Best Efforts and TBA-MBS short protect IRLC
Historically, TBA-MBS increases gain by 30bp to 60bp depending on market and product
When rates go up, the value of the pipeline and warehouse goes down.
The reason there is a decline in value when rates rise is because the future cash flows from the mortgage note are discounted at the higher current market rate compared to the note rate, which results in a lower present value. This gets complicated quickly and requires and deep understanding of finance, but it's fun finance to learn.
To protect from interest rate risk, mortgage lenders may receive a "Best Efforts" forward purchase commitment from an investor to protect the BE pipeline and BE warehouse. A lender may alternatively use "hedging" to protect the pipeline and warehouse from interest rate risk. This is accomplished by shorting a TBA-MBS position to protect the pipeline and then use a short-term mandatory commitment for the loan delivery. It is also possible to DVP and deliver the loans into the short position once securitization is available.
Following are 10 steps to launch hedging.
As noted in items 1 & 2 below, the first things to do include getting educated and hiring a hedge advisor. Never start hedging without a hedge advisor.
10 Steps to hedging with TBA-MBS
1) Learn the Hedging Process
2) Select a Hedge Advisor
Contact 3 or 4 Hedge Advisors
(MCT, BKCA, BKOBSS, MIAC, Vice Capital, Flatirons, etc)
3) Obtain pre-hedge assessment by one or both of the selected Hedge Advisors.
Dr. Schell can help select a Hedge Advisor
4) Launch LOS Status Codes that include the following or similar:
(lock, processing, submitted UW, approved, CTC, funded)
5) Track Status Code results
(pull-thru by status code)
6a) Confirm Pull-Thru values by Status Code (no errors or hedge is wrong)
6b) Confirm Pull-Thru values by Status Code AGAIN (new hedging companies usually have LOTS of LOS status code errors)
6c) Segment Status Code results by branch and LO to look for outliers - fix or remove (fix or remove the outliers by using BE and worse pricing for poor pull-thru branches)
7) Create Hedging Policy and Procedure
Dr. Schell and Hedge Advisor will help
8) Establish Broker-Dealer Relationships
Hedge Advisor will help
Approval is based on net worth, cash, and experience
Prepare for Margin Calls that suck away your CASH
9) Train Management and Accounting about Hedging
IRLC revenue is not cash. It can't be spent.
The IRLC is not a tradable MBS. Its value is net future cash flow.
(See Dr. Schell's IRLC white paper - HERE
Make sure ALL management reads Dr. Schell's hedging article HERE
10) START - TBA-MBS hedging -
protect IRLC by selling short TBA-MBS
then sell closed loan into short-term mandatory commitment.
MBS Financial Services supports the following areas:
Growth Strategy – We can help you plan and execute a growth strategy.
Hedging & Pipeline Risk Management - Dr. Schell can help explain how hedging functions, the benefits of hedging, and the risks associated with the activity. See blog posts.
Technology must align with a firm's strategic objective. Every mortgage lender's technology infrastructure significantly impacts its customer experience and employee workflow. MBS will help select, configure and deploy the best technology solution.
CEO Development - Leadership is a learned skill. Dr. Schell can teach you to be an amazing leader, an effective manager, and an inspiring coach that can foster a vibrant culture.
Accounting Services – Dr. Schell, CPA, leads the accounting services team to become your outsourced accounting department. This alternative makes more and more sense for companies wishing to focus on their core business and also want trustworthy accounting and financial reporting support.
About Dr. Schell:
Dr. Andy Schell, Ph.D., DBA, MSML, MBA, CPA/CFF, CMB
Dr. Schell is CEO, Managing Partner, and Co-Founder of Mortgage Banking Solutions and the Founder of MBS Financial Services ("MBS"), based in Austin, Texas. Dr. Schell is known for his ability to turn "vision into reality" and "chaos into order" as he finds creative solutions to the challenges his clients face addressing Revenue Stability, Technology Enhancement, Financial Management, and Workflow Efficiency.
He has 4 decades of experience as a strategist directing the activity of both small and large groups of employees including mortgage lending activity at Bank of America. His leadership knowledge extends from his hands-on experience and his academic training in his MBA, his master's degree in leadership, and his doctoral work to examine employee dynamics given leader stimulus.
To find out more information on MBS Services, please click HERE
Find more information at
DoctorSchell@MBS-Team.com ; (512) 501-2812;
Doctor Schell the Profit Doctor