No, UCM believes that valuing the asset hedged and hedging the same asset sets up a potential conflict of interest.
No, UCM uses HedgeCalc™ in its hedge consultancy and it’s only available to UCM’s active clients as part of their service.
After an initial retainer and setup fee, UCM charges a number of annual basis points on the notional amount hedged. The rate declines as the notional amount increases. With some clients, in exchange for a lower fixed fee, UCM will share in a percentage of the net hedging results.
No, UCM is privately held and has no affiliation (direct or indirect) with any mortgage servicing enterprise.
UCM has formal policies and procedures for hedging on its clients’ behalf and has a national auditing firm perform a “Type I” review annually. Additionally, UCM provides detailed instructions for daily reconciliation procedures that reduce its clients’ reliance upon UCM’s controls.
With our largest clients we recommend detail trades to the institution’s treasury or trading group and those trades are executed by the institution. UCM receives email verification of such trades as one of the checks to assure that there is no miscommunication.
$250 million is around the minimum that UCM can efficiently hedge. UCM would be happy to review your portfolio in detail to determine the feasibility to hedge.
With the largest companies UCM would typically only be part of a larger, more complicated solution.
UCM believes that it is most efficient to address basis risk through frequent re-valuation (typically twice per month) of the hedged MSR asset’s value and rate sensitivity rather than trying to create a hedge that addresses basis or spread risk. UCM’s observes that most hedges that attempt to cover basis risk tend to add negative convexity, cost and volatility.
Some people assume that since MSRs are mortgage-related therefore it would be best to hedge with some mortgage product like TBA securities. There are several problems with this. First, the durations between thirty-year, fixed rate TBAs and thirty-year, fixed rate MSRs don’t match well, so you can’t achieve dollar-for-dollar offset without adjustment. The adjustment is complicated by the need to construct a “par-equivalent” future security by owning a mix of at least two different coupons; therefore, a hedger hedging MSRs with a Weighted Average Coupon of 6-1/8%, when the current par rate is 5-7/8%, might hedge with a 80-20 mix of 5% and 4-1/2% TBAs. If the par mortgage rate dropped to 5-3/8% the hedge would need to be adjusted to a 20-80 mix of 5% and 4-1/2% TBAs, selling 5% and buying 4-1/2% coupons.
Unfortunately the par coupon is moving every day, so there’s lots of transaction costs to keep the mix properly balanced. When there are large moves in rates, as in early 2008, the price performance is seriously impaired because the market is not liquid enough to absorb the spike in volume when all hedgers make the same move at the same time.
In times of market uncertainty, treasury securities usually outperform mortgage securities.
UCM recommends US Treasury Futures rather than Swaps because the small spread advantage of swaps is offset by higher transaction costs, counterparty risk and more difficulty in keeping the swaps balanced against the MSR risk profile.