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MCT Whitepaper: Mortgage Pipeline Hedging 201

Building on the foundation of Mortgage Pipeline Hedging 101, this whitepaper by MCT’s Sr. Capital Markets Technology Advisor, Cody Echols, delves deeper into hedging practices that enhance mortgage lender profitability, efficiency, and execution related to pipeline hedging.

Various hedging instruments will be explored, baseline inputs used in mortgage pipeline hedging will be examined, and recent industry advancements that have reshaped the hedging landscape will be discussed. Data integrity remains crucial to maximizing opportunities in hedging, and its importance will be emphasized throughout the discussion.

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Mortgage professionals may also be interested in reading Introduction to Mandatory Loan Sale Delivery or Pipeline Pull-through Rate Analysis Explained in order build foundational knowledge prior to investigating the more advanced concepts to follow in this whitepaper.

About the Whitepaper:

In this whitepaper, MCT’s Sr. Capital Markets Technology Advisor, Cody Echols, provides a more advanced overview of mortgage pipeline hedging as a follow up from the Mortgage Pipeline Hedging 101 whitepaper. 

Topics Include:

  1. Hedging Instruments Explained
  2. Typical Inputs of a Hedge Model
  3. Calculating Hedge Recommendations Based on Pipeline Data
  4. Managing a Hedged Mortgage Pipeline Over Time
  5. Predicting Change of a Hedged Mortgage Pipeline
  6. The Changing Landscape of Pipeline Hedging

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Whitepaper Author:

Cody Echols – Sr. Capital Markets Technology Advisor, MCT

In his role as a Sr. Capital Markets Technology Advisor, Cody Echols leverages his years of capital markets, leadership, and coaching experience to help MCT clients exceed their goals. His demonstrated capabilities in mortgage operations and technology ensure a successful onboarding experience for new clients, as well as a hands-on approach to ensuring current users are able to conquer new market challenges as they arise. Mr. Echols is also experienced in managing integrations, product and pricing development, hedging strategy, and compliance requirements. This has enabled him to create educational material such as training guides as well as author the daily market commentary.

Featured Whitepaper Excerpts:

Hedging Instruments Explained

Even though there are a variety of instruments that can be used to hedge mortgage loans, using to-be-announced mortgage-backed securities (referred to as TBAs moving forward) ranks among the most commonly used instruments. TBAs represent commitments to deliver or receive agency mortgage-backed security pools (UMBS), following delivery rules and a settlement calendar established by the Securities Industry and Financial Markets Association (SIFMA), an industry trade group. These commitments are traded in an over-the-counter market, with liquidity provided by both primary and smaller regional broker dealers. TBA markets exist for 30- and 15-year commitments for all three federal mortgage market agencies: Fannie Mae and Freddie Mac in terms of UMBS, and Ginnie Mae in terms of Ginnies (the Government National Mortgage Association). This provides associated fixed-rate hedge coverage that correlates closely to agency conventional and government fixed production.

Predicting Changes in Mortgage Pipeline Hedge Coverage

Over time, secondary marketing personnel may become familiar enough with pipeline dynamics to make educated decisions ahead of potential changes in active hedge volume. They may see an average amount of locks per day, have relatively consistent fallout, or can review expiring locks daily and can foresee when loans will be committed. This gives secondary an advantage to position themselves ahead of those daily happenings.

The Evolution of Assignment of Trade (AOT) Transactions

AOTs, or assignments of trade have been a capital markets staple for years. AOTs provide the opportunity to deliver loans into existing TBA coverage and assign the TBA over to a given investor. The TBA pricing acts as the basis for loan pricing. AOTs reduce hedge costs by avoiding the realization of the bid/ask spread in a typical TBA settlement process. AOTs “draw down” existing hedge coverage and allow for delivery of loans in a shorter time window. This dynamic improves cash flow as the TBA would have settled out in terms of cash at a given settlement date in the future. The AOT allows a lender to deliver loans in a shorter time window allowing for quicker purchase, moving up the cash event associated with purchasing loans that have been assigned.

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