Investor Basis Risk Update

by MCM Analyst 9/7/2017

“You gotta know when to hold’em, know when to fold’em”

Not paying attention to when a good day to sell your closed loans can cost you sometimes quite a bit!

Many in the capital markets perform best execution analysis daily on their portfolio of loans for sale sometimes more than once per day. Some complete this task with extraordinary discipline and analytical capabilities beyond single loan best exe to include an optimized execution for the entire portfolio of loans available for sale. This is a great thing; however, it ignores the other half of the coin – is it a good day to sell given the pricing levels from your investors. Investors price loans whether for GNMA II’s or FNMA loans based on a general spread level to the corresponding security price, their valuation of servicing based on the characteristics of the loans and the desired spread they want to earn on any given day. At MCM we pay attention to this spread level and track it daily. In fact this spread moves relatively predictably based on the day of the month it is and the general volume of loans produced by sellers. The graph below demonstrates the volatility produced from selecting the best price available from 4 different large investor’s daily prices available for a 4.125% note rate without significant LLPA’s that would be pooled into a FNMA 3.5 security. The time period is from February 2016 through September 2017.




Here is another look just based on the last two months from 7/17 – 9/17:

In both data sets one can see that the spread the best investor would pay is quite volatile and semi dependent on the general level of prices – they pay less when the market has increased and FN3.5 prices are over 104.5 and the volatility of this spread is not dependent on the price of FN3.5’s as demonstrated by the lack of a statistically significant R2.  What can be gleaned from this review: somedays it doesn’t pay to sell loans other days it is a great day to sell. Investors are in this business to make money you should be as well. Whether to sell on a given day is also dependent on whether one can wait due to liquidity or capacity constraints. Just selling every day is definitely not optimal regardless if done on a best ex basis.


© 2017 Mortgage Capital Management, Inc.