JPMorgan Invests in Mortgage Clearinghouse

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JPMorgan

JPM 1.70%

Chase & Co. is redoubling efforts to revive a type of mortgage that largely died out after the last financial crisis.

The bank is reinvesting in an electronic clearinghouse for “private-label“ mortgages, which are packaged and sold to investors without a guarantee from a government-backed firm like Fannie Mae. The market has been growing during this year’s hot housing market.

The investment bank has contributed additional venture capital funding to Maxex LLC, a growing digital exchange for residential mortgages, executives at both companies said. Terms of the deal weren’t disclosed.

Maxex connects sellers and buyers of the home loans, providing standardized documentation so they can be easily purchased by financial firms. Those firms invest in the loans or bundle them into mortgage-backed bonds, or securitizations, they sell to others.

“If there’s a segment of finance that has lagged in utilization of technology it’s the mortgage business—it’s remarkably inefficient,” said

James Bennison,

an executive at insurer Arch Capital Group, which bought about $120 million of loans on the Maxex platform this year.

Maxex provides a clearinghouse where mortgage lenders can sell loans and where large banks and asset managers can buy them. The company, which launched in 2016, conducts due diligence on the loans it lists for sale and uses a standardized contract for buyers and sellers, streamlining the trading process, said chief executive

Tom Pearce.

Loans funded on the platform averaged about $1 billion a month this year. JPMorgan has traded about $4 billion this year, up from $2.2 billion in all of 2020, according to Mr. Pearce and

Marc Simpson,

a managing director at JPMorgan. The bank helped finance Maxex’s launch and is investing the new funds to help the platform attract other large banks and institutional investors to increase trading activity, they said.

The market for private-label mortgage bonds played a central role in the financial crisis 2008-09. It grew mightily in the years leading up to the crash, but investors got burned when millions of homeowners stopped paying their mortgages.

Today, government-backed giants Fannie Mae, Freddie Mac and Ginnie Mae dominate the U.S. mortgage industry, guaranteeing more than three-quarters of the mortgages originated last year.

Wall Street banks and investors have long tried to restart the private-label market, with limited success. It remains a tiny fraction of the home lending industry and originations effectively shut down during the early days of the pandemic last year.

The U.S. mortgage market involves a variety of key players. Here’s what investors should understand and what risks they take when investing in the industry. WSJ’s Telis Demos explains. Photo: Getty Images/Martin Barraud

But the market has since reopened up and it stands to grow further. One factor boosting demand is new government restrictions limiting the amount of vacation home and investment-property mortgages that can be sold to Fannie and Freddie. As a result, more lending is likely to originate from the private-label market, industry analysts say.

Issuance of bonds backed by private residential mortgages hit about $84 billion so far this year, roughly 72% of 2020’s total, when the pandemic temporarily shut down the market, according to data from Bloomberg LP. Sales of bonds backed by so-called jumbo mortgages—loans, often for luxury properties, that are too large to sell to Fannie and Freddie—have reached about $22 billion, more than the total sold in each of the three previous years, according to data from JPMorgan.

Maxex has helped connect underwriters of those bonds to a diverse network of mortgage lenders.

“I’m a small lender and what [Maxex] allows me to do is access multiple buyers of jumbo mortgages,” said

Steve Abreu,

chief executive of Emeryville, Calif.-based Newfi Lending. Tapping those new buyers has enabled NewFi to boost the jumbo mortgages it makes to about 25% of its total business from about 5%, he said.

Write to Matt Wirz at matthieu.wirz@wsj.com and Ben Eisen at ben.eisen@wsj.com

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