What Do the 1985 Chicago Bears and Hedging Strategies Have in Common?

In the 1984 NFL postseason, the Chicago Bears surrendered the fourth-most yards per game to its opponents (361.5) and the fifth-most points per game (21). That team lost the NFC championship to the eventual Super Bowl champions and offensive juggernaut: the San Francisco 49ers.

The following year, defensive coordinator Buddy Ryan perfected his famed 46 defense and, in 1985, the Chicago Bears became the first team in league history to allow no points in consecutive postseason contests, en route to their win over the New England Patriots in Super Bowl XX by a score of 46-10.

Ryan came up with the defense in 1978, and in the seven years from its inception to its perfection, he conducted a great deal of analysis about the teams and the overall landscape of the league. From this analysis, he made countless small tweaks and changes leading up to the Bears’ 1985 season, which culminated in a championship and propelled the defense to legendary status.

In Ryan’s case, the constant improvements to his defense relied on his ability to analyze the intricacies of the then-successful run-heavy offenses. For lenders, constant improvements to hedging strategies rely on their ability to analyze the intricacies of the secondary market. And the only way this is possible is to make decisions and adjustments based on observing real-time, accurate market data and movements, which help identify opportunity and optimize the impact of any volatility.

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Many lenders choose to engage with third parties to analyze market trends and provide meaningful insights into their data, but these typically require processing overnight to be turned around. This means that the lender is making critical decisions based off a market that no longer exists – even 12 to 24 hours is a long time in the ever-moving global economy, and entire markets can dramatically change within that span.

What we saw in December 2016 is a perfect example of this. Mid-month, there was a  market correction that drove interest rates up dramatically, and in response, loan prices plummeted much lower than they had been the day before. If you were relying on data from the previous 12 to 24 hours, you would have been selling into an entirely different market than what you predicted, leading to lower profits and poor margins. If, on the other hand, you were monitoring a live data feed, you would’ve known what to hedge, what to sell and what to hold until the market corrected itself and demand stabilized.

Optimizing your hedging and selling strategy with real-time data can equate to a difference of a million dollars or more in revenue, depending on your monthly volume; revenue that is better spent training new employees, improving product offerings and even marketing to borrowers. Ultimately though, your success will hinge on the information you have access to, which ensures that all hedging decisions are made at just the right time.

How can lenders take that next step with their secondary marketing programs?

  1. Understand that perfecting a hedging strategy doesn’t happen overnight. Remember, Ryan’s 46 defense took nearly a decade to perfect – and similar to creating a great defense, the secondary market requires patience and a cool head in order to see favorable results. Decisions must be based off facts and data, not emotions or quick determinations. These decisions have serious implications for a lender’s long-term goals. In particular, small, incremental changes that lead to gains over an extended period of time, rather than large gains followed by even larger losses, offset the benefits of trying to “predict” the market.
  2. Examine the source and quality of their market data. In today’s digital world, technology has had a major impact on the methods investors use when choosing whether to buy, sell or hold. Thanks to the global economy, markets are constantly changing, and events halfway across the globe can impact the decisions American investors make half a day later. Because of this, many of the same strategies that past generations used no longer apply with the same veracity as they do today.

The secondary market is a powerful, yet underutilized tool. Lenders often believe that the number of loans they close or the number of borrowers coming in and out of their branch will determine their future. But in reality, all areas of the business must be optimized in order to drive meaningful company growth.

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The reason the 46 defense was so successful is because it was optimized for the NFL at that time. As a result of their weaknesses being exposed, opposing teams took note and evolved their offenses accordingly. Today, the 46 defense wouldn’t be successful because it was a great run defense, but is easily exploited by a pass-heavy offense. Equivocally, lenders must constantly adjust their strategies to ensure they’re appropriately and constantly positioned for success.

Tom Gillen is senior vice president of capital markets for Churchill Mortgage. He has more than 20 years of experience as a financial services executive, with expertise in business development, product innovation and organizational leadership. Churchill Mortgage provides conventional, FHA, VA and USDA residential mortgages in 44 states.

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