Welcome to this week’s episode of Optimal Insights. Jim Glennon and Alex Hebner begin with a market update, discussing recent inflation trends, geopolitical developments, and their effects on interest rates and consumer sentiment. They are then joined by Karim Maaliki for a special segment that walks through his day in the life on the hedging desk, breaking down the fundamentals of mortgage hedging, interest rate risk management, and the loan lifecycle from rate lock through execution. The speakers share their expert opinions and insights into how these factors are shaping the industry and the broader economic landscape.

Key Points:

• Market update on inflation, geopolitics, and mortgage rate volatility
• A practical overview of mortgage hedging and interest rate risk management
• A day-in-the-life perspective on hedging execution and loan sales

Chapters:

• 00:00 – Market Update and Rate Environment
• 12:45 – Hedging Basics and Industry Comparisons
• 21:20 – A Day on the Hedging Desk: Loan Sales and Execution

Optimal Insights Team:

• Jim Glennon, SVP, Hedging & Trading Operations
• Alex Hebner, Hedge Account Manager

Special Guest:

• Karim Maaliki, Hedge Account Manager

Production Team:

• Executive Producer: Sara Holtz
• Producer: Matt Gilhooly

Commentary included in the podcast shall not be construed as, nor is Optimal Blue providing, any legal, trading, hedging, or financial advice.

Mentioned in this episode:

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Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode.

Hey, welcome everybody. Thanks for being here almost halfway through April. Feels a little bit weird, but here we go. got a great show.

for you today, as always, in the interest of making sure you know what to watch out for, whether you're an originator, a capital markets person, or just someone interested in the mortgage industry and some great market commentary. We'll get into it here in a second. So we'll start with Alex and I will have a little market update, a lot to discuss there, obviously, some changes over the weekend with our stance on the war and general geopolitical pressure. A lot of numbers.

Came out last week, you got some numbers this week, a lot of Fed speak, just a lot of interesting components driving the market right now. And then after that, Alex and I will have fellow trader from our desk, Karim Maaliki on the podcast to talk through what we do each and every day on our desk. It's been a while since we've done that. We'll generally have a conversation around the subject of hedging. So kind of a hedging 101, if you will. We'll keep it very high level. So don't be discouraged or worry about us getting too technical.

We'll just have a good discussion about what hedging is in the mortgage industry, but also what it looks like in other industries as well to kind of draw some parallels to things like that. Maybe the airline industry right now, where there's obvious gyrations and things like fuel prices. we'll also just talk about many of the other things that we do to serve our clients every day. Before we get into either of those things, just very high level data, the OBMMI conventional 30 year tempered a little bit late last week. We're down to almost six and a quarter. So

starting to shave some points off, interest rates for 30 year mortgages, the 10 year 4.33. So a little bit of relief there as well. Still about a two point spread between treasuries and mortgages. So we're hoping we get some kind of traction this week, some sort of progress in resolving this conflict in the Middle East that should send rates lower. But for now, I think six and a quarter is probably going to be a bit of a floor for what we're seeing. So let's check in with Alex.

generally check in on what's going on in the market.

Okay. As usual, Alex and I were kind of chatting on the side. We decided to just hit the record button. Just a ton happened over the weekend. We got some pretty good data last week. We were generally talking through the high level concepts here of what should we be focused on as capital markets experts, originators, folks that are, anybody who's just interested in what interest rates are doing, especially in the mortgage industry. Where do we start, Alex? What did we see in the way of data last week that we care about?

mean, had inflation, that's probably the biggest one, wouldn't you say, just in terms of regularly scheduled data?

Yeah.

Yeah, in terms of regular scheduled data, last week we got both PCE and CPI, PCE being that preferred metric for the Fed's inflation readings. Both were elevated off of last release. Both touched 3 % on their non-core numbers, which it's really isn't surprising. I think the market saw elevated readings for March coming down the pipeline with the events that have been transpiring in the Middle East.

Mm-hmm.

Both showed real big pops in energy, no surprise there. just gonna be a matter of how long are these releases going to be in place? It all comes back to the geopolitics. If 20 % of the world's oil is shut off, that's gonna result in higher prices.

