At MCT’s MSR Services division we are frequently asked questions about how to mitigate the risk of an MSR asset.
When is the right time to hedge MSRs? How large do I have to be? Isn’t there a lot of risk in hedging MSRs?
In this introduction to hedging MSRs, basic concepts and questions are considered, with the the discussion of technical and modeling issues reserved for future issues of the Servicing Insights Series.
This discussion introduces how we look at risk in owning MSR assets, so it also represents a precursor to part 3 of the review of servicing risk and return, which we reviewed in our previous insights volume 4 (Appropriate Discounting Methodology) and volume 5 (Yield & Arbitrage Theory).
This note is the seventh in a continuing series focusing on particular aspects of mortgage servicing valuation and modeling. The series discusses issues such as delinquencies, prepayments, risks, and how a servicing model and analyst of servicing ought to approach these issues.
We will be focusing on the note “Introduction to Hedging a Mortgage Servicing Rights (MSR) Portfolio – Servicing Insights Volume 7” which explains servicing as an asset and debunks common myths about hedging MSRs. If you are wondering whether you are ready for hedging your MSR portfolio, we conclude this note with a discovery tool that will help you consider if you should hedge MSRs and explain when is the best time to start.
Servicing Insights & Strategies for Success
The series explains detailed aspects of servicing valuation & modeling for experienced mortgage bankers.
These strategies are defined by our industry veteran and author of the Servicing Insights series, Phil Laren. We are proud to make the insights from our servicing and modeling expert available through the Servicing Insights Series. Phil Laren leads the MSR services group at MCT, which provides robust software, consulting, and valuation solutions.
We are dedicated to sharing seasoned insights and strategies for success with mortgage professionals everywhere.
The Who, What, When, and How of Hedging a MSR Portfolio
In this volume, we answer the basic questions that come up when our MSR clients realize it may be close to the time when they are ready for hedging their MSR portfolio.
Servicing Insights Volume 7 will explore why hedging MSRs is practiced and what significant risks and costs can be accrued by not hedging MSRs. We hope that by busting the common myths about MSR hedging, and by bringing this complex topic down to earth, we can equip the reader with the confidence needed to take the first step for their own business.
Lastly, the Hedging Barometer tool, a 5 question questionnaire, will let you know if you should hedge MSRs and tell you when is the best time to begin.
Have all of your preliminary hedging MSR questions answered by reviewing this funny and easy to digest note.
“Although any MSR hedge will involve a degree of basis risk, secondary marketing managers are already taking such risks, utilizing techniques to hedge their pipeline such as calendar spreads, coupon spreads, and cross product hedges. Even though in these cases basis risk is relatively small, it still requires a degree of management and risk/reward tradeoff analysis. It is the same with MSR hedging.”
– Excerpt from Servicing Insights Vol. 7
About The Author – Phil Laren
Phil Laren has 29 years experience in all aspects of servicing, modeling, pricing, trading, negotiating, hedging, risk analysis, accounting analysis and operations.
He created MSRlive!, our newly launched mortgage servicing software, based on the same Desktop Servicing Model that has helped countless Mortgage Banking professionals make the right decisions in their servicing valuations.
In this volume he explains prepayments in servicing valuation.
Read Servicing Insights Vol. 7 – Introduction to Hedging a Mortgage Servicing Rights (MSR) Portfolio
We hope that this series of Servicing Insights will give you the assurance as a professional to weigh your risks and inform your judgments while managing your MSR portfolio.
By utilizing these valuable and practical insights, you can look forward to a measurable difference in the certainty of your servicing decisions that will impact your bottom line directly. Download, read, and learn more from our experts.
Let us know what you think in the comments!
- Servicing Insights Vol. 1 – Foreclosure Costs in Servicing Valuation
- Servicing Insights Vol. 2 – Late Fee Revenue In Servicing Valuation
- Servicing Insights Vol. 3 – Prepayments in Servicing Valuation
- Servicing Insights Vol. 4 – Appropriate Discounting Methodology
- Servicing Insights Vol. 5 – Yield & Arbitrage Theory
- Servicing Insights Vol. 6 – Tax & Insurance Escrows: Calculation & Impact on Servicing Values