WORKING DRAFT — Pending review by Lisa (CEO), Greg (President), and Jay (Operations). Not approved for publication.
Know Your Exposure Before the Market Moves Against You
Between origination and delivery, your desk holds loans. Sometimes for 30 days. Sometimes 60. During that window, your pipeline has a market value — and that value changes with every rate tick.
If rates drop 25 basis points and you're over-hedged, you've locked in losses on hedge positions you didn't need. If rates rise 25 basis points and you're under-hedged, your pipeline value just dropped and you have nothing offsetting it. Either way, you're explaining the P&L impact to your CFO.
A 25-basis-point unhedged rate movement on a $500M pipeline is a $1.25M swing.
Most desks know their hedge ratio in the morning. By 2:00 PM, after new locks, fallout, and rate movement, they're estimating. By the next morning, they find out what actually happened.
Risk Manager closes that gap.
What Risk Manager Does
Position Reconciliation — Where You Stand, Right Now
The core of risk management is one question: what is my net exposure?
Risk Manager answers it by reconciling three things:
- Loan position — the market value of every loan in your pipeline, adjusted for closing probability (fallout)
- Hedge position — the market value of every trade you've executed to offset pipeline risk
- Net exposure — the difference, broken down by profile, segment, instrument type, and security class
This isn't a morning snapshot. Position data updates as loans lock, fall out, and close — and as trade values change with the market. Your desk sees net exposure by segment, in both dollars and percentage terms, throughout the day.
Scenario Analysis — What Happens If
Knowing your current position is necessary. Knowing what happens next is where risk management earns its keep.
Risk Manager runs three-scenario analysis on every risk profile:
- Rates stay flat: Your current net position, confirmed
- Rates drop (e.g., 50 basis points): How your pipeline value and hedge value change, and what your new net exposure looks like
- Rates rise (e.g., 50 basis points): The same analysis in the other direction
Rate scenarios are configured through rate cones — defined sets of interest rate shifts that can span from -200 to +200 basis points. The analysis computes the dollar impact at each shift point, so you see a complete sensitivity curve, not just two data points.
DPC — Rate Sensitivity at the Instrument Level
Dollar Price Change (DPC) calculations measure how much each instrument's value changes for a 1-basis-point rate movement. But not every instrument moves the same way when benchmark rates shift.
Risk Manager uses beta-weighted sensitivity: a 15-year MBS doesn't move the same as a 30-year when the 10-year Treasury shifts. Beta factors adjust each instrument's rate sensitivity to reflect its actual behavior relative to the benchmark. A 100-basis-point benchmark shift might translate to an 80-basis-point effective shift for a 15-year instrument with a beta of 0.80.
This means your position reconciliation reflects how your portfolio actually behaves under rate stress — not a simplistic assumption that everything moves in lockstep.
What-If Analysis — Model Before You Execute
Before you pick up the phone and execute a hedge trade, you want to know: how does this trade change my exposure?
What-If analysis lets your risk team create phantom trades — hypothetical positions that haven't been executed — and see exactly how they affect the risk profile. Add a $10M MBS forward sale, recalculate, and see the impact on net exposure across every scenario.
The Target Coach goes a step further: tell it your desired hedge ratio, and it calculates the trade size needed to get there. Then you verify with a What-If run before executing.
Closing Ratio Management
Not every loan in your pipeline will close. Fallout — borrowers who withdraw, get denied, or go elsewhere — reduces your effective pipeline position. If you hedge 100% of your locks and 20% fall out, you're over-hedged by 20%.
Risk Manager tracks historical fallout patterns and applies closing ratios to pipeline positions, so your hedge sizing accounts for expected fallout. The system supports granular analysis by loan type, rate range, and origination channel — because your conforming 30-year fallout rate is probably different from your jumbo ARM fallout rate.
SFAS 133 / ASC 815 Hedge Effectiveness
If your organization applies hedge accounting, you need to demonstrate that your hedges are effective — that they actually offset the risk they're supposed to offset. The accounting standard (ASC 815, formerly SFAS 133) requires effectiveness ratios between 80% and 125%.
Risk Manager handles this with:
- Similar Asset Groups (SAGs) — groupings of loans with similar characteristics for effectiveness testing
- Mark-to-market tracking — current values for both hedged items and hedging instruments
- Effectiveness ratio calculation — automated testing against the 80–125% threshold
- Audit-ready output — documentation your accounting team and external auditors can rely on
This is built into the system, not a separate spreadsheet exercise bolted on after the fact.
By the Numbers
- $1.25M — the P&L swing from a 25bp unhedged rate movement on a $500M pipeline
- 3 scenarios modeled on every risk run (flat, rates down, rates up)
- Beta-weighted DPC sensitivity for instrument-level accuracy
- 80–125% ASC 815 hedge effectiveness testing, built in
Who Benefits
Secondary Marketing VP: "I know my net position at any point in the day, not just after the morning report. When the CFO asks 'are we hedged,' I have a number — not an estimate."
Risk Analyst: "I can model a hedge trade before executing it and see exactly how it changes our exposure across every rate scenario. No more backing into the math on a spreadsheet."
CFO / Auditor: "SFAS 133 compliance is built into the system. Hedge effectiveness is calculated, documented, and audit-ready — not reconstructed from spreadsheets at quarter-end."
Executive: "Rate risk is managed, not prayed about. We know our exposure, we know our hedges, and we can explain both to our board in precise terms."
The Differentiator
Risk Manager wasn't designed by a software company that read a textbook on mortgage hedging. It was built by practitioners who've managed hedge books through rate cycles — rising rate environments where fallout accelerates and pipeline value drops, falling rate environments where prepayment risk spikes and hedge positions need rapid adjustment.
Greg, PowerSeller's President, brings decades of hands-on hedging experience to the system's architecture. The result is a risk platform that doesn't just compute numbers — it computes the right numbers, organized the way an experienced hedger thinks about them.
This isn't a generic analytics tool adapted for mortgages. It's a mortgage risk system built from the ground up by people who've sat at the desk and felt the market move.
Want to see how Risk Manager would measure your current exposure? Let us walk through a risk analysis using your pipeline and hedge positions. →