Shortly before the Great Recession wiped out billions in assets, veteran entrepreneur and self-described “mortgage geek” Tom Pearce was managing the assets of commercial paper facilities for Vertical Capital, LLC when he received word that storied global financial services firm Lehman Brothers had collapsed.
“When Lehman went down, the commercial paper markets ceased to function,” says Pearce. That brief market blip led to an experience that strikes fear into the heart of every investor — or anyone who knows the Eddie Murphy classic “Trading Places.”
“I got a $4 billion margin call, which will wake you up,” says Pearce. “That was an ‘aha’ moment.”
Pearce’s harrowing tale has a happy ending, however: After “betting the farm” on distressed mortgages in 2009, he ended up giving his investors a sixfold return on their money over the next five years. In fact, many of them also invested in his most recent venture, MAXEX, where Pearce currently serves as chairman and CEO.
Pearce co-founded MAXEX in 2016 in commercial partnership with JP Morgan after he started thinking about not only what led to the financial crisis, but what — if anything — could have lessened its effects.
“What were the root causes?” says Pearce. “What piece of infrastructure, what market utility, could have existed that would have mitigated the financial crisis?”
It occurred to Pearce that transparency and due diligence throughout the mortgage loan process — or lack thereof — was the key. “It struck me that if you could ever convince all the lenders and the banks, as well as all the investors in the mortgage ecosystem to buy and sell under a single standardized contract, then you can get them all to trade through a centralized hub and clearinghouse,” Pearce adds. “If you could have that utility, because you standardized everything, you could mitigate toxic mortgages from getting into the system.”
Atlanta-based MAXEX (a member of the Metro Atlanta Chamber’s 2018 “Backed by ATL” cohort) provides a turnkey solution that lets the company act as “the hub out to the spokes” of lenders that allows them to sign a single generic contract instead of paying five figures for each individualized one. This standardized trade agreement helps simplify the loan process for lenders. “They sign one contract, and it’s done,” says Pearce.
MAXEX has grown so quickly — it just surpassed $5 billion in lock trading volume and has raised more than $90 million since its founding — largely due to the company’s ability to simplify secondary market trading in three crucial ways. In addition to the one-contract system and its single, proprietary clearinghouse acting as central counterparty to each side of the loan transaction, the company also helps buyers and sellers to execute trades via one simple cloud-based platform.
Since the company’s founding, more than 100 banks and lenders, as well as more than 15 market-leading investors, have been approved to buy and sell mortgage loans on MAXEX. The platform has found some traction, as trading volume more than doubled in the second half of 2019 as compared to the first half of the year.
“It would have been really hard, pre-financial crisis, to get this done, because everybody was making so much money with their own private little channels,” says Pearce. “It took a tsunami to hit for people to start saying, “I don’t want to start putting all the infrastructure in place with my mortgages again, because if it blows up, we’re on the hook.’ A number of Wall Street dealers want to buy mortgages and loans, but they don’t want to spend millions and millions of dollars to put the technology in place to do it.”
MAXEX’s platform also addresses many market complexities that have hindered other mortgage exchanges. The company’s digital platform enables loan buyers and sellers to obtain consistent liquidity at optimal price execution by providing access to multiple trading partners, reducing costs and mitigating risks to both parties. Previously, parties would meet on exchanges and bypass any scrutiny of their loans by interacting with each other directly instead of through the exchange.
“Those exchanges didn’t add any value,” says Pearce. “By forcing everyone to use common standardizations, using a common technology and underwriting process, and using our technology to mitigate errors, we’re enhancing the value of the loan asset.”
MAXEX’s standardized platform also helps democratize the mortgage process. “We’re allowing Main Street to compete on a heads-up basis with Wall Street so that Wall Street no longer has the advantage,” Pearce says, with the ultimate goal of helping U.S. homeowners getting less expensive mortgages while reducing errors in the loan process — and the risk to taxpayers that bad loans can often pose. “The platform helps mitigate fraud in the system, which helps community lenders better serve their customers in their respective communities.”
While surpassing $5 billion in lock trading volume is already quite the milestone, MAXEX is already turning its focus towards a capital funding round to be completed later this year and mulling a plan to give buyers and sellers an ownership stake in the platform. That said, Pearce is already seeing proof of his platform’s popularity.
“All the people on our platform are now coming to us,” says Pearce. “A lot of buyers and sellers are saying, ‘this is really cool. It’s reducing my risk, I’m reducing my costs and increasing profitability. I want to own part of your company.”