Countrywide Benefits from 'Multidimensional' Hedge.(Countrywide Financial Corp.)

Saying that Countrywide Financial Corp. has "among the most flexible hedging regime" in the industry, a stock analyst here says the company has positioned itself well to withstand interest rate gyrations such as the ones experienced this summer.

And its hedging strategy may be less of a drag on increasing MSR values in a rising rate environment than many peer companies will experience, according to David Hendler of Credit Sights, New York.

While other lenders may be hurt by "negative whiplash" from mortgage-related hedges that were designed for a falling rate environment, Countrywide has put in place options-based hedges that will expire without an effect on fair values or earnings as interest rates rise, according to Mr. Hendler.

But there is a cost for this "insurance-like policy" - the premiums Countrywide must pay on the options.

Countrywide has said it is vigilant with regard to "fat-tail" risk, Mr. Hendler said. That condition exists when interest rates react sharply and unfavorably, thwarting the effectiveness of hedging programs that are designed to mitigate gradual rate shifts.

But Countrywide, by using more option-based hedges that fade away when the mortgage durations extend and servicing accretes in value, avoids the Catch-22 of losing value on its hedges ...