In the previous article we explored why making hedging decisions based upon the bottom line is the most direct
path to improving overall hedging performance.

A prerequisite to hedging for performance is to have your model drive the analysis that is tuned to the layered
dynamics of your pipeline.

Managing from a position of understanding

Managing a pipeline is an exercise in group dynamics. One of the challenges of hedging a mortgage pipeline in an
optimal fashion is that your pipeline may appear to you as a blob. You need to understand the condition of the
trees that make up your orchard. It is not until you study the pipeline at a stratified level that you understand the
dynamics of the group. Not until you understand the dynamics of your group that you will be able to shape a
hedging strategy that provides you control to shape your profit picture.

Stratification studies reveal that not all loans have the same:

- propensity to fallout
- price sensitivity
- yield sensitivity
- market liquidity
- package quality

Stratification reveals that loan dynamics change as they mature through the underwriting process, as market
conditions change, as they are modified.

Thus, to not approach pipeline management through its layers is to compromise on the efficiency and opportunities
available. Not managing with layer dynamics in mind leaves you vulnerable when market conditions shift dramatically.

Tests of a model

• Does it accurately replicate real world experience?
• Does it allow you to match your actions with your expectations?
• Does it allow you to match your actions with your tolerance?
• Does it allow you to understand whether you are positioned conservatively or aggressively?
• Does it provide a sufficient amount of transparency for you to understand the assumptions driving its reports?
• Does it allow you to manage the assumptions that drive its reports?

Greg Crosby manages the secondary marketing software and services product line having joined ASC in June 1997. Greg has been involved in the mortgage industry since 1981. His fields of experience include secondary marketing, financial and performance auditing, construction and design of financial conduits, software development, commodity and securities portfolio management, and design of risk assessment systems. He developed the Risk Manager and Servicing Shepherd™ software products. Greg has served as a chief financial officer, with both commercial banks and investment securities brokerage firms, and has served as an advisor and board member to companies ranging from service providers to financial conduits. Greg is considered an industry expert in the fields of secondary marketing and risk management has authored numerous articles, papers and a book titled The Theory and Practical Application of Improving Secondary Marketing Performance with Software Tools.