Yeah, it's crazy how quickly it kicks in, but it makes sense, right? As we've said, fuel kind of affects the price of everything. And especially the perception that fuel is going to be more expensive in the future makes it that much worse. was reading about jet fuel prices just in preparation for the segment that we're going to have coming up here in a moment. even with good hedging of fuel, of oil prices,

Fuel has gone up a lot quicker than even oil has in terms of price. And some of that is just speculation of what's the, know, how are these fuel companies going to maintain their margins when there's volatility in oil prices and a lot of unknowns, particularly when this conflict will end and how it will end and how quickly tankers will be again, let through the straight. So they basically just jacked their prices up and wait and find out, right? Airlines don't have much of a choice. They have to buy fuel. They've already sold tickets. They have to fly around the world, right? So just.

Just freaking havoc is this conflict in the Middle East.

Yeah, definitely. There could be second order effects, I think, as we will talk about later. Airlines often hedge their fuel costs months ahead of time using futures contracts. So they're able to lock in the price of fuel a little bit ahead of time. But as those contracts expire and the airlines have to go back out into the market, yeah, they're going to be seeing sharply steeper, more expensive fuel probably in the mid summer, late summer.

Right. Meanwhile, as you said, the consumer is paying higher and higher prices for everything. And that is anticipated to remain that way for a while. There's also the consumer confidence and sentiment type numbers have been coming out and those are lower than they've ever been. I mean, as you pointed out earlier, for the last year or so, they've kind of been in the toilet, but this last number was really poor. And that likely had everything to do with the conflict in the Middle East and how.

felt like we were right there, of soft landing, low unemployment. We had inflation down in the kind of mid to low twos is starting to feel pretty good. Now we're uncomfortably high again with inflation. The jobs numbers have yet to crack somehow. They seem to be defying gravity, but the consumer is not in a good place headwise in terms of their opinion on what's going on in the economy. Yet we keep spending. Somehow that doesn't show up in the actual numbers.

But as you pointed out too, some of this is the K-shaped economy or the K-shaped recovery, if you will, where I think you said it was like 10 % of the top income earners are the folks doing a lot of the spending right now. I'm kind of propping spending part of our economy, which is essentially 60 % of GDP. Does that mouth jive about right?

Yeah, that's correct. Yeah, we've seen an emerging trend over the past year. It's always kind of been the case, but especially so in the post-COVID world that the well-to-do's have been carrying the brunt of consumer spending. as you said, know, sentiment's been really bad spending has been pretty poor out of, ⁓ you know, the rest of the economy.

but it's able to be propped up by these high income earners and those that are pretty asset rich and feeling rich, you know, looking at their bank statements and their portfolios. But you know, the price of gasoline is something just about every single American feels. It determines election cycles. You we are in election year. And so yeah, pain at the pump is probably even more so a pain point than inflation is at the moment.

Right? Yeah. It's like, if you look at the very high headline number, spending looks fine. But then if you dig just one level deeper into certain types of restaurants, stores, just certain types of purchases that different demographics tend to make, you can kind of pretty well tease out who's actually spending money versus folks who are really seeing, really getting pinched, whether it's at the pump or at the Applebee's or whatever your preference is to the...

to look at, you start measuring fast food versus casual dining versus upscale, and you can see it there too. So not a light at the end of the tunnel yet in terms of consumer sentiment or inflation and same with interest rates, right? Just to tie this back every time we get another escalation in the war or we don't, or we get more uncertainty like we saw over the weekend with the, you know, we're now implementing our own blockade on the Strait of Hormuz in response to the

Iranians essentially blocking the straight. Fuel goes up again. Interest rates go up again, although pretty flat today. We didn't see any kind of, I don't know. We're not seeing really any major moves in either market, which seems a little bit, almost like the market's paralyzed at this point. Maybe it doesn't know which direction we're going.

Yeah, the headlines I've read are that investors are quote unquote, looking through this recognizing that there will be some resolution at a certain point, elevated fuel costs, as we've talked about, will be a factor to consider in the 12 to 24 month forecast. if you're looking at a longer time horizon, investors are deeply discounting this conflict at this point in time. And yeah, I'm sure you mentioned it in the opening, but the 10 year is that.

know, 4-3 today, was right around there on Friday as well, before the peace talks that completely fell through over the weekend.

Yeah, OBMMI, same kind of thing. We're about 6.3, six and a quarter, feels like our floor right now until we get some kind of follow through on some of these resolutions or peace talks.

