In the wake of recent market volatility and record low rates, the spotlight in the business is on secondary marketing executives, which could see some changing of the guard in this area as a result.
A game of “musical chairs” among secondary market executives tends to follow market and rate volatility, Les Parker, an industry veteran who works as a hedging consultant, noted in an interview with this publication.
He suggests that one pitfall for secondary marketing executives to avoid in some situations is the temptation to make up losses in the market without authorization as conditions shift.
Instead, he recommends either maintaining policies currently in place or making sure they have gotten the approvals needed to make changes.
Sometimes secondary executives are unfairly scapegoated for losses, he said. But they are more likely to be rehired somewhere if they can show they were acting within approved directives. Those who act without the proper authority may not only lose their jobs but find it more difficult to get employed again at all.
When asked what market participants have been doing or can do to mitigate their secondary market risk given volatile market conditions, Parker said the industry should understand there is no easy answer when dealing with secondary marketing strategies and operations.
“People are trying to hedge and they have been having some troubles with it because volatility expanded pretty dramatically...and people have gotten used to a comfort zone,” he said.
Some mortgage bankers, Parker said, will “just let their pipelines run. When [the market] starts to reverse, that is when they don't know if they can really sell enough. If it reverses [again] the other way [as happened at one point recently] then what have they done?
“If you were using some options you felt a little better about it all, but it is still a challenge,” Parker said.
“You can lay off risk and if you are disciplined about it, it is fine, but when you have this type of movement, most mortgage bankers use some form of reactive risk management. That is, they anticipate what they think the current risk is and use a couple different methodologies to do that.”
Since such methods are reactive, when the market moves a lot from where it was, “the market is going to be impacted, there is no way around that,” he said.
“The people who guess the market, they actually may make more money, but if you have a disciplined risk-management approach but you don't use any options...these types of moves, they are not going to make the margins they anticipated.
“There is an asymmetric risk associated with mortgage banking. Anticipated profit is going to decline if rates move higher and it is also going to decline if rates go lower.
“You can lay off risk to a certain degree with some options, it just takes the edge off,” Parker said.
Mortgage bankers who do this “can be a little bit more proactive with their risk management.”
But adding these is not a decision to be made in the midst of turmoil, he said. “It takes awhile to implement” and requires capital. The time to do it is during calm markets but unfortunately that is when companies tend to become complacent, Parker said.
“Most mortgage bankers say, 'we took our beating' and they move on,” he said. “You can be a reactive risk manager. It is fine.” Companies can choose whether they want “to pay the premium and buy options or pay the premium for when you have this type of slippage.”
In other news related to recent market volatility and lower rates, Credit Suisse global head of structured product research Dale Westhoff told this publication refinancing and prepayments could really pick up if the 30-year primary market mortgage rate were to fall to 4%.
At press time, according to Freddie Mac's weekly primary market survey, the average 30-year rate during the week ending Aug. 18 was 4.15%.
