Austin Tilghman, managing director of the United Capital Markets hedging advisory service, has bought the business from Matrix Bancorp of Denver and plans to expand its operations into fixed-income money management.
United Capital Markets main line of business is advising mortgage servicers on how to hedge their portfolios of servicing rights. When interest rates fall, homeowners refinance their loans, the fees that servicers collect get cut short, and servicing rights become less valuable. Since the mid-1990s, many servicers have bought derivative instruments that tend to gain value when rates fall, in order to make up for losses in servicing.
Mr. Tilghman, 48, did not disclose the price he paid. He said he expects United Capitals money management business to rack up about $100 million of managed assets in its first year. He said it will manage funds that invest primarily in mortgage- and asset-backed securities. Initial investors would for the most part be wealthy individuals.
He also said he plans to keep building the hedging advisory business. He noted that United Capital has retained its dozen or so clients, most of them regional banks.
Thomas C. Cronin, vice chairman of Matrix, said the thrift company will continue to work closely with United Capital, which will make use of Matrixs analytics. Matrix will also continue to refer clients to Mr. Tilghman, he said.
Mr. Tilghman said he sees another potential source of business for the hedging consultancy: private mortgage insurers. Like servicers, mortgage insurers have reason to worry when rates fall, because just as loans get paid off early, policies get canceled, cutting short insurance premiums.
Mortgage insurance companies are an untapped client base for risk management, Mr. Tilghman said.
United hedges clients portfolios with Treasury futures and options that correspond to particular tranches of loans in servicers portfolios. Mr. Tilghman called this a wiser strategy than the more common method, which is to use a basket of derivatives such as interest rate floors or swaps, that do not relate to specific parts of a portfolio.
For one thing, he noted that under Financial Accounting Standard 133, which servicers must adopt no later than Jan. 1, they will be penalized harshly if the movements in their hedges do not closely match the changes in the value of their servicing.
And futures and options can be purchased on the Chicago Board of Trade, making them easier and cheaper to buy and sell than derivatives like swaps, which are only available from Wall Street dealers, Mr. Tilghman said.