Yep, yep, definitely.

All right. For the rest of this week then, as far as what might affect markets outside of some kind of development in the conflict, what are we looking at in terms of numbers or Fed speak?

We'll get PPI on Tuesday, the final inflation reading for the month, that producer price index, what the inputs are looking like. It could shine some light on energy costs more so than what we're getting out of consumers, just because I think it'll bleed through much more so as an input.

When we're talking about inflation, oftentimes we exclude the cost of energy when it's fuel costs for the average consumer. But again, we utilize fuel as we keep saying for everything, transportation, and as an input into many products. So I think it'll be an interesting release there. But other than that, it's mainly just a lot of fed speakers. ⁓ Just keep an eye on pivots in their terminology and how they're thinking about things.

But right now, broadly speaking, we're looking at a pretty hawkish Fed. I'm interested to see what would Myron, our most dovish prior to the Iran conflict, how he's thinking about things. But I really don't see a path forward for rate cuts at this juncture. You can print money, but you can't print oil.

Yeah, agreed. It feels like the stance of the Fed is unlikely to change until there is some sort of resolution of the conflict. Prices are up as expected. So we're back to expecting flat rates this year, even rate hikes versus cuts. It would be interesting to hear what Myron has to say, given his previous rhetoric that we should be a point or two lower than we are now on the Fed funds. I don't know, weird to think about where we would be.

In terms of inflation or growth, had we made cuts like that over a year ago when the White House was generally loudly calling for that.

Yeah, I would agree.

But

that's a parallel universe that we may never know the answer to. Otherwise a quiet week is probably why so many of the fed heads are out speaking this week. It's hard to know what sort of language would cause the market to change much more than it already has. feels like that we've already baked in possible rate hikes this year. There'd have to be some sort of.

odd word or some sort of implication of panic from the Fed, think, to cause people to be much more worried about yields going up.

Yep.

Yeah, another reason they're speaking this week is they enter their blackout period, I believe on Monday before the end of April meeting. So get the speaking engagements in while they can. But yeah, the third week of the month is generally pretty quiet on the data front. So we'll check back in next week.

Right.

Alright, sounds good. Anything else?

I don't think so. Just keep an eye on those headlines and look for any shifts in sentiment.

Absolutely. Good advice. All right. Thanks a lot, Alex.

Okay, we are back. We've got Alex, of course, and we've got Karim. Welcome, Karim. Thanks for being here.

Thanks for having me.

Yeah, man. So as promised, there's a couple of things we want to get into today. It's been a while since we've had a guest from the desk on, other than of course, our market experts, James and Alex and, and Vimy. We wanted to just talk through a couple of things here. And I think Alex and I will just start off with hedging, right? We are the hedging and trading team. We do a ton of other things for our customers, which we'll get into here in a minute with Karim, but generally wanted to.

talk through kind of the high level of what is hedging, like the actual physics or math or need for hedging in our industry and in other industries. like, where does it come into play in the mortgage origination process versus something like say airline tickets, right? I try to tie those things together. So backing up a little bit, like why do we even need hedging or where does it fall into the process of mortgage origination? And to me, it starts with

Like pricing, mortgage pricing. You may have heard people say that. You may have heard Bill Pulte tweet about it recently. And if you've ever bought a home, you've talked to a loan officer perhaps, or you've talked to someone online about locking in your interest rate. Right? So first our technology is generally the bellwether for mortgage pricing. So there's a ton of buyers of mortgage loans out there that generally set a market for what's my interest rate?

That's what comes out of these analysis that our systems do. What interest rate can a borrower get? What interest rate should I give if I'm a loan officer to a borrower? Right? So we're talking about that through the process. And then at some point, the originator of the loan officer says, all right, today's a good day to lock your loan. We're going to lock in that interest rate. We're going to guarantee you that interest rate for 30, 45, 60 days, no matter what interest rates overall are going to do during that time. So how is that possible? Like how can we...

promised that interest rate for a long period of time, for more than a few hours for a bar, we're knowing that interest rates can gyrate pretty wildly, like they've been recently. Like we've talked about the OB-MMI and every mortgage interest rate out there has gone up roughly half a point during this conflict that we're having in the Middle East right now. Like how do you foresee that? How do you hedge against that movement? So.

