Magazine article Mortgage Banking


Magazine article Mortgage Banking


Article excerpt

This continues a series of articles aimed at helping readers to make critical software choices. Each of the articles concentrates on a mortgage banking business area, highlighting the strategic and management issues associated with selecting appropriate software. The articles describe the range of functions the reader can expect to find in software marketed to support the business area. In each article, we present products that are representative of those found on the market We discuss how well the products support each business function, point out prominent or unique features and review the experience of users. The product reviews rely on information obtained from product literature, interviews with vendor representatives, talks with product users and the authors' own experience with mortgage systems. We do not endorse or recommend any specific products.

In earlier articles we looked at software to support the loan origination business function. This time we look at support for a concurrent function: risk management. For the purposes of this article, we have chosen to include those activities that manage the loan during the entire time the mortgage banker is at risk for it, from the day it locks until the day it is sold. These functions include: * measuring your exposure; * deciding what and how to sell; * making trades; * allocating loans to cash and security commitments; * allocating securities to trades; * analyzing performance.

Measuring your exposure is an analytical function and reporting function that enables you to decide what your company's risk exposure should be. Of course, this means the system must take into account the organization's guidelines and risk management paradigm. Features typically include three reports: a position report to measure exposure, a mark-to-market report to measure gains or losses and a sensitivity analysis that estimates what your position and mark would be if the market were to trade up or down. As part of estimating exposure, the system must calculate the risk for locked loans in the pipeline. We are going to look at systems that support two ways of doing this: traditional fallout calculations and pipeline delta hedging (explained later in this article).

Deciding what and how to sell is a tactical decision based on the loans in the pipeline and current market prices. Features might include a report that stratifies your pipeline, summarizing loans into possible pools and comparing the pools to your forward sales; a best-execution model to compare cash sales and pool sales, as well as the value of excess service fees to help with buy-up/buy-down fees; and an ARM-pool model. A well-estimated production forecast will help alleviate the need for pair-offs.

Making trades involves the actual sale of loans and pools as well as trading in hedging instruments. Trading itself is not a system function, but the system must record those trades. The system should handle forward sales, futures, futures options and cash options. It should allow easy entry of a hedge ratio and a delta for trades and calculate (on the position report) the amount of coverage provided by the trades using these figures. Additionally, it should monitor futures and options for expiration. Finally, the system needs to provide a mechanism for trades to be paired off, including one-trade-to-many pair-offs and vice versa.

Allocating loans is the operational function of selecting loans into cash sale commitments or into pools being formed. Features typically include sophisticated selection of loans by pre-defined or ad-hoc criteria and an interface to Mornet/Midanet (or other investors' equivalent) to ship loans for sale or swap.

Allocating securities to trades prepares for notice day and settlement day. The system should include features to match securities trades with pools and print-delivery schedules.

Analyzing performance involves analyzing historical data to predict future market performance. …

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