Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1999-03-17
2004-08-17
Millin, Vincent (Department: 3628)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S03600T, C705S035000
Reexamination Certificate
active
06778968
ABSTRACT:
BACKGROUND OF THE INVENTION
I. Field of the Invention
The invention is directed to online auctioning systems and methods, and more particularly to an online opportunistic auction system and method for use in commercial secondary markets.
II. General Background of the Invention
When a person or entity borrows money from a lender, the borrower must sign a promissory note promising to repay the home loan and a mortgage note (or deed of trust) to serve as collateral for the loan. The bearer of such notes has a legal claim to the underlying property until the mortgage loan is either paid in full or refinanced. When a lender has distributed all of its available funds, the lender will often raise money by selling groups of notes (mortgage loans) to investors. The selling of mortgage loans to investors is referred to as the secondary mortgage market.
Loans sold on the secondary markets are often bundled and securitized. Securitization is the repackaging of non-negotiable securities into negotiable securities (e.g., issuing securities against future cash flows such as mortgage backed securities). Complete securitization of a financial intermediary's assets removes the need for deposits as funds that would be recouped when the assets were securitized. In pure form, securities remove default risk and interest rate risk from balance sheets.
For example, mortgage backed securities are created when loans are packaged, or “pooled”, by issuers or servicers for sale to investors. As underlying mortgage loans are paid off by homeowners, investors receive payments of interest and principal. Investors may purchase mortgage securities when issued or afterward in the secondary market. Investments in mortgage securities are typically made by large institutions when securities are issued. These issued securities may ultimately be redistributed by dealers in the secondary market. Similarly, asset-backed securities are created when student loans, credit card debt or other forms of consumer or corporate debt are pooled.
Mortgage securities play a crucial role in the availability and cost of housing in the United States. The ability to securitize mortgage loans enables mortgage lenders and mortgage bankers to access a larger reservoir of capital, to make financing available to home buyers at lower costs, and to spread the flow of funds to areas of the country (or other countries) where capital may be scarce.
Buying and selling of mortgage notes takes place on the secondary mortgage market among sophisticated investors such as commercial banks, insurance companies, governmental agencies, savings and loans institutions, Wall Street firms and other high volume mortgagees. Unlike the primary mortgage market, secondary market investors do not necessarily service loans purchased and they do not collect monies owed directly from the borrowers.
Primary lenders such as commercial banks and thrifts generally keep their loans in a portfolio and exploit the secondary market to maintain portfolio liquidity and to accomplish any strategic restructuring. Two operational categories exist: First there are purchasers of portfolios from retail lenders, that create a secondary market with a balance-sheet transfer of loans, passing some related risks from originators to investors. These types of transfers are funded by issued securities. Default risks usually are not passed to the final investors of securities, and are assumed by the facility or retained by originators through recourse purchases. Cash-flow risks are initially absorbed by the facility but may be passed to investors through issuance of pass-through securities. Examples of such portfolio purchasers are Fannie Mae and Freddie Mac. Second, there are lenders that act as liquidity facilities to primary institutions, with loans backed by mortgage portfolios, and funded by issued bonds or borrowed external refinancing lines. The default risk remains with the originator but the facility can offer a variety of loan terms to meet primary lender liquidity and cash-flow needs. On example of such a lender is U.S. Federal Home Loan Banks.
Secondary mortgage market mechanisms typically used to deliver loans can be categorized as “bulk” and “flow delivery” arrangements. Bulk deliveries are one-time agreements to deliver a specific group of loans to a purchaser and are offered on the market either directly by the lender or through a loan broker. In non-brokered transactions, the lender sends the loan specifics to each purchaser and receives back bids individually, as the purchasers evaluate the loans. If offered through a broker, the lender delivers the loan information to the broker, who prepares an analysis and advertises the loan to prospective purchasers. The process of compiling up to date loan specifics and advertisements for possible purchasers is typically a time consuming and expensive task. The reliability of pricing information also suffers because mortgage pricing is not static and as such, mechanisms for updated pricing are required.
Loans may also enter the secondary mortgage market as part of a flow deal. Flow deals are contracts spanning a period of time (generally six months) where the lender or broker (collectively “seller”) agrees to provide a negotiated minimum amount of loans (typically several million per month). Conventional transaction methods and systems require each lender to apply to sell loans to a number of purchasers, find purchasers willing to buy the loan(s) and negotiate the best possible deal. In situations where there is more than one interested purchaser, the lender can compare different deals. Evaluating multiple possible deals unfortunately is an extremely complex task because there are no standard sets of terms and formulas among purchasers when buying loans. The non-uniformity among purchasers in the secondary market for flow deals currently requires lenders to develop profiles of average loans offered and run the profile against models built for each deal analyzed. Typically, only a few flow deal scenarios are employed resulting in non-optimum mortgage transfers. Furthermore, the actual process is characterized by intense negotiations that may necessitate high commissions to expensive salespersons. The transaction costs for a flow deal using past methods is therefore both time consuming and expensive.
Notwithstanding the high capital volume involved, the secondary mortgage market suffers from many problems associated with the above described transactions. Purchasers must create situation specific contracts for each seller and agree upon delivery mechanisms resulting in a portfolio of non-standard contracts and contract terms requiring individual attention be paid to each loan. Rather than fixed transaction costs regardless of loan size, operating expenses can vary from each transaction and typically increase with transaction volume. Deals are often contingent upon salespeople and their contacts at various lenders and purchasers. Further, there can be a lag of several weeks to months for changes in portfolio and delivery pricing models to be effected. Price changes are often manually handled by technical staff, thus increasing the likelihood of human error and associated auditing costs.
With reference to
FIG. 1
, the secondary mortgage market involves transactions conducted between entities originating mortgage loans
100
,
102
,
104
(which may or may not be banks), banks, thrifts (savings and loan associations, saving banks, and credit unions), mortgage companies or similar entities that act as primary lenders
110
,
112
,
114
, mortgage brokers
106
,
108
acting as an intermediaries between originators and lending agencies, and secondary purchasers,
122
,
124
. Commercial banks and thrifts may hold mortgages in their portfolios and also participate in the secondary market as purchasers. In contrast, mortgage banks are rarely mortgage investors: the loans they originate are generally sold to more permanent investors in the secondary market. Typically, originating banks and brokers act as sellers on the secondary market
Kanof Pedro R.
Kukkonen, III Carl A.
Millin Vincent
ViaLogy Corp.
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