You know, one thing that comes to mind for me, and I've used this analogy on this podcast and other podcasts before, and it's also timely, is airlines. Right now, airlines are obviously contemplating major increases in ticket prices, and they've probably already made some of those moves because jet fuel is just more expensive now than it was two months ago. Right? But they've also already sold tickets for flights that are going to be taking off in April.

May and June and beyond then, right? So how do airlines handle this sort of situation similar to the mortgage loan dilemma? It's the hedge. A lot of airlines hedge. Some don't. Some have kind of done away with that process and accepted losses over time because they feel like it's cost too much to hedge in the past. But let's say we're one of the airlines that does hedge with fuel futures.

I'm selling tickets today for flights that are again, two, three, five, six months in the future. I may decide to hedge my biggest expense other than people, which is jet fuel, right? I'm going to hedge with oil is likely what a lot of these airlines are doing. So I'm going to do some open market trades for oil. I'm going to basically lock in the price of oil for the foreseeable future for two, six.

12 months down the road. I'm gonna pay a little bit to do that, but that's gonna be my hedge against whatever you wanna call it, inflation or increases in fuel prices so that when I sell those tickets, I know that I've made my profit margin on those tickets even though the plane's not gonna take off until August, for instance. So if prices continue to climb, I'm hedged. If prices go down, I'm in a good position as well. If prices stay the same, I'm also in a fine position. Very same thing happens with.

with mortgages. When you say Alex, like you kind of talk through how you could tie a parallel between like jet fuel and interest rates.

Definitely, definitely. think, you know, in the popular imagination, especially post Wolf of Wall Street movie, think a lot of people think of hedge. When I think hedging, they think of hyper-leveraged bets and Wall Street. That's not what we're doing. When we say we're hedging, what we're doing is locking in a price today. You as the borrower walk away with a locked rate. The people extending that rate to you, they also want to lock in that rate as well. And so how we achieve that is through TBA mortgage forwards.

which essentially, when you buy your rate from the mortgage lender, they're gonna also sell that rate forward, get a price on that today that they can then deliver that loan into in 45, 60 days, however long it takes for everything to get closed, you to sign and get keys for your new house.

Great. Yeah, like you said, really relatively simple, not super intimidating. There's some fine tuning that our models will do to ensure that you're really hedging down to like the fraction of a percentage point so that no matter what the market does and how quickly it does it, you're maintaining that profitability that you were trying to make the day that you agreed with that borrower to lock that loan. Right. So again, similar to an airline or you know, this happens in lots of industries that deal in

Yeah.

large scale sales that happen in the future, right? Maybe it's food, certain types of commodities like food. You hear people trading coffee futures or futures in hogs for things like bacon and other various delicious products. that's generally same kind of concept. Again, they've promised certain products to be delivered in the future and they're going to hedge the price of those products on the open market. Cause especially the last few years,

Everyone's read about beef prices rising and dropping the price of whatever, carrots, butter, eggs, right? Like all these things, many of these things have an effective hedge that you can use to hedge the price of these goods. So then what happens at the end, right? So let's say we did guarantee this interest rate for 45 to 60 days for this borrower, and then that loan closes, they get the keys to their home or they get their refinance. Then I think...

The last thing that a lot of folks don't understand about mortgage lending is, or you may, now that you've had a mortgage loan and you may have experienced the, what we call the hello goodbye letter, you get a letter in the mail, 45 days after you close your loan, it says, remember me, we did a loan together 45 days ago, but now you're going to be dealing with Bank of America. Are you going to be dealing with Chase or Wells Fargo or Penny Mac or one of these other, what we call aggregators, right?

Most likely, if you're dealing with a small lender, especially, or an independent lender, they're to be able to get you a great rate just as well as anyone, you know, as it may be even better than some of the big banks. But they will take that loan then that they closed with you and they'll sell it because they need to get that. They need to get money back so that they can lend to the next borrower. So that's something to keep in mind and something that we do again on the desk that we'll get into with, with Karim here in a second. In fact, why don't we just kind of make that the segue? So we've sold the loan.

