Why Hedge Mortgage Servicing Rights?
Holding an asset on the balance sheet brings your institution revenue, but revenue comes with risk. A regular part of the mortgage origination business is creating Mortgage Servicing Rights (MSR) as institutions sell their production to one of the GSEs or private investors. Swings in the market can switch a profitable holding – like an MSR – into a loss. By appropriately hedging those servicing rights, your institution can protect itself against market movements outside of your control.
ALM First’s MSR Hedging Strategy
ALM First offers both risk measurement valuation and hedging solutions to reduce the impact MSRs may have on your institution’s financial statements. Together, we hedge this risk through the use of various financial instruments, including Treasuries (cash and futures), interest-rate derivatives, and MBS.
Benefits of MSR Hedging Service
- Generate a variety of stress testing and scenario analyses
- Identify market risks, shock scenarios, and returns
- Evaluate the outcome of MSR values relative to different hedging instruments
Why Partner with ALM First for Your Mortgage Servicing Rights Hedging?
- Fee-based Compensation: we don’t take commissions, and we have no incentive to push you into specific trades; all actions are for your benefit.
- Capital Market Access & Expertise: we have a specialized Investment Management Group that interacts with the market all day every day. With over 250 clients across the country, ALM First manages over $20 billion in assets.
- Hands-On Approach: monitoring and measuring the effective duration of the balance sheet and its components is crucial in intelligently managing the institution. We dynamically rebalance the portfolio; rather than a one-time strategy of buying options, we are frequently updating the position and structure of the hedges as rates move.
- Advanced Resources: dynamically rebalancing requires the systems, the time, and the experience – all of which ALM First provides. Success demands continually assessing the market and executing the right trades at the right time. Your job should not be playing the market – and neither is ours. Instead, our strategy exists for the long-term growth and stability of the asset’s income stream.
- Proven Track Record: the focus of hedging is not providing a mean return, but providing portfolio stability. In the long-run, it could be that the portfolio performs well without any hedging included; the interim movements, though, can result in large income volatility. Management shouldn’t be in the position of explaining why income dropped millions over the course of a quarter.