“Optimized” Pipeline Management

Optimization Techniques:

1. Total Sale Optimization: Best Execution – MCM employs a Goal programming system’s engineering approach to make sure all available executions, securitized pooling opportunities, mandatory, AOT, Co-issue, and Bulk pricing are evaluated to arrive at the highest possible sale pricing across all potential executions. Hence, we not only find the highest price for each loan, but for the entire group of either closed or locked loans evaluated.

2. Investor Spread Analysis – MCM provides a daily review of correspondent and agency investor’s pricing levels relative to the pooled coupon to illustrate whether it is a good or bad day to sell to investors. For example, every day the price from investors for a 3.25% note rate is evaluated versus the TBA price of a 2.5 coupon to see if the spread has widened or tightened. We use mean reversion as a gauge over both a ten-day and 23-day moving average to assess pricing. Hence, by checking the spreads for each product and coupon one can determine whether today is a good day to sell loans to investors.

3. Market Volatility & OAS Spread – in a similar fashion to the investor spread analysis we evaluate options volatility for both Puts and Calls on the Treasury curve to determine whether it is a good day to buy options. The same for OAS spreads to the MBS TBA current coupon – here we evaluate whether spreads are wide or tight which provides our clients with information on whether to buy calls and create a synthetic Put or buy Puts outright on the 10yr.

4. Value at Risk Hedge (VAR) Optimization – MCM employ’s implied market volatility from the Treasury options market in an OAS scenario analysis framework to calculate the Optimized Hedge Position given the current mix of trades and pipeline exposure. The system determines how much coverage and what type is needed to minimize the risk presented by a client’s pipeline due to changes in interest rates, fallout expectations and market volatility.

5. Base Pricing System – MCM’s loan level pricing system has been engineered to price all originated loan products by coupon according to the execution likely to be used to sell the loans at the predetermined profitability level. The system considers market rolls (UMBS pricing by Month), delivery timelines, hedge costs, maximum and minimum cash invested, servicing, excess servicing, and current TBA levels to arrive at the optimized pricing level for each loan rate by lock period.

6. Scenario Analysis – MCM provides a complete cloud based, secure platform outside of its normal processing environment for clients to explore alternative strategies for hedging the current pipeline. A client can add or subtract trades of any type, change trades, add, or subtract closed or locked loans, edit loans, change market assumptions, and generally explore alternatives before executing a position strategy all in a live market environment.

7. Computational & Data Structures – MCM employs state-of-the-art computational algorithms, database management techniques, and cloud computing to ensure the accuracy, speed, and availability of all systems.

8. Float Down Pricing & Hedging – MCM provides clients with customized Float Down lock programs for pricing and hedging loans for borrowers who need extended pricing protection. The rate Protection Program can either be for tracts of homes in a builder commitment or “Spot” commitments for individual borrowers. All are managed and priced in our OAS Pipeline Management System.

9. OAS Hedge Ratios – MCM determines hedge ratios and recommendations using an OAS approach that minimizes estimate error over the entire 100 basis point in yield shock horizon not just one point. In addition, this approach considers servicing value changes, excess yield value changes, coupon pooling range changes, duration drift and convexity changes, and fallout estimate changes as the market increases or decreases.

10. Fallout – MCM employs the best applicable modeling techniques using statistical approaches in a multidimensional framework or an AI – Neural Network system custom tuned by client for loan level fallout exposure analysis and forecasting.

© 2021 Mortgage Capital Management, Inc.