Our Vision
At DXM, we utilize artificial intelligence and machine learning to increase the efficiency of pricing and risk allocation in residential mortgage securitization markets. This results in higher risk adjusted profitability for banks, non-bank originators and investor participants.
The Problem We Address
Unlike other major capital markets, the $ multi-trillion residential mortgage securitization markets have lagged in their deployment of such state of the art technology. They continue to utilize trading practices often based on government regulated and antiquated dealer pricing/risk allocation techniques. Since 2008, such practices have caused major potential investor groups to limit their participation and, hence, their provision of liquidity to these markets. With the right technology, these markets can attract new liquidity, becoming more efficient and, thus, more profitable with less risk.
Our Platform
DXM has created a breakthrough exchange platform and proprietary strategies through which such market efficiencies/ profitability can be realized.
Our Long Term Goal
To establish market leadership working closely with major financial institutions to help direct the rapid technology evolution of this massive market. As a result, the investor base/liquidity for private label Securitizations will continue to expand and market participants will become more profitable. Additionally, millions of currently disenfranchised borrowers will be able to access expanded home loan availability with more flexible lending criteria at more affordable prices.
What DXM is and How it Works
DXM technology provides a means to increase demand for senior tranches for private label securitization (PLS) by uniquely offering:

  1. Uncapped floating rate tranches
  2. Interest rate and prepayment risk in swap format (with no risk of principal loss from mortgage defaults on a senior tranche)
Comparison with Standard Structures

DXM can create an uncapped floater and an interest rate swap from the full size of the senior tranche. The technology can also, simultaneously, create floating rate structures with any desired cap. In standard securitizations, the inverse floater buyer assumes the interest rate and prepayment risk. Even with subordination, inverse floaters have the risk of principal loss from borrower defaults. Because of such transaction specific risk, inverse floaters cannot be aggregated across securitizations – creating highly illiquid instruments. And the transaction specific credit risk can render interest rate risk hedges ineffective.

By contrast, in a DXM securitization, the interest rate and prepayment risk are assumed by the swap counterparty. As the swaps have no credit exposure to the underlying mortgages, swap positions can be aggregated across securitizations. And, without transaction specific credit risks, counterparties can use interest rate derivatives to transform the risk/return profile of the swap. In particular, DXM enables swap counterparties to transfer any or all of the prepayment risk on the swap. Thus, unlike inverse floaters, counterparties to the swap can create structures with any desired risk return profile (not just instruments that benefit from stable or falling interest rates).

And because the DXM structure is in swap format, investors for the first time have the flexibility to combine the interest rate and prepayment risk from a senior tranche with a floating rate instrument of their choice (such as a CLO) to create the equivalent of a fixed-rate senior tranche with any desired risk/duration profile. And DXM also provides investors with the flexibility to change these combinations at any time. 

In current securitizations, the inverse floater typically only attracts interest from investors who believe rates will remain stable or fall. In DXM enabled securitizations, investors with a broader range of views (e.g., rates will rise, rate will fall, etc.) will likely have an interest in the swap. Having a larger group of investors bidding on the senior tranche may result in better execution for the securitization sponsor.

Importantly, securitization sponsors have no role in the structuring of these custom transactions and have no liability in their outcome. The customization is solely at the discretion of the investor.

Innovative “Best Efforts” Auction Platform
Minimizes Risk and Cost

DXM enables securitization auctions among mortgage originators and investors, without any sponsor execution risk. Sponsors act as riskless principal intermediaries without additional investment or balance sheet risk. They conduct an auction for: 

1) Investors seeking floating rate tranches who indicate their desired spread; and 

2) Swap counterparties willing to pay fixed / receive float who indicate their desired fixed rate.

The auction process can easily match floating rate buyers with swap counterparties. The sponsor can also sell a portion of the senior tranche through this process. If no match occurs, no transactions are executed.  Execution fees are paid by the participants in the auction and not the securitization sponsor.

What are Mortgage Swaps

A Mortgage Swap is a standard interest rate swap that has an embedded short position in a prepayment option. The prepayment option mirrors the option embedded in a portfolio of whole loans, a tranche of private label securitization, or a pool of agency mortgage-backed securities (MBS).

As the principal balance on the underlying mortgages declines due to scheduled amortizations or prepayments, the notional balance on a Mortgage Swap declines by the identical amount. Mortgage Swaps also replicate a critical feature of government guaranteed MBS – the notional balance also declines to reflect the decline in the underlying mortgage balance due to borrower defaults.

Thus, the receive fixed/pay float counterparty has no risk of principal loss from borrower defaults even at a 100% default rate on the underlying mortgages. Mortgage Swaps replicate a leveraged position in agency MBS. Both MBS and Mortgage Swaps only have interest rate and prepayment risk regardless of the credit quality of the underlying mortgages.

Mortgage Swap can have multiple entities contributing the underlying assets that create the reference pool for the notional balance. These entities use Mortgage Swaps to transfer some portion or all of the interest rate and prepayment risk to third parties. DXM enables these entities (the pay fixed/received float counterparty) to obtain basis risk free hedge for their specific pool of mortgages. The notional balance used to calculate payments for any pay fixed counterparty is based solely on its mortgages. Consider a Mortgage Swap where ten banks (Bank 1 – Bank 10) have contributed mortgages. The prepayments and defaults on mortgages contributed by Banks 2 – 10 have no bearing on the payments for Bank 1.

Conversely, the received fixed/pay float counterparties have aggregate and diversified exposure to the entire pool of mortgages. Consider our previous example with a pool contributed by ten banks. Assume that there are twenty investors receiving fixed/paying float on this Mortgage Swap. The payments for each investor are based on the combined balance of all ten banks. Investors do not have idiosyncratic prepayment risk exposure to any specific bank.

As with agency MBS, few investors (i.e., received fixed/pay float counterparties) have the risk capacity to handle thirty-years of interest rate and prepayment. Investors can use the DXM platform to transfer (hedge) the prepayment risk inherent in their particular swap. Example prepayment hedges include:

Offsetting Mortgage Swap. An investor can execute an offsetting Mortgage Swap with lower legal final maturity. For example, an investor received fixed/paying float on a thirty-year Mortgage Swap can execute a ten-year Mortgage Swap (paying fixed/receive float). The thirty-year investor now only has tail prepayment risk. The investor in the ten-year swap has a position equivalent to a ten-year sequential CMO but with a hard legal final maturity of ten years. This investor has a structure with only call risk and no extension risk.

Interest Rate Caps. An investor can also purchase an interest rate cap to limit the floating rate payments on the Mortgage Swap. The notional balance on the cap tracks the notional balance on the Mortgage Swap. The maturity of the cap need not match the maturity of the Mortgage Swap. The investor in a thirty-year Mortgage Swap can purchase protection, for example, for seven years. The seller can combine the cap with positions in cash instruments to create synthetic capped floating rate agency MBS of any desired legal final maturity.

Creation of sequential CMOs or capped floating rate MBS requires significant capital and carries significant execution risk. The structuring process for these instruments generates illiquid residual instruments (e.g., support bonds, inverse floating rate securities, principal only strips) that dealers must warehouse. And dealers have no means to hedge the significant idiosyncratic prepayment risk inherent in these structures.

DXM platform can create more desirable structures without creating these illiquid structures. Transaction execution can be accomplished through a ‘best efforts’ auction process all but eliminating the need for capital.

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