Managing Your Mortgage Pipeline Risk

Being a competitive mortgage lender in the real estate market provides a consistent revenue stream. However, due to fluctuating interest rates and other market conditions, the mortgage sector can be exceedingly risky, with loans falling through. To keep money flowing, you must efficiently manage mortgage pipeline risk to guarantee everything runs well. Take a look at these three methods to manage mortgage pipeline risk to help you get started properly.

What is a Mortgage Pipeline?

Mortgage loans locked in with mortgage originators, often mortgage brokers or mortgage bankers, are referred to as the mortgage pipeline. The secondary marketing department of a mortgage originator manages where their house loans and service rights are bought and sold between investors and lenders and so manages the mortgage originator’s mortgage pipeline. Mortgages are bought and sold every day on the secondary market, where they are bundled into mortgage-backed securities and sold to investors in various forms, such as hedge funds and pension funds.

The loans in an originator’s mortgage pipeline are frequently hedged to reduce the risk of default. Therefore, it’s critical to take preventative measures to manage mortgage pipeline risk, which we’ll address in the second section below.

Steps in Managing Your Mortgage Pipeline Risk

Most mortgage lenders and originators pool their loans and sell them to a purchasing agent like Fannie Mae or Freddie Mac, who then sells them on the secondary market. The mortgage pipeline is the period between when a mortgage is recorded on a lender’s books and when it is sold to a borrower. Follow these three actions to manage your mortgage pipeline and reduce risk while increasing efficiency:

1. Keep track of your mortgage pipeline in preparation for a secondary sale: The first step in reducing mortgage pipeline risk is managing your mortgage pipeline for secondary sales or giving a homebuyer a mortgage to purchase a home. A borrower locks in a current interest rate when they take out a mortgage. At this point in the process, the loan enters the mortgage pipeline. Borrowers, on the other hand, can switch lenders without penalty if mortgage rates decline.  However, this isn’t good news for lenders. Lenders’ loan obligations are firm, which means they could wind up with an extensive portfolio and dangerous lending commitments, which could lead to a fallout or price changes. But, again, efficient mortgage pipeline management, accomplished through forward-sale agreements and pipeline hedging, helps to reduce the risk taken.
2. Commitments to sell in the future: A forward sale commitment requires the loan originator to commit, either mandatory or best effort, to complete a deal at a later period that specifies the mortgage loan terms, such as the price, interest rates, and delivery date. The originator must clarify these elements in their obligatory commitment, and if the originator fails to do so, the agent can levy a pair-off fee. If the originator fails to deliver, they can make a “best-effort” commitment that is not subject to a pair-off cost. However, this can come with significant markups, making the house loan price less attractive.
3. Mortgage hedge: Suppose a mortgage originator has a pipeline fallout, such as when a commitment does not close. In that case, they can use a mortgage hedge to lower the volatility of the mortgage pipeline and increase profitability. If a forward-selling promise comes with a high sticker price, this can be advantageous. To develop an effective hedging program, you must include these three steps:
   1. Maintaining reliable data and maintaining your models will assist in avoiding human error and increase efficiency when making the best hedging selections.
   2. Estimate the likelihood of pipeline fallout to reduce hedge monitoring error and better comprehend the impact of each pipeline step, interest rate fluctuations, and borrower characteristics.
   3. Calculate the hedge dollar amount, which can help originators protect themselves if the price falls and the value of the hedge position grows.

You can manage mortgage pipeline risk by following these three methods for hedging with market capital interest.

Managing Your Pipeline

Do not float your pipeline

A floating pipeline isn’t even a pipeline. You will be unable to meet the contracted rate if rates change, or you will cause delays by moving lenders, in which case you will have a dissatisfied client.

Don’t take on Bad Loans

As a lender, you understand the level of risk you are comfortable taking on. The fact is that two bad loans take the same amount of effort as ten good loans. So, understanding what you are willing to take on is essential. 

Provide reasonable timelines

If your turnaround times are closer to 30 days, don’t commit to a 21-day close. If the loan requires additional documentation than typical due to extenuating circumstances, plan on a more extended escrow closing because these processes take time, and you are relying on a third party. Do not commit to a closing date if the loan is not CTC (clear to close). It is crucial to communicate any delays immediately, even if it means losing one time rather than every day.

Understand your policies and documents

You must understand how to organize a deal and what paperwork is and is not acceptable. Your loan package should be solid, only requiring minor approvals. For a CTC, you can’t have a loan go through underwriting three times. You can’t rely on a Processor to bundle your loan because that’s not their function. If you take bad loans, set high expectations, then switch lenders, even the finest processors, will take 2-3 months, if not more, to close a deal. It makes no difference how good your processor is.

Make Sure Your Mortgage Pipeline is Organized

It’s essential to revisit your yearly goals and reorganize your loan pipeline management. For both house purchasers and loan originators, the amount of paperwork during the lending process is overwhelming. As a result, think about examining and improving the management process of your loan pipeline. 

According to industry news, on average, the process time to close has increased over the last year by ten days.  The increase in time is attributable to the frenzy of activity in refinancing and demand for loans on new purchases.

Bringing it All Together

Over the years, technology has gotten much better at simplifying the mortgage process. As a result, mortgage automation software can help bring everything together and shorten the time it takes to complete what may have previously taken days or weeks. At Liquid Logics, we will work with you to customize our cloud-based software to meet your needs.  

Whether you’re a retail bank, a mortgage broker, or a mortgage lender, managing your mortgage pipeline risk along with effective loan process management is critical. In addition, it’s vital to refresh your loan pipeline management in an industry that relies on recommendations and repeat business. As a result, you’ll be able to provide an excellent borrower experience while saving time and effort. Liquid Logics is a SaaS Full Cycle Lending Software Solution for the Residential Mortgage Banking Industry, offering a full-cycle loan generation, automated underwriting, and mortgage brief case.  To learn more about our best in class product suite, contact us to schedule a demo.