Published in: FMS – Perspectives
Residential mortgage banking is a sizable and important market segment, and many institutions operate originate-and-sell models, in which mortgage production is sold to investors (e.g., Fannie Mae or Freddie Mac). Loans locked with borrowers but yet to be originated-and-sold represent the entity’s “mortgage pipeline.”
Managing this pipeline is critical in today’s market and calls for skilled management to keep risk under control while ensuring profitability. The hedging process can often seem confusing – even daunting – to some because it involves complex computations and the use of sophisticated models to manage risk and determine pricing. When done correctly, however, hedging strategies protect lenders from the unpredictability of interest rate movements and other financial risks, thus improving risk-adjusted returns and long-term business viability.