Wednesday, May 5, 2010

Hedging - Do You "Get It"?

I have been speaking with many successful mortgage bankers lately, and I am very surprised by how few CEOs/CFOs/Secondary Managers truly understand the nuances of hedging their pipelines through the mortgage-backed securities market(MBS). I wonder why?

I think most bankers have been in the business for awhile; they understand mortgages, leads, credit, operations etc..., but trading securities? Not so much!This is often a whole new medium and a scary step for many executives. Who has the time to learn a new craft which can be time consuming and daunting?

There are many firms specializing in analytics, helping guide bankers in hedging their pipelines and neutralizing interest rate risk. Most of these firms take on the majority of daily responsibilities and send out very impressive, often complicated, mark to market reports. I've also seen reports which are overly simplified and limited in scope.

It's rare that I speak with a mortgage banker who can confidently explain their mark to market reports, or speak intelligently about their hedging strategies, processes, and philosophy. There seems to be tremendous reliance on the analytics firm to handle this, but shouldn't bankers have a good understanding of how this all works?

To be fair, it's not the analytics firms responsibility--their focus is really on hedging the pipeline. Why should they be charged with understanding all of the nuances of each client's business model and internal procedures? Truly understanding the reports and how the markets and internal processes impact performance is, and should be, left to the banker. Hundreds of thousands of dollars are made or lost for each firm every single month. Knowing the intricacies of a particular banker and proactively managing the hedging platform along WITH the analytics firm can easily translate into additional gains of 15-40bps on the entire pipeline. That could be $50-150k/month!!!

That is where our firm can come in real fill the gap. The opportunities are big, but often go unrealized. What a shame!