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Mortgage Bankers managing large pipelines of loans in process always need to stay on an even keel avoiding both the normalcy bias and the worst-case scenario bias. Normalcy bias describes a condition where people underestimate the likelihood of potential disaster (think large market moves) and fail to react in a required fashion and fail to prepare themselves. The worst-case scenario bias describes the opposite condition where small deviations (think small market movements) are dealt with as signals of an impending catastrophe (large Market movements.) Here at MCM we strive to keep our client’s market positions on an even keel neither expecting a disaster or normalcy bias. We measure mathematically how much coverage a pipeline needs at any given time and what mix of coverage (think Options and TBA forwards) are required to mange the position over all likely market moves. We calculate this potential market movement expectation from the implied volatility imbedded into the prices of options traded in the US Treasury options market which auto corrects for the perceptions of all participants. Hence, if you are always long and/or don’t cover any portion of your pipeline’s position with options you may have been lulled to sleep by the recent pasts lack of market volatility. Those with less than ten years of experience in the mortgage business may never have had to deal with a volatile market and may not expect or know how to deal with one in actual disaster (think about an instantaneous market movement of over 3 points.)
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