanted to replicate. 

Matter of fact, the group that invested in Maxex, back in 2021, when JPMorgan invested, is the same group that led the consortium investments at JPMorgan into Tradeweb, which basically had ownership from across the dealer community. That’s also a thesis shared by JPMorgan, as where they wanted to see Maxex evolve.

FN: Why did Tradeweb come to Maxex?

TP: They are trading over $3 trillion a day across the fixed-income landscape. They actually hold about 80% of the agency MBS, the TBA markets, and the spec pool markets, which is the predominant way that originators hedge themselves and sell their forward production. They don’t have any non-agency or whole loan exposure. 

Part of what we’ve built is a proven network that’s taken us years to build: this trusted, conflict-free market utility for the mortgage market, and we’ve managed to get over 450 of the market’s leading participants, including every major dealer, plus the Blackstones of the world and other insurance and private credit all trading under the same contractual framework, using identical reps and warranties guidelines through the exchange.

They were looking for a battle-tested piece of infrastructure, platform, network that they could come in and lean into because they already had the agency market covered. Now we’re the non-agency market, which happens to be the largest, the fastest growing component, of the overall mortgage market.

FN: What is the size of this opportunity for Maxex?

TP: They have 3,200 global institutional clients in 85 countries around the planet. If you’re in credit, asset management, risk management, if you’re a broker-dealer, anywhere in the world, you come in every day and you log into two places: Bloomberg and Tradeweb. For us, being able to have that connectivity where everybody’s on everybody’s desktop is a powerful and transformative event, not only for Maxex but also for the mortgage market. We’re a liquidity provider who has facilitated over 270 private label mortgage-backed securities transactions.

FN: How will the connection with the Tradeweb platform work?

TP: Today, the top mortgage originators in the United States are directly connected to Tradeweb – that’s where they’re going every day to sell their agency, TBA, spec pool business, on a forward basis. We’ll be able to have on that same landing page where they’re selling their agency, the Maxex icon right there for non-agency. Assuming they’re signing up with us and the clearinghouse as Maxex, they can also sell non-agency production. It gives access to that same cohort of investors and originators, and one-stop shopping for both agency and non-agency in one place. That’s very powerful.

FN: How do you see this integration amid turbulence in the private credit market?

TP: If you look at private credit in general, it’s bifurcated into two places: corporate private credit and residential private credit. The $2.2 trillion corporate private credit market, alternative lending, has got some big headlines going on right now… What that’s done is it’s caused a tremendous amount of stress within the corporate private credit world.

That other $4.6 trillion residential private credit, that’s where we play, and the component of the residential private credit market, which is everything that doesn’t go to the GSEs, that’s performing phenomenally well. The credit fundamentals within the U.S. housing market are strong. There’s nothing subprime about anything that we do. If you want to do subprime mortgages today, you go to Ginnie Mae. They’re the king of subprime. What we do, we think of in the non-QM and non-agency markets, is traditional bank portfolio lending paper that is traded through our platform.

FN: How is the supply-demand balance in the platform right now?

TP: We have way more demand. A lot of that supply-demand imbalance is, if you call each mortgage in the United States that’s originated a widget, the widget manufacturing — for a lot of macroeconomic issues, between interest rates, the cost of housing, rental homes — there’s just not a ton of underlying widgets or supply of new mortgages being manufactured and put out in the secondary markets at the present time. 

That’s a function of the fact that a lot of people are still in a loan with a coupon below 4%. People are staying in their houses longer, not moving around. At Maxex, there are imbalances there, but there’s a lot of pent-up demand, that once rates come down, or other events may occur, we are ideally positioned to help provide liquidity to that originator ecosystem.

FN: Looking ahead, what is your long-term vision for this partnership?

TP: JP Morgan and Tradeweb are now our board of directors – they look at mortgages as the last frontier of a major large market. It’s the largest credit market in the world, the residential private credit market. Yet it had never been put on the centralized exchange until Maxex. A lot of what we’re doing with Tradeweb is about compressing the period of time between when a loan is closed with a borrower at the closing table, and when it can be sold to an investor or securitized, and compressing that time frame – we call it the velocity of capital. 

The faster we can do that through the exchange and trade with the different processes and technology, what that’s going to result in is better pricing, and it will ultimately help homeowners in the United States get access to mortgages at a lower cost.

FN: To what extent will this increased velocity of capital ultimately benefit borrowers?

TP: The folks that are in the moving business – packaging up, securitizing and selling loans, generally speaking – can only turn in their books somewhere between three and five times a year. Actually, in the best case four times a year for the most efficient ones that we know. That’s because you have to deal with a servicing transfer, custodial review process, third-party due diligence and loan audit. Loans can only be turned over during that period.

Let’s just say, in a 90-day period the loan is sitting on somebody’s balance sheet while it’s getting fixed or getting all of the pay. If we can take that time and cut it in half to 45 days, suddenly, on that same allocation of capital, instead of trying to look four times a year, we can return eight times a year. On the same capital, the return on equity for the dealer community and the folks out there is compressed, and they no longer have that carrying and hedging cost for that period, which translates into more competitive pricing.

FN: What volume is Maxex currently trading, and does the platform deploy its own capital in these transactions?

TP: We are tracking to do roughly $10 billion in volume on the platform, and we think we’ll double that in the next year. We hope to. We think we’ll just keep doubling it every year. We’re not just one buyer. We represent the aggregate liquidity and aggregate buying power of all of the buyers who are on our platform. 

We don’t take any market risk. We don’t take any hedging risk. We never buy a loan without it already being pre sold at a pre-determined price settlement date, and we don’t ever buy anything at one price with the intent of ever marketing it up at a higher price. We are the buyer of the loan from the seller and the simultaneous seller of the loan to the buyer, but before we buy it from the seller, it’s already pre-determined. We completely de-risk that process. We’re a pure technology company. We’re not an aggregator.