Competitiveness in the mortgage marketplace has pushed risk management and profitability strategies to the forefront. Originating conforming mortgage loans to be sold to the agencies exposes your institution to pricing risk from the time of the initial commitment to the borrower until the time that the loan is committed for sale to the agencies. Currently, many institutions pay the GSEs to hedge their pipeline for them, at a significant cost. Effective mortgage pipeline management presents an opportunity to enhance return and profitability through risk reduction and cost savings.
Institutions engaging in mortgage loan production and sale to investors (e.g. the agencies) understand this operation can be highly profitable, but also can by highly cyclical. Changes in mortgage pricing can lead to significant variability in profitability. Learn how to protect yourself from the volatility of the mortgage market.
Balance sheet hedging techniques can be very effective in balancing the ALM position and a very important part of the ALM process. Implementing core balance sheet hedging strategy can help reduce balance sheet risk, thus achieving superior risk-adjusted financial performance.
Those who are familiar with Mortgage Servicing Rights (MSR) assets understand MSR assets tend to exhibit a great deal of price volatility even for small changes in interest rates. While MSR assets can offer significant returns on capital, the inherent price volatility of them makes hedging considerations very important.