Fleet Financial Group has joined a growing number of institutions that are managing the interest rate risk in their mortgage businesses.
The Boston banking company's Fleet Mortgage Group has adopted Quantitative Risk Management Inc.'s mortgage banking system. The move resulted from the mortgage group's reassessment of its technology systems.
The unit is under orders from parent company executives to increase its annual net income to $100 million. Annual net fell from $86 million in 1995 to $40 million last year.
The unit is looking to technology to increase its profit margins. David M. Sheppard, the group's chief information officer, has made changes in several business systems, including the Compass in-house origination software.
Quantitative Risk Management's technology lets Fleet manage its interest rate risk by evaluating and calculating the risk and then recommending the optimal set of daily adjustments in hedge positions to cover it.
The software also sets mortgage interest rates.
In April Fleet reported a $75 million charge because of early mortgage repayments, partly offset by $50 million of investment gains from hedging.
Fleet is interested in tracking the historical characteristics of loans that fall out, said Patricia Evans, a capital markets vice president at Fleet Mortgage Group.
Monitoring fallout is important in today's low interest rate environment, she said.
"Is it a finance or purchase transaction, at a fixed or variable rate, was it a 15-day rate-lock commitment or a 90-day rate-lock commitment, what channel originated the loan?" Ms. Evans said in a written statement.
"All of these things can" affect whether a loan will make it to closing, she said. "QRM's system will enable us to track detailed loan-level characteristics" affecting fallout, "allowing us to better predict the outcome."
The system's hedge optimizer helps traders manage the risk in the pipeline. It lets traders program their own rules, preferences, and tolerances. Up to eight Fleet traders can work on the system simultaneously.
Fleet will also use Quantitative Risk Management's technical reporting capabilities and option-adjusted spread modeling.
"We think it will be a good tool for our traders, helping them to spend less time compiling reports and more time acting on the information to take advantage of market opportunities," Ms. Evans said.
Fleet is one of several new clients for the risk management system this year. More than 40% of all mortgage originations in the United States this year will be hedged by Quantitative Risk Management systems, said Charles A. Richard 3d, co-founder and senior vice president. The company specializes in option-based interest rate risk management systems used for balance sheet management and mortgage pipeline hedging.
Mortgage lenders are increasingly depending on technology because of shrinking margins and better information gathering by borrowers, said Paul Tuttle, founder and managing general partner of Mill Valley, Calif.-based Tuttle & Co., a leading risk consulting firm.
"As information flow to customers and companies becomes more efficient, the market becomes more efficient," Mr. Tuttle said.