Building a mortgage hedging program was among Brian Ludtke’s first priorities when he joined Dearborn, Michigan-based credit union DFCU Financial as executive vice president and chief financial officer in 2016. Ludtke set about looking for a hedging advisor that not only inspired trust, but would be willing and able to work closely with his internal team and adapt to DFCU’s internal requirements as a credit union.
Ludtke leaned into his deep experience with bank and independent mortgage lending operations and as principal of a mortgage quality control services firm to identify a qualified and trustworthy provider. Throughout a multi-decade career, Vice Capital Markets Founder Chris Bennett had impressed Ludtke both as a coworker and as a fellow member of the Michigan Mortgage Lenders Association, where Bennett is held in high regard as an expert and straight-shooter.
“Hedging is fundamentally about operating with a long-term view, and trust is integral when you adopt a long view in the mortgage environment, so I was primarily driven by a need to trust implicitly any third-party that we worked with to implement hedging at DFCU,” Ludtke said.
When evaluating vendors, Ludtke keeps his fiduciary responsibility to DFCU at the forefront of his decisions by maintaining a critical eye for risky characteristics, such as frequent turnover among staff, often a harbinger of instability. He was impressed by the minimal attrition Vice experiences both among its clientele and its staff.
“Vendor reputation is always a major factor when I evaluate options,” he said. “Everybody that I know in the business that has to essentially worry about secondary and hedging believes in Chris Bennett and Vice Capital Markets. Furthermore, he’s built a reputation with the Michigan Mortgage Lenders Association as a no-pretense expert whose firm prioritizes positive outcomes.”
After selecting Vice Capital Markets in 2017, Ludtke and Bennett’s respective teams got to work in setting DFCU’s mortgage operation on a course undergirded by what Ludtke called a “sleep at night” hedging strategy to balance out the impact of various sources of market flux.
“Operating without a hedging strategy, and the infrastructure to execute upon it, our credit union was not as protected as it could have been against the vagaries of the marketplace and lacked the ideal level of confidence to serve our members’ diverse borrowing needs,” said Ludtke. “Introducing hedging to our lending business has allowed DFCU to lend confidently regardless of rate fluctuations.”
Citing the Q3 2019 period of unexpected rate fluctuation, Ludtke illustrated his hedging as risk management perspective:
Early in the quarter, for whatever reason, rates fell dramatically. And it was shot in the arm for a lot of lenders. In a hedging world, lending entities can always make money when rates are falling. Conversely, when rates experience a dramatic uptick – such as they did in September – it could get more stressful. What is needed at a time like this is a strategy that covers rate risk. Thanks to the hedging strategies we’ve put into place I seriously didn’t even pay attention when rates sho back up. I was totally at peace. I knew our strategies were covering us to essentially guarantee the profit we thought we had when we originally priced the loans.
Further, when I respond to our regulators and auditors, I can give them everything they need, and then some, detailing how we’ve eliminated the guesswork and risk exposure. That’s important because there’s a prevailing misunderstanding that hedging is speculation. That is the last thing hedging does. It’s very methodical and scientific. I would characterize hedging as a way to do something fairly complicated and make it quite simple.
Some people mistake hedging for a risk enterprise when, for Ludtke, the absence of a hedging strategy was what made it tough to sleep at night. Since implemented at DFCU, hedging has provided a natural way to confidently determine the optimum profit margin on its pricing and then determine how to ensure that profit is sustained when the loan locks and is ultimately sold.
The advantage, he said, is twofold: number one, allowing DFCU to provide the rate promised to their member – and then also make sure that the business side realizes the profit planned for at pricing. Moreover, DFCU’s relationship with Vice Capital Markets has delivered the desired ROI both from the perspective of services provided and injecting greater confidence in the profit margin in its annual budget projections.
According to Ludtke, DFCU rate sheets built on base pricing provided by Vice provide reliable profitability within one or two basis points “each and every month, month in month out and annually.” He points to that overarching reliability as case-in-point for why he does not feel the need to micromanage pricing.
“When I first joined DFCU, the credit union didn’t even really do daily rate sheets – maybe weekly. Now, we get daily price indications from Vice, and we put together a daily rate sheet based on what we determine will work best for our business model and our membership,” Ludtke explained. “As a CPA by trade, I’m a conservative person by nature. Hedging gets me what I need to feel comfortable but also, from a member perspective, hedging lets us be who we are as a member-driven credit union, which is that our members know we’ll keep our rate promise to them no matter where rates go.”
Even better, he explained, the DFCU staff that work with Vice on a daily basis are also fans of the relationship, citing immediate, and consistent response to inquiries. Having been both on the client side and the vendor side, Ludtke says he is a big believer in the value of vendor partnerships to grow a business wisely. He cites Vice as an example of how a vendor can deliver flexibility by allowing their clients to be as small or as big as they need to be.
“I think that’s a special trait that Chris and his firm has put together,” he explained. “Vice is not the flashiest hedging vendor out there, but it delivers consistently and reliably.”
Further, Ludtke says Vice outclasses the competition. Once, when seeking an interest rate survey service to supplement his understanding of how DFCU pricing compared with the marketplace, he queried Vice, which referred him to one of its competitors offering that service, and within months, DFCU signed an agreement with them. Now, twice a week DFCU gets accurate rate indications on its competition, thanks to the unselfish character of its hedging vendor.
“Having a resource like that to which I can say ‘Is there another vendor that I can use that can help me get some reliable information that I don’t get inside my four walls,’ and to get that assistance is just, to borrow a phrase, priceless,” he said.
In summary, Ludtke calls DFCU’s mortgage hedging relationship with Vice Capital Markets “an injection of stability in our day-to-day operation knowing the long game is planned for so that we can meet our members’ needs where they are day-to-day.”
Headquartered in Dearborn, Michigan, DFCU Financial’s full-service branches located in metro Detroit, Ann Arbor, Grand Rapids and Lansing are staffed by local financial specialists uniquely qualified to help members and businesses achieve important financial milestones. Since its inception in 1950, DFCU Financial has expanded significantly to include multiple branches and more than 200,000 members, making it one of the top-performing credit unions in the nation. The credit union also ranks in the top ten among peer credit unions in the nation for Return on Assets (ROA). For more information, visit https://www.dfcufinancial.com.