ALM First Financial Advisors: Post-election Stress Alive and Well in Mortgage Market, Causing Values to Decline for Those With Unhedged Mortgage Loans

Best advice is to execute sound pipeline-management strategy, not rely on interest rates

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Dec 21, 2016, 05:05 ET

DALLAS, Dec. 21, 2016 /PRNewswire/ -- In the weeks since the U.S. presidential election, long-term interest rates have soared … and that's a cause for concern for financial institutions with unhedged mortgage loans, according to ALM First Financial Advisors.

"Right now, the 10-year Treasury rate is sitting at roughly 2.40 percent, compared with 1.88 percent just after Election Day (Nov. 8)," said Travis Goodman, CFA, Principal, Advisory Services. "Just last summer, the long-end Treasury was at its lowest in decades, setting an all-time record of 1.37 percent July 8. "Now it's at almost double that figure."
Goodman says the jump in interest rates may help net interest margins going forward; but it isn't good for those with pipelines that include unhedged mortgage loans, whose value has been dropping significantly.

"Here's an example," he said. "The pricing for 30-year, 3.5 percent coupon mortgage loans have dropped between 3 and 4 points, from 103 around October 1st to below 99 as of November 30th. So, for financial institutions with unhedged mortgage loans, you're looking at a painful month of lost value. And, depending on size, that could be in the millions of dollars for some."

(Please refer to the attached chart, "Net Hedged Position - $50mm Pipeline.")

Economically speaking, Goodman says there isn't much institutions can do about the existing loss because its diminished economic value already has been "realized," regardless of accounting practices. Although the mortgage market could move back in sellers' favor, timing the markets more often than not leads them astray.

Goodman says the best advice for all anyone engaged in mortgage loan production is to never rely on interest rates to determine profitability. "The focus should be on a proper mortgage pipeline management process to mitigate the risk of changes in mortgage values," he said. "Not only will that help improve efficiencies, but it also will reduce the risks of secondary mortgage operations."

For more information about ALM First and how the firm helps clients develop customized and efficient mortgage pipeline management processes, call 800.752.4628 or visit www.almfirst.com.

About ALM First
ALM First Financial Advisors, LLC is a leading, trusted strategic partner for financial advisory services. With approximately $20 billion of investments under management, ALM First is an SEC-registered investment advisor, acting as an unbiased third party, offering commission-free, fee-based services to more than 250 financial institutions across the country. Since 1995, financial institutions have relied on our industry expertise in formulating strategies to manage risk and enhance return to help them manage their balance sheets and investment portfolios. For more information, call (800) 752-4628, or visit www.almfirst.com.

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SOURCE ALM First Financial Advisors, LLC