Then we start the whole cycle over again, that same lender bringing in new loans, locking new loans, and we're hedging those in just kind of a large position or corpus of mortgage loans that are constantly coming in and being sold out the back. And meanwhile, we're hedging that interest rate risk throughout that process. So, Karim, put a little pressure on you now, day in the life, right? Again, we've talked through this process and

high level, is relatively simple in theory. There's a lot of fine tuning that goes into it, a lot of expertise that you and the rest of our teammates need to have to do this effectively. There's also a ton of other things we do at this job. We're going to try to talk about all of them in the next like seven minutes. where to start? So first of all, anything that Alex and I got wrong, I haven't been on the desk, you know, trading in many years. Did I do anything backwards?

You

No, I think you did a good job. I think you got the main points there.

All right, very So yeah, where does it start for you? Like, what is the day in the life of Karim? You come in in the morning, whether we're in the office or we're, you know, working from home, kind of how do you start your day? What are some of the more, I don't know, the unsung attributes, know, aspects of this job that most people may not know about?

For sure. I think primarily, right? When I log on in the morning, most important thing to do is to make sure we're getting all the data in for all of our clients and kind of diagnosing what happened overnight. We have some clients that open post market hours, right? They'll keep a lock desk open until 8 p.m. Eastern or something like that. And I want to make sure that if any locks were closed in that time period, I can at that point go in and make sure that the position is flat.

meaning that we hedge those logs that came in after the hours. So the main thing that I do in the morning, I log in and I just take a look at data, take a look at positions, make sure everyone is risk neutral, meaning that we are correctly covering any locks our lenders have made in the time period from closed to open.

be familiar, the bond market, is what we utilize to take out our hedging contracts, that closes at 5 p.m. Eastern. So in Kribs example here, if the lock desk is open until 8 p.m. Eastern, perhaps you're a West Coast lender, might have three hours worth of locks that were not hedged on the day of the lock. They have to be hedged the next morning.

First.

Right. And, and, and data, the thing I just keyed in on was data too, that I hadn't mentioned earlier on, like really have to have good data to equal good hedging. mentor who used to tell, ⁓ clients and me and us that all the time, good data equals good hedging. It's like any other thing. If you get garbage in, you're going to get garbage out. So yeah, one of the things we rely on heavily from our clients is to produce and send us good data through our

various system integrations, but also our system does some checks on that to make sure that the data generally makes sense, that there's not large inconsistencies day over day or hour over hour, so that we can kind of fluidly start in the morning and begin kind of good hedging when that market opens at 6 a.m. Mountain time.

For sure. Yeah. And I think, speaking of data, right. think a large driver for all of our clients, right. I am bees independent mortgage banks, credit unions, everyone that utilizes compass edge or OBSS or compass in general, right. P and L is the main driver, right. Profit and loss to stay in business. You got to be profitable. You can't be just hemorrhaging money. So

Mm-hmm.

Speaking of data, right? I think something that I dig into every morning as well is I will hop into a client site. I'll take a look at their data in general. I'll kind of keep track of their gain loss. I'll see if there's any, we call them bleeds, right? If there's anything that's kind of screaming out to me, hey, this is something that we should correct. This is a, someone fat fingered a number in the LOS, the origination system.

And we can kind of correct that and kind of keep trend of, we maintaining the profit that the client expects day over day?

Yeah, that's another good point, right? I think when people hear hedging, they think we're trying to make money. We're trying to extract some sort of alpha out of this process. We're trying to time the market, which couldn't be further from the truth, especially in mortgage hedging, right? We're trying to maintain a profit margin that the lender, our client, determined on day one, right? We're not trying to make more than that or certainly not trying to make less. We're trying to say we've built in a healthy profit margin on the Jones loan and we intend to

maintain that throughout that 45, 60 days, no matter what the market does, and then execute on that when we sell that loan 45 to 60 days from now. That's another good, I think, misconception about hedging. A hedge fund, for instance, is trying to make money. It's trying to invest your money and be relatively market friendly, market neutral-ish, but trying to extract alpha. With hedging and mortgages, we're not looking to make money. We're just looking to maintain the money that we've...

We've decided we're building it up front.

we've kind of moved through your morning. We've made sure the data is good, positions are good. We've done a little bit of trading. Then of course, again, it's not just the Jones loan, it's millions of other loans, millions of other lines of data that we're receiving and sending out. And every day we're selling loans, right? Whether we're doing that for the client or the client's using our system to do that. we've got a very liquid, kind of dynamic

Mm-hmm.

market for mortgage loans, which is something no other country in the world has and probably in no other time of history has there's been this much liquidity, this many buyers and this much kind of transparency into what that market is. So it's probably another thing that a lot of folks don't know about is kind of what, you know, that that exists and how we are a participant in that, how our clients are as well. So walk us through that. That's kind of later in the morning, right? Market is kind of settled.

rates are out there for new borrowers to get and come in. managed our clients' positions to what we call market neutral, right? We have as many trades on as we do loans in the pipeline, but then we start selling loans out into the secondary market, right?

