Staying the Course: Managing Risk and Margin in Volatile Mortgage Markets

In today's mortgage capital markets, volatility seems to be more the new normal than a passing trend. From geopolitical events to headline-driven market reactions, and of course economic indicators, the pace of change has intensified. Yet, amid the noise, one truth stands firm: success in this business comes not from chasing the market, but from consistency, risk discipline, and execution. In the face of market chaos, companies must resist knee-jerk reactions and instead double down on the fundamentals of risk management.

The Illusion of Timing the Market

Market timing, while tempting, is rarely a winning strategy in mortgage banking. Loan officers (LOs) and some capital markets professionals might feel compelled to "float" loans or delay locks in hopes of favorable rate movements. But with today's limited loan volume and heightened uncertainty, this can be a costly misstep. There simply isn’t an abundance of excess margin to play games with. The focus must be on originating loans cleanly and getting them closed, on time while maintaining margin.

Yes, mortgage banking is a business of closing loans at your original target margin. That’s it. It’s not a hedge fund. If someone wants to speculate on market direction, there are plenty of careers for that, but mortgage banking isn’t one of them. Making a lucky call on rates once might earn a pat on the back, but the risk of being wrong, with company money and employee livelihoods on the line, is a far more serious proposition. Put another way, this is a risk management profession first and foremost. Walking into the CEO’s office to brag about a profitable bet might go over once, but explaining a big loss from gambling on rates is another story entirely. Further, capital markets professionals are wise to remember it’s not their own money they are risking, it’s the company’s. In uncertain markets as in all markets, the mandate is to preserve margin, not swing for the fences.

Behavioral Pitfalls and Market Psychology

At the heart of many suboptimal decisions in mortgage capital markets lies a fundamental human trait: fear of loss. Behavioral finance teaches us that in times of stress, people often abandon rational models in favor of emotional responses. That’s dangerous. Elevated risk and volatility naturally trigger these tendencies, leading to inconsistent decisions and margin erosion.

Instead, successful lenders ground their decisions in data, models, and discipline. As Ira Selwin noted on a recent Capital Markets Wrap call for the Chrisman Commentary, you should be making decisions based on what your hedge model tells you, not on the latest Twitter (or Truth Social) headline. Especially during periods of high volatility, the focus should be on optimal coverage minute by minute. Old rules of thumb, like letting things ride until a rate sheet update, may no longer be viable.

The Real Cost of Volatility

Volatility isn't just emotionally taxing, it's expensive. It directly impacts hedge costs, loan valuations, and profitability. A volatile market leads to more frequent adjustments, bid/ask spread widening, and greater transaction costs. Option costs rise. Pull-through assumptions become less predictable. And all of this erodes margin.

From a hedge standpoint, a lock is essentially an option granted to the borrower. As market rates move, so does the likelihood that the borrower exercises that option. In volatile environments, this pull-through probability becomes less stable, and the cost of defending your pipeline rises. On top of that, intraday market swings require nimble repricing strategies, faster reactions, and occasionally even hard stops on locking loans late in the day.

Even at the asset level, increased volatility impacts how loans are valued in the secondary market. Investors grapple with greater uncertainty around how long loans will stay on the books. This affects everything from servicing values (MSRs) to specified pool pay-ups. In short, volatility makes every component of the mortgage value chain more fragile.

Practical Measures to Preserve Margin

In this environment, capital markets teams must be vigilant. That means reviewing and adjusting lock policies, considering best effort executions when appropriate, tightening pricing on rate sheets, and even limiting after-hours locks. Defensive margin strategies are not a sign of weakness, they’re a sign of leadership.

Companies should also review renegotiation policies before volatility spikes. Don’t wait for rates to drop 50 basis points before deciding how to respond to borrower inquiries. Proactive internal planning, such as scripting talking points for LOs and modeling spec pay-up adjustments, is key to executing smoothly under pressure.

There's also a human element to volatility. LO behavior changes when the market swings. Frustration, second-guessing, and increased exception requests are common. Being prepared for these downstream effects, and setting clear communication protocols, is just as important as refining pricing strategies.

Stay the Course

The core message here should be clear: don’t gamble. Don’t chase the market. Don’t let short-term noise distract from long-term strategy. This is a business built on consistency, discipline, and risk control. When volatility strikes, as it inevitably will, successful lenders focus on fundamentals: closing loans, preserving margin, managing risk.

The temptation to be a hero in the moment must be outweighed by the responsibility to steward the company’s capital wisely. That’s what separates professional secondary market operators from lucky guessers. The market may swing, but the mission doesn’t: originate, hedge, deliver, and stay the course