With interest rates at rock-bottom levels, mortgage lenders are paying increased attention to hedging. And a small number of specialized consultants is standing ready to help.
One of the most active is Chicago-based Quantitative Risk Management Group. QRM and others function as high-tech tailors for mortgage lenders, helping them hedge risks from the birth of a loan to its securitization.
"One size does not fit all in mortgage risk management," said Charles A. Richard 3d, co-founder and senior vice president of client services. He said that every mortgage company needs to be able to customize its risk management program.
QRM writes software for mortgage lenders and investors-and in soup-to- nuts manner. It offers an asset-liability management system for fixed- income investments, a servicing valuation and hedging system, and a mortgage banking system designed to manage risks associated with originations.
In 1997, QRM signed more than 35 clients, including Residential Funding Corp., a subsidiary of General Motors Acceptance Corp.; Fleet Mortgage Group; First Nationwide; and InterFirst, a division of Standard Federal Bank of Troy, Mich.
Other leading risk consultants are Tuttle & Co., Mill Valley, Calif., and MIAC Risk Management Services, New York.
Steven C. Kapp, vice president and financial strategies group manager at InterFirst, said it was cheaper to purchase the QRM system than to use in- house technology to create risk management tools like option analytics.
The mortgage banking system looks at the origination characteristics of a loan, including its purpose, source, lock-type, and origination status. The system then measures the propensity for a loan to close and the underlying risk characteristics of the mortgage, to determine its value and that of individual hedges.
"There is an asymmetric risk in mortgage lending," Mr. Richard said. He explained that when rates go up, more loans will close, and when rates go down, lenders cannot sell loans at a profit, and borrowers may walk away in search of better rates.
"A mortgage pipeline is a living, breathing animal," he said.
Consolidation in banking and mortgage finance has increased the demand for risk data to report to parent companies, said Daniel Rudd, vice president of client services. And with the refinancing boom, "there is a lot more focus on the risk that these mortgage units are taking."