Totally, right? That's kind of the name of the game. We lock loans in 45 days later, we got to sell these loans. Typically most of our clients will sell loans to aggregators as Jim mentioned prior, probably once or twice a week.

It's kind of dependent on the client's needs, We'll sell for some clients every single day. We'll sell for clients, some clients once a month, kind of all depends on their business structure and what they're kind of going through as far as their procedural steps. So we'll at that point start sending loans out to the aggregators using CompassEdge system, right? Pretty streamlined essentially. We just send all of our loans to

the aggregators through a bid tape, they pass back their bids and we run best execution, right? So we essentially just price out the best execution for each single loan. And then we'll commit those at that time. And by committing those, kind of promise them, promise the aggregators that we will deliver those loans in about a seven day window, right? It's not instantaneous.

some parts of the mortgage market are still a little bit behind the curve. We just don't like paper notes. You got to deliver and send. So there's always a little bit of a buffer between the committing and the funds actually being received from the clients. But we'll sell those loans. And after we sell those loans, right, because we have fulfilled that future, we need to at that point, lift our future contract back. Right. So when we took that lockdown 45 days ago, we

down a trade covering that future market interest rate movement. And at that point, after we commit the loan, about 45 days later, we will buy it back from the broker dealer who we took down the coverage with. And at that point, the cycle has pretty much closed for all intents and purposes, right? And we have hopefully re maintained and captured that predetermined profit margin for the lock.

Right. the, I, if I could paraphrase, so basically you got, you got all these loans today, you got the Jones loan and 50 others that are similar, but different, and you're auctioning them off. This is an auction, right? So there might be 30 different bidders that bid on the Jones loan and all of these others, and they bid on them individually. And then as you said, we do an analysis that says, all right, these four loans are going to go here. These two here, these, this one here, just the absolute best execution possible best sale price for each loan within that.

group of loans that were auctioned off that day. So you've made that commitment, then you may have made money or lost money on those loans over the last 45 days. This is where it gets kind of, this is what we're talking about with hedging in the market, right? So if interest rates have gone up like they have in our industry in the past month and a half because of the war, those loans that were locked back in March are worth less than when they were locked in March, right? Because interest rates have gone up, but we're still.

giving that borrower a five and seven eights when rates are at six and a half. But we've hedged them. We've put on open market trades that have gained value throughout that time, throughout that previous 45 days. So today you sell the Jones loan and a bunch of others like it for a loss, but you're going to close out those trades that you took out 45 days ago and those made money. So that net difference has protected that margin that was built in by that lender on day one. That's the crux of it. That's the...

That's the answer. When people ask what is hedging, like that's what it is, right? That's the, what can be intimidating to hear at first, but once you walk through those mechanics, relatively simple in terms of the math, there's there again, for some fine tuning that goes on in the background, but generally speaking, sell one side of the equation for a loss, sell the other side for a gain and you end up with a gain, which is the margin you built in on day one. Cool.

And

just a quick clarifying point, when we're doing these loan sales, the vast majority of these loans are being sold into what we call a mandatory commitment, which means that ⁓ if you're a smaller lender who may be just looking at hedging for the first time, you might much more so be familiar with the best efforts commitment, i.e. you're making a best effort to deliver that loan, but there's no penalty should you not deliver that loan if you have to cancel that contract. When we were talking about mandatory commitments as the definition of mandatory,

maybe gives you a hint, you are expected to deliver that loan into that aggregator's commitment. And if you are unable deliver that loan or provide a substitute, there is a fee that has to be processed during that time period. That's a little bit deeper, maybe hedging 201 to keep in mind, but it's just something to keep in mind if you are just looking at hedging for the first time.

Right. No, good distinction. Mandatory versus best efforts, just trying to get that absolute best execution you can. when you graduate to working with us this is the general kind of concept that a lot of folks will get introduced to. And again, kind of remove some of the mystique around it, because it is, again, relatively simple on paper. And you've got experts working with you on our desk to do all of these intricate details.

