Mortgage Capital Trading says it has improved the functionality of its mortgage hedging software with customized spec durations.
Mortgage lenders using MCT’s capital markets platform MCTlive! now have the ability to increase, review, and refine the granularity of their spec durations, leading to more precise hedging and reduced basis risk.
The new specified loan durations functionality, customized to the given lender’s execution, puts the formerly back-end modeling directly in the hands of mortgage capital markets professionals.
“Pricing granularity in the secondary mortgage market has steadily increased for nearly a decade,” says Phil Rasori, chief operating officer for MCT, in a release.“We feel it is essential to give clients transparency and customized control around spec durations.”
“As evidenced by the Mission Score programs and the latest low loan balance specified pool tranches, a rising share of production can be expected to be spec eligible in the future,” Rasori says. “With this release, our clients are prepared to reap the benefits of that trend while maintaining the strongest possible hedge performance.”
Specified loan products available to be sold to the agency cash windows or Ginnie Mae securitizations yield better pricing for mortgage lenders, but their durations vary compared to non-spec production, which, if not properly accounted for, exposes hedged mortgage pipelines to basis risk and underperformance. Many lenders choose to adjust for the spec duration variance by estimating off an average of their pipeline expected to be spec eligible, but this approach leaves them vulnerable to changes in the makeup of their pipeline.
MCT’s approach runs an analysis of each execution of each spec program to calculate and set spec durations. These executions include product-level cash window, dealer pay-up survey and, most importantly, MCTlive! platform specified pool executions.
Spec durations are now available for review and customization by clients. This new functionality is designed for seasoned capital markets professionals to get involved in the process themselves rather than having it managed by MCT experts. Lenders interested in a refresher are encouraged to read Duration & Convexity in Mortgage Pipeline Hedging.
“Giving our clients and traders the ability to match their loan durations to their spec executions provides them a critical edge in the industry-wide progression towards higher pricing granularity,” says Andrew Rhodes, senior director, head of trading at MCT. “For lenders delivering significant specified loan production, increasing duration granularity can bring about a meaningful improvement in their hedge performance.”
