Aggregator

Key Takeaways

• An aggregator buys mortgages from lenders, then packages and sells them as mortgage-backed securities (MBSs).
• Aggregators can include banks, brokers, dealers, and correspondent banks that participate in the mortgage market.
• By collecting various types of mortgages, aggregators create tailored MBSs, offering diversified investment options.
• Originators acting as aggregators often establish special purpose vehicles (SPVs) to effectively manage and sell pooled mortgages.
• Aggregators streamline the securitization process, helping issuers reduce the workload in mortgage-based asset creation.

What Is an Aggregator?

An aggregator in real estate investing is an entity that buys multiple mortgages from financial institutions and transforms them into mortgage-backed securities (MBSs). These aggregators can be banks, brokers, or dealers and play a crucial role in streamlining the mortgage market by pooling individual loans into a diversified portfolio. By securitizing these loans, aggregators enable financial institutions to free up capital and reduce risk, all while offering investors a stable income stream.

How Aggregators Streamline Mortgage-Backed Securities

Aggregators are essentially service providers who eliminate some of the effort issuers need to go through in creating a mortgage-backed security. Depending on what the end customer is looking for, aggregators can seek out and purchase a defined type of mortgage from a diverse set of lenders and originators. By expanding the search across a variety of mortgage originators, including regional banks and specialty mortgage companies, it is possible to create tailored mortgage-backed securities that can't easily be sourced from a single mortgage originator.

Aggregators' Role in the Secondary Mortgage Market

Aggregators are better understood as a phase of the securitization process rather than a distinct entity in the secondary mortgage market. When an originator, like a bank, issues a mortgage, they want to move it off the books to free up capital so that they can issue more loans. Selling a single mortgage directly to an investor is tricky because a single mortgage faces a lot of difficult-to-quantify risks based on the individual buying a property. Instead, the aggregator buys up a collection of loans where overall performance is easier to predict and then sells that pool to investors in tranches. So there is a pooling/aggregation phase that takes place before the MBS can be sliced up and sold.

Dual Roles: When Aggregators Serve as Originators

Mortgage originators often become aggregators, as securitizing a pool of mortgages can be seen as a natural extension of their business. When the originator acts as an aggregator, they usually create a special purpose vehicle (SPV) as a walled-off subsidiary for pooling and selling loans. This removes some liability and frees up the originator’s aggregator arm to purchase loans from other institutions as well as from the parent entity, as is sometimes necessary for the creation of a tailored MBS.

In theory, the originator-owned aggregators operate the same as third-party aggregators even though they are dealing with a majority of the mortgages from a single customer, which is also the owner. In practice, there could be situations that would not exist with a third party. For example, the aggregator could be subtly encouraged to not seek as steep a discount on secondary market mortgages to help the parent company’s balance sheet, shifting any overall loss to the aggregator. Of course, the MBS market leading up to the mortgage meltdown had more significant issues than the possibility of an aggregator and originator colluding.

Investing

Alternative Investments

Real Estate Investing