So we sold all those loans and we've got the money back, right? That's the important part is we sell 20 loans today that we've kind of advanced on a line of credit and now we're get all that money back so we can lend to another 20 borrowers tomorrow. And meanwhile, we're managing and reviewing things like P &L, like you said, Karim, just to be sure that the machine is well oiled and working for us and for the client. So what else do we do? That's like just a little piece of what we do.

to me the tactical part of what we do. What other things do do throughout the day when you've got a little time, whether you're waiting for bids to come back or you're kind of middle of the day between, know, calls with broker dealers and loan sales. What else do we do to serve our clients?

Hmm.

I think honestly, the majority of the time in general, right through my ⁓ day as a account manager, I spend almost all day with on the phone with our clients, right? And each client comes in with a bunch of different questions and they have different needs. And essentially me and my team, we hop on and we kind of just address whatever they need to get addressed, right? Whether that's why don't we talk about P and L.

Why don't we hop on the phone and go over last month's accounting report and see where we are from.

at the end of March, for instance, versus the end of February. Some clients are kind of a little back in the times and they want to get updated on all of our new that Compass Edge provides, or they have a new business strategy that they want to discuss, right? So we kind of hop on the phone with all of our clients and just address their needs as they need, right? So whether that's...

implementing a new part of Compass Edge or talking strategy. Another big part, right? I think since the implementation of the Edge platform, we've moved over a lot of clients to from full service to self-service, right? And what that means for us specifically, right? Full service clients, we do the hedging and the trading and the committing, right? So all those kinds of steps that we've talked about prior, Jim, kind of

take care of that for the client completely, right? They send us back data and we take care of it from there. We'll probably hop on once a month and discuss P &L and stuff like that, but they're pretty hands off, right? we've been doing a lot of recently actually is moving clients from full service to self-service where they take ownership of the loan sales, they'll take ownership of the hedging and the trading in general, right? And a lot of my day is kind of just focused on

teaching them how to do what we do essentially on the desk from the tactical perspective.

Yeah, man. I think you keyed in on a few things there that I'm super proud of about what we've always done and what we've always been. And we've always really, to me, been an extension of our client's capital markets division. So every mortgage bank, no matter how big or small, has capital markets people that manage that huge part of their strategy and their P &L. we have those discussions every single day, as you said, throughout the day about strategy.

We're very open about talking about what we see other clients doing and using that to help clients do better. Who should I be? What should my counterparties be? What aggregators should I be selling loans to? What broker dealers should I be implementing to get the best possible pricing out in the market? And then further, we want the client to get comfortable with these different things that we do tactically so that they can do it on their own. That's like the ultimate, I think, goal for us.

And the goal of the new system that we've built is to make that super approachable, right? And to, over time, have that client get comfortable with our confidence in what we do to the point where they can do it as well. We still are there for them to talk strategy and all these other things that we do, but they take over kind of the reins. If you will, they drive the car, but we're still, you know, in the pits and we're still on the phone with them every day, ⁓ talking them through it. So yeah, thanks for talking through that. That's to me, that's one the most important things we do. Maybe the most important is kind of act as this.

extension of their business.

Totally. I totally agree. think honestly, especially as times have gone on, like I said, the amount of time I'm spending hedging and trading and committing has gotten way less as we've gotten more clients comfortable with our system and understanding the model, understanding secondary in general. that's my favorite part of the job as well. You know, just talking to clients, get so many personalities and ⁓

Yeah.

Yeah.

And honestly, you just get to learn a lot of different business strategies from different clients that you can kind of like help out in general, right? One client's doing one thing that you can kind of pass back to a different client that might be struggling with something similar.

Right. Just general best practices. know, what we see out there, because we are generally we're a nexus, if you will, or a hub of this industry with over 300 clients that we talk to day in, day out. We do have valuable information that sometimes we take for granted. So yeah, I miss, I do talk to clients every day, but not all of them. So I do miss some of the personalities sometimes that y'all get to deal with constantly. yeah, but hope to see more clients out there. We've, you know, we certainly don't just.

Course.

Thanks for being here, Karim.

All right,

thanks, gents.

All right, let's close this thing out. Thanks so much, Karim and Alex. Great conversation today. Very informative, educational, and also timely. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.