Key Benefits of Mortgage Pipeline Hedging
Originators can continue holding closed and hedge loans to earn interest carry and increase profitability
Hedge positions can easily be rebalanced as interest rates ebb and flow
Hedging costs are lower by directly using capital market instruments
What is Mortgage Pipeline Hedging?
No matter the size of your institution, if you have a mortgage portfolio, Mortgage Pipeline Hedging (MPH) can provide great benefits.
MPH provides you, as the loan originator, protection by hedging the risk associated with the negative impacts of market fluctuations.
At ALM First, we help your institution set the appropriate strategies. ALM First acts as your connection to the TBA (to-be-announced) MBS market – a market that trades over $200 billion in Agency MBS each day. Participating in MPH allows your institution to commit to future sales without having to know the specific sale so long as there are agreed upon mortgage characteristics (maturity, coupon, etc.). As a result, you could get easier position sizing, lower costs, better clarity, more flexibility, and increased profitability.
The benefits are notable. For mandatory commitments, where the loan originator must deliver promised loans or pay a fee, using the TBA MBS strategy produces incremental income on every loan sale. In best-efforts commitments, where delivery of the loan is not required, incremental income on average is well above 30 basis points. Gains, though, can be significantly more sizable based on enhanced strategies, volume and approach. Smart strategies and successful management could result in gains of over 2%.
ALM First’s Mortgage Pipeline Hedging Partnership
The foundation of ALM First is building partnerships, and our approach to MPH is no different. As a partner, ALM First will provide you as much or as little assistance as you would prefer (i.e., you can be as involved in this process as you would like). This partnership can be anything from a turnkey operation to a continual conversation. Since education is a key part of our philosophy, we want to provide transparency and share how – and how much – our methods are helping you.
Even if MPH is a straightforward concept for your institution, successful MPH cannot be run through simple Excel spreadsheets. Rather, managing pipeline hedging is highly involved, requiring daily review and analysis. Without a dedicated staff and a deep understanding of the markets, hedging can quickly fail leading to income losses and increased risk positions.
This is why ALM First, as your partner, will continually monitor your balance sheet position and hedging options. With potential swings in the market every day, we look at trends over a long time period to measure performance.