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56 Scotsman Guide Residential Edition | ScotsmanGuide.com | June 2017
Bob Selingo is senior vice president of secondary marketing
at Waterstone Mortgage Corp. Selingo oversees the lock desk,
as well as the interim and subservicing, and capital markets
departments. He has more than 30 years of experience in
the mortgage-lending and financial services industries.
Reach Selingo at email@example.com.
These present-value calculations present mortgage originators with a
unique challenge: interest-rate risk. This risk comes about because the buy
price is set when the borrower’s rate is locked, but the sell price isn’t final
until the resulting funded loan is committed to be sold to an investor. These
typically occur at different times.
Another complication is that not all rate-locked loans will fund, and many
that do fund have pricing characteristics that changed after they were
locked. During the time between rate lock and committing loans for sale,
pricing is constantly changing. All of these factors create a risk that the sell
price will change relative to the buy price. This risk must be addressed for the
mortgage lender to realize its expected revenues. This is done by hedging.
Hedging addresses the interest-rate risk. Hedge trades act as placehold-ers for the eventual sell prices that will capture the value of rate locks after
loans fund and are committed for sale. Hedge trades may be used to sell the
loans, or they may be paired off while simultaneously committing the loans
to specific investors. In addition, on a daily basis, hedging must account for
rate locks that will fall out (not fund), new daily lock volume and pricing
characteristic changes on all pre-existing locks.
Hedging is one of the main responsibilities of a mortgage company or
lender’s secondary market team. The team managing the overall hedge
position must adjust outstanding hedges against changes in rate-lock
loan-pricing characteristics quickly, so the hedge performance remains
as effective as possible. This is important because the mortgage-backed
securities market does not provide an effective hedge against those changes.
As a final tip, remember that even though many originators tend to call
applications and rate locks “loans,” they technically aren’t loans — and
they don’t begin realizing value — until they fund. That’s when interest
accrual and principal repayment liability from the borrower begins. Lock
polices focus on the uncertainty of this funding event in an ever-changing
Now that you have a basic education, what does all this information mean
to you, as a loan originator? There are several ways you can work with your
secondary market professionals to ensure the best situation possible for
1. Know your company’s lock policies. Ask for explanations for any of the
rules that don’t make sense or that will impact the approach you take with
borrowers in those circumstances.
2. Anticipate borrower questions. Never make a promise to a borrower
involving a loan’s characteristics or the anticipated funding date if you don’t
fully understand the impact of those details and how your company’s lock
policies might affect the loan pricing.
3. Communicate with your secondary marketing team. The secondary
market team will want to know about any unusual circumstances that will
alter or delay the funding of a loan. If your origination system has an alert
function, address those alerts as soon as they come up. Do not wait until just
prior to funding.
If you follow these tips, you’ll be well on your way to giving your borrowers a positive and smooth loan experience from application to closing
and beyond, which will encourage them to return to you for their future
home-purchase and refinance needs. n