WE’RE HEARING that in the wake of the rate volatility seen this year, technology advances have made pipeline risk easier to manage when it comes to placing loans in the secondary market, while experience and self-knowledge remain the most effective strategies when it comes to hedging.
Virpack president Michael Coar Jr. and chief operating officer Cy Brinn tell us their automation has made it easier for lenders to keep up with shifting market conditions that require them to make sure they have multiple options for selling their loans into the secondary market most advantageously.
On the other hand, Robert Satnick, national sales director for Mortgage Capital Management, said when it comes to pipeline hedging that helps mitigate the effect of interest rates, “There’s no substitute for experience and working with people that have that experience.”
“There is really nothing new…if you look at a long horizon,” he said, noting that his company has been providing services in this area since 1994. “In that window you can [examine] numerous windows where there has been volatility due to different events causing rates to rise or fall.”
“It all comes down to information,” he said, specifically referring to the question: “Does the mortgage company have the right information about their pipeline? Do they have the knowledge to know how their pipeline is going to behave?”
Satnick said this includes information about the behavior of specific loan channels and products, noting that retail, wholesale, consumer-direct, purchase and refinance product mixes, all will behave slightly differently, and this impacts decisions mortgage company make about how to hedge their pipelines.
“All those different channels, all those different borrower profiles will behave slightly different and can impact ultimately what your closing ratios are,” he said. “You have to have a good idea of what your fallout is by all those different channels and…those different product types. The more accurate that is, the less susceptible your P&L will be to the erratic market movement.”
“One thing we advocate…would be the use of options to protect…some portion of your pipeline” with the goal of stabilizing earnings, Satnick said. “They expand and contract with prices without causing the company to become too long or too short during an intra-day period and therefore protecting the pipeline” from extreme market moves as the result of interest rate swings.
“If you approach it diligently mortgage companies should fare all right” when interest rate volatility hits,” he said.
Bonnie Sinnock is managing editor of National Mortgage News and editor of Origination News. She has been covering the mortgage industry since 1995.