Thursday, August 29, 2013

Secondary Marketing: Hedging is Half Science, Half Art

There are two elements of secondary: 1.) the actual process of pricing, locking and delivering loans (and the unfortunate loss mitigation from buybacks), and 2.) hedging strategy.

You have to separate these two elements because the secondary process is pretty much standardized - we have been able to template it out.

Hedging, however, is a developing science - even an art form.  So when an investor, regulator or agency asks you for a hedging policy you will be mixing a cocktail that runs from

1.) 100% hedged through forward commitments,
2.)  a combination of best-efforts and mandatory whole loan delivery contracts
3.)  a hedging/options adviser using options strategies - like one of the many advising firms that specialize in this.
4.)  naked! (don't tell the regulator if this is how you are hedging...)

Strategies 1 and 2 are covered in the template process.  If you are using an options broker to hedge pipeline, that broker will provide you with the strategy they are utlizing, and can provide the financial performance model for your lock/loan/product mix.  Include your broker's hedging strategy as an addendum when providing your secondary marketing policy to a regulator, agency, warehouse bank or investor.

Having a good broker can also help you. You should get recommendations, but here is one to start with (Anthony used to be a wholesale/correspondent representative, so understands your business):

Anthony Ianni
Lender Services - MCT Trading
Phone 610-742-1816 (mobile)

Additional Resources:

Article - Everything You Ever Wanted to Know About Hedging... - Schell//Hopson, 2007
Book - Demystifying Mandatory - Jennifer Fortier

Take a look at our secondary policy here:

Secondary Marketing Policy and Procedure Manual table of contentsSecondary Marketing Policy and Procedure Manual Table of Contents page 2

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