Electronic mortgage market moves a step closer with MBS request for quote

The U.S. mortgage market is not renowned as a hotbed of innovation. The basic business of originating and servicing home loans has remained remarkably unchanged since the first government sponsored enterprises (GSEs) expanded the availability of credit and reduced the cost of home financing in the 1930s.

The biggest development in the intervening decades was the emergence of the first GSE-backed mortgage securitizations in the late 1960s and the packaging of the first private-label mortgage-backed securities (MBS) by investment banks in the mid-1970s.

In addition to dramatically increasing overall credit capacity among U.S. lenders and making homeownership attainable for millions, MBS is today the second-largest fixed income asset in the U.S., a $12.2 trillion market which saw almost $1.6 trillion in new issuance in 2024.1

Once strictly the preserve of institutional investors, today MBS is an important asset class for wealth managers, and increasingly a part of retail portfolios as high net worth individuals seek to diversify their fixed income holdings. Making the trading of MBS seamless and efficient is crucial in a market that sees more than $360 billion in daily average traded volume.2 Nonetheless, the mortgage market has proved stubbornly resistant to embracing electronic trading in the same way as the U.S. Treasury and corporate bond markets.

Indeed, the trading of many over-the-counter securitized mortgage products remains predominantly voice-negotiated, with the use of chat messages the closest these transactions come to being classed as electronic. A recent study by Coalition Greenwich found that more than 70% of all trading in commercial MBS, spec pools, collateralized mortgage obligations and asset-backed securities are still transacted over the phone or via chat. Only the relatively standardized market for to-be-announced (TBA) MBS sees a majority of trading executed electronically.3

Amid this backdrop, ICE Bonds – in concert with our colleagues at ICE Mortgage Technology (IMT) – has been assiduously working to inject some much-needed innovation into this vital sector of the U.S. economy. An important step in this journey has been the recent introduction of new request for quote (RFQ) functionality on ICE TMC, our market-leading anonymous multi-asset class alternative trading system.

While ICE TMC has offered on-screen click-to-trade capabilities in MBS for some time, clients have made it clear that - for the time being at least - RFQ is their preferred means of transacting mortgage securities electronically. This is due to the relatively sparse liquidity that can presently be sourced on screen: in essence, the MBS market at large is not currently ready for fully electronic point-and-click trading.

As such, adding electronic RFQ functionality is the obvious step to bridge the gap between a market that still transacts in large part over voice/chat messaging but that is clearly moving in the direction of electronification. Requests are transmitted electronically to the wide community of MBS dealers, market makers and investors on the ICE TMC platform who can choose to respond without disclosing their identity.

In so doing, the party issuing the request is able to gather quotes from a broader range of respondents, maximizing their chances of receiving a better price than simply sending a chat message to a small group of prospective providers. Since ICE Bonds sits in the middle of the transaction, both counterparties are able to execute anonymously, eliminating costs associated with client onboarding and “know your customer” obligations. Furthermore, since the identity of all parties is non-disclosed, counterparties can solicit quotes confident that other participants can’t attempt to trade against them.

Adding RFQ capabilities creates a more robust solution for MBS and represents the latest enhancement ICE is making to our mortgage proposition. ICE clients will ultimately also benefit from ICE Bonds’ future integration with the extensive data and analytics developed by ICE Mortgage Technology, providing a key differentiator for market participants looking to manage the complete mortgage securitization workflow all in one place.