To generate an accurate mortgage hedge recommendation, it is essential to determine the to-be-announced (TBA) security coupon that corresponds with a given note rate on an interest lock commitment.
Learn the best hedge model to navigate fluctuations from increases in agency guarantee fees (g-fees) and mortgage-backed security (MBS) coupon curve changes that cause note rates to transcend their original coupon.
In this blog, we showcase MCT’s educational article from October 2016, Hedging Note Rates that Transcend Coupons. Featured in Secondary Marketing Executive Magazine, it explains why many hedge models are missing the mark when assigning price sensitivity to the asset prices of certain note rates.
About The Educational Article in SME
We are proud to have one of our esteemed thought leaders featured in this premier publication.
Secondary Marketing Executive is a monthly, free magazine that provides mortgage executives in North America with a front row seat in the mortgage market. At MCT, we are dedicated to providing our clients and vendor partners with solutions that can assist in any stage of business growth. Learn more about hedging best practices from our experienced hedge advisers in the MCT newsroom.
Breaking Down Loan Note Rates and Security Coupons
In this article, you will learn about loan price movement, effective duration, and the relationship between loan note rates and security coupons to improve your business operations.
“Hedging Note Rates that Transcend Coupons,” breaks down the basics of how 75% of all note rates can transcend coupons in a best execution analysis, which causes most models to be fundamentally flawed.
This “fundamental oversimplification” is explained in detail with helpful examples to address g-fees, MBS coupons, and how to utilize BU/BD grids to your immediate advantage.
“The negative duration associated with agency buy up multiples is actually a long-held precept in mortgage pipeline hedging. However, the majority of hedge platforms will average these note rates duration discrepancies to a grossly oversimplified coupon duration. Although this may be somewhat acceptable for lenders delivering MBS, it can be catastrophic for cash window sellers.”
– Excerpt from Hedging Note Rates That Transcend Coupons
About The Author – Phil Rasori
Mr. Rasori is a recognized thought-leader in capital markets operations within the mortgage banking community. His areas of expertise include complex financial modeling, computational dynamics, and linear programming for operational optimization.
He developed the ground-breaking mortgage pipeline hedging algorithms that form the foundation of MCT’s HALO Program today. Mr. Rasori has functionally led MCT operations since 2005 and ascended to his current role as COO in 2007.
Download Hedging Note Rates that Transcend Coupons
We hope that this article will give you the assurance as a professional to determine the TBA security coupon that corresponds to a given note rate.
By utilizing these valuable and practical insights, you can look forward to a measurable difference in the certainty of your decisions that will impact your bottom line directly. Please download, read, and learn more from our experts.
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