Mortgage Servicing Rights (MSR)s are interest rate sensitive and require constant monitoring and frequent hedge adjustments. HedgeCalc™ allows United Capital Markets’s experienced traders to employ a very dynamic strategy that maximizes hedge performance.
United Capital Markets partners with its clients to help implement “best practices” to maximize the value of mortgage banking operations, from production pricing through MSR recognition, hedging and accounting.
HedgeCalc™ provides real-time analysis of risk exposure and solves for the most effective hedge at the highest potential income or, in the case of options-only hedges, the lowest cost. UCM’s clients can provide a risk acceptance target and see the hedge solution for that target within seconds. The high speed and accuracy of HedgeCalc™ encourages investigation of multiple solutions and clients are not limited to any predetermined number of alternatives.
Beginning since 2006, FAS 156 allowed companies to elect fair value accounting for MSRs. This has greatly simplified hedge accounting such that all of UCM’s clients have elected to account for their MSRs using fair value. However, fair value accounting for MSRs is an option, not a requirement, and UCM can provide highly effective MSR hedges no matter which method of accounting its clients chose.
Also since 2006, UCM engaged a national accounting firm to review its Controls Placed in Operation and report pursuant to AICPA SSAE No. 16. This “SOC” report supports UCM’s clients’ reliance on HedgeCalc™ and the surrounding controls while providing their auditors with a starting point for understanding the system and its control environment.
- United Capital Markets recommends reflecting the full value of MSRs in production pricing, maximizing both production volumes and margins.
- Many institutions are uncomfortable with the perceived volatility of MSRs so they record them at very “conservative” values, often well below market value. This penalizes earnings by not fully reflecting the value of servicing produced. If this conservatism is carried over into production pricing, then production volumes are depressed, penalizing earnings by both price and volume.
- Increasing recorded MSRs accentuates financial volatility; therefore, UCM recommends using income generating hedges to minimize such volatility.
- In early 2006, the Financial Accounting Standards Board issued Statement No. 156, requiring initial bookings of MSRs at fair value and allowing an election to subsequently account for MSRs at fair value, rather than the lower of amortized cost or market.