Lenders’ non-agency loan pipelines and inventories awaiting sale or securitization are exposed to rate changes that can impact profitability. Secured overnight financing rate (SOFR) interest rate swap futures — easily accessible and liquid financial instruments — can be used to efficiently hedge this interest rate risk.
SOFR, set daily by the Federal Reserve Bank of New York, is the benchmark on which all U.S. dollar financing is based. It is also the floating index rate used in fixed versus floating interest rate swaps.
In the conventional 30-year agency-guaranteed residential space, this risk can be hedged by selling to-be-announced mortgage-backed securities. These are over-the-counter commitments to sell a pool of loans for a certain pr...
