Overall, rate of interest risk is very easily treated by the modifying maturities out of possessions and you can obligations. However, hedging prepayment risk is more cutting-edge. To handle that it chance with little investment requires a good conceptually advanced level hedging framework. Basically, the present day program depends on the chance managers at Fannie and you may Freddie to complete everything you just right, unlike depending on market-situated system backed by the danger tests and you can government possibilities out of many professionals with assorted views as well as other tricks for hedging threats.
As always, issues about general chance try appropriately concerned about high, highly leveraged loan providers like the GSEs you to play large roles from the functioning out of monetary markets. I should emphasize one Fannie and you may Freddie, up until now, appear to have handled these types of dangers better which we see nothing for the immediate panorama that’s planning to create a good endemic disease. But to ward off you’ll upcoming general problems, hence we evaluate while the likely in the event that GSE expansion goes on unabated, preventive strategies are required sooner rather than later.