best execution in mortgage secondary markets.pdfVIP

Best Execution in Mortgage Secondary Markets 1 2 Chung-Jui Wang and Stan Uryasev RESEARCH REPORT #2005-3 Risk Management and Financial Engineering Lab Department of Industrial and Systems Engineering University of Florida, Gainesville, FL 32611 Version: March 14, 2005 Correspondence should be addressed to: Stan Uryasev Abstract A significant task faced by mortgage bankers attempting to profit from the mortgage secondary market is the best execution problem. This paper built a formal model to perform the best execution analysis. The model offers secondary marketing functionality including the loan-level best execution, guarantee fee buy-up/buy-down, and base/excess servicing fee. The model is formulated as a mixed integer programming problem. The case study shows that a realistic large-scale mixed-integer problem can be solved in an acceptable time (15 seconds) by CPLEX-90 solver on a PC. Keywords: best execution, secondary mortgage market, mortgage-backed security (MBS), Fannie Mae, MBS coupon rate, guarantee fee, guarantee fee buy-up/buy-down, servicing fee, mixed integer pr ogramming. 1 University of Florida, ISE department, P.O. Box 116595, 303 Weil Hall, Gainesville, FL 3261 1-6595; E-mail:cjwang@ 2 University of Florida, ISE department, P.O. Box 116595, 303 Weil Hall, Gainesville, FL 3261 1-6595; E-mail:uryasev@; URL: /uryasev 1 1. Introduction Mortgage originators underwrite mortgages in the primary market. These mortgages bring fixed income