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Hedging: Why Does a Big Originator Hedge its Servicing Rights?(Brief Article)
American Home Mortgage Holdings, an independent retail mortgage bank, has started a hedging program to protect its mortgage servicing rights from impairment.
Not an unusual move with interest rates declining, except that American Home Mortgage is primarily known as a mortgage originator, and its servicing portfolio - even after its recent acquisition of Columbia National - totals less than $10 billion in mortgage loans.
Michael Strauss, CEO of American Home, told MSN that even with his firm's substantial loan origination capacity, it makes sense to use financial hedges to protect the value of the portfolio, rather than just relying on natural loan production to replace portfolio runoff.
The company currently services 85,000 home loans with a nominal principal balance of between $8 billion and $9 billion.
So, with an annual origination capacity that is many times greater than the nominal balance of the servicing portfolio, why hedge?
"If we didn't hedge, the runoff would reduce the boost we get when interest rates decline," Mr. Strauss explained.
American Home Mortgage benefits from today's favorable rate environment, and the company doesn't want to see that benefit in the front end of the business hampered by loan runoff on the back end.
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Source: HighBeam Research, Hedging: Why Does a Big Originator Hedge its Servicing Rights?(Brief...