FORWARD BUILDER COMMITMENTS
Forward builder commitments are very similar to our float down lock offering, but instead of providing spot commitments for the options required to lock a long rate on a single home, we allow a builder to provide rate lock assurance for an entire development.
This is an offering we pioneered and have been offering the industry since the 1980s. It was developed when our principal was working for a family real estate development business in Southern California. Interest rates were on the rise and homes were becoming less affordable by the time the construction was complete.
The innovation came in the form of the Float Down Lock for a one-time close on new construction. The offering provides assurance to the buyer that they’ll be able to afford the financing when the home is complete. Our Forward Builder Commitment makes this product available for a group of homes under construction.
Here is an example of how this product is used: A developer breaks ground on a $300 million project and expects about half of the homes to be financed through its own captive mortgage company while the other half will be financed by large, national lenders. The developer can buy an insurance option to hold rates to a certain level for the homes it plans to finance.
This is a much better option than just paying to buy down the rate because some investors, including the GSEs, have limitations on the resulting loan to value for the loans they buy. It’s far better to use a forward builder commitment to purchase an option and then hedge against it to mitigate any risk caused by rate volatility.
Like our popular float down locks, if the rates fall or don’t rise to the cap, the lower rate can be offered to the home buyer. Even if the rate goes higher, the borrower will pay only to the cap rate.
From a marketing perspective, this is a fantastic tool for construction lending as it offers buyers in a volatile market the assurance that they can afford the home under construction. We often refer to it as the builder’s rate protection plan. MCM helps lenders price the commitments and then hedge them appropriately during the timeframe in question.
In a market where mortgage interest rates are rising, offering new home buyers the security that comes with knowing what their financing will cost will save deals and help builders grow.
While builders see great value in this offering, it’s not something most companies can offer. MCM’s experience allows us to price the commitments properly and then hedge them correctly. One mistake we often see is a lender attempting to hedge the risk in $10 million worth of float down locks on a development by selling an equal amount for the TBA. If the market sells off, the lender will be successful, but if it rallies the lender will have too much TBA coverage while the hedged loans will fall out or close at lower rates.
When lenders see this happening, they will correct their hedging strategy, but in a volatile market they end up getting whipsawed back and forth, losing money on every trade. It’s far better to just buy an option to hedge based on good market intelligence and analytics, which MCM provides.
This service is often purchased as a stand-alone offering, but MCM also provides this service to clients working with us through either type of standard relationship
MCM advises clients, who then execute trades, best execution based pooling and delivery. MCM is always available for conference calls to discuss trading strategies and to provide consulting and market analysis.
MCM does it all, executing MBS trades, providing best execution based pooling and delivery, monitoring pricing and leading a daily client conference call to coordinate secondary marketing activities.
Under either type of business relationship, MCM’s systems, reporting and analysis tools are all available online providing instant accessibility to comprehensive analysis and reports, eliminating the need for the client to load, maintain and manage the software.
Ease of access, ease of use, quick report generation and real‑time “what‑if” scenarios all provide the client with the necessary tools to succeed in the world of risk management. Combined with MCM’s experienced advisors, Hedge Commander allows clients to grow and prosper in any market environment.
Since 1994, Mortgage Capital Management has helped mortgage bankers of every size become more profitable through the use of best-in-class pipeline risk management tools and strategiesy. Our pipeline risk management services, secondary marketing consulting, and hedging/trading services enable clients to prosper in any market environment.
For nearly 30 years, the U.S. mortgage industry has called upon Mortgage Capital Management for expert advice and proven technologies all designed to deliver best execution in service to a more profitable enterprise. Our customer list includes some of the most successful firms in the business.
Viewing the online demo costs you nothing and will shed light on a unique approach to secondary marketing success that you won’t find anywhere else. Don’t settle for mediocre when excellence is achievable.
Get the MCM Competitive Advantage! Call us to today to learn more or schedule an online demo: 858.483.4404 x220
Call us to today to learn more or schedule an online demo
Project & Services
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