Mortgage lending continues to represent a significant portion of business for most banks serving consumers. These home loans provide an important revenue stream and help depositories stay competitive, not to mention serving a vital societal need. To reduce market risk and make more loans, it is common for institutions to sell groups of mortgages to a purchasing agent such as Fannie Mae or Freddie Mac.
These government sponsored entities (GSEs) package the loans with like mortgages for sale in the secondary market. The time between the loan going on the lender’s books and its sale to the purchasing agent is called the “mortgage pipeline.”
Why hedge the mortgage pipeline?
Managing the pipeline is a critical part of mortgage lending that calls for skilled management to keep risk under control and ensure profitability. Hedging is often used to offset risk and increase efficiency, but it can be confusing – even daunting – to some because it involves complex computations and the use of models to manage risk and determine pricing. Yet, when done right, hedging strategies may offer lenders more selling flexibility, greater efficiencies and the ability to hold loans on the balance sheet longer – all leading to potentially higher returns. Usually, this process is most successful when financial managers work with qualified investment advisors that have proven hedging experience.