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Prepay Derivatives Offer Lenders Another Tool.
In the complex business of hedging portfolios of mortgage assets against interest rate risk, lenders and investors have long been searching for tools that provide a strong correlation to the unique prepayment characteristics of mortgage loans.
Now, the Goldman Sachs Group, which in cooperation with Deutsche Bank began offering derivatives on broad economic indicators, is starting a market for derivatives based on mortgage prepayment speeds. Goldman Sachs hopes the instruments will prove popular with mortgage servicers trying to protect themselves against the borrower's inherent option to refinance when rates fall.
The first auction of options and futures on prepayment speeds was scheduled to take place last month. Thereafter, Goldman Sachs hopes to conduct the auctions on the second and fourth Thursday of each month.
Each month, all extant options will effectively reopen as existing contracts, Goldman Sachs said.
Goldman Sachs executives say that creating a market for prepayment derivatives will provide a better hedge for mortgage prepayment risk.
"The key for the success or failure of this product is can we get mortgage servicers to participate," said Allen Brazil, managing director for mortgage and ABS research at Goldman Sachs.
Ian ...
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Source: HighBeam Research, Prepay Derivatives Offer Lenders Another Tool.