Mortgages locked in with an originator are referred to as a mortgage pipeline. A home loan stays in a mortgage originator’s pipeline until it falls out, is sold, or is put into its loan portfolio. There is one significant risk involved with managing mortgage pipelines: the terms of the contract may be agreed upon, but the borrower or client may choose not to close on it.
If you do all of the work to come up with a contract and agreement only for a borrower not to close, you’ll risk losing money without the right mortgage pipeline optimization. Mitigating risk is your best bet for boosting profits and ensuring that a lost sale doesn’t mean losing money.
Here’s how you can manage mortgage pipeline risk.
Managing Mortgage Pipeline for Secondary Sale
A secondary sale is when you approve a homebuyer to buy a home with a loan. When borrowers take out loans, they lock in their interest rate, allowing the loan to enter a lender’s mortgage pipeline. If mortgage rates fall, borrowers can choose to work with a new lender for a better rate, which creates risk for lenders, as loans are firm commitments. In this case, lenders can be left with risky commitments that can result in price fluctuations.
Forward-Sale Commitments
A forward sale is an agreement to go through with a transaction in the future with specific terms on the loan, like pricing, rate, and date. With this agreement, a loan originator must meet these commitments and offer assurance. If they fail, an agent can charge a pair-off fee. An originator can make a best-effort commitment that won’t be subject to a pair-off fee if they fail to deliver; however, it can come with markups on the home loan price.
Mortgage Hedge
If an originator’s loan doesn’t close, this is called a pipeline fallout. However, originators can boost profitability with a mortgage hedge, which can be helpful if a forward-selling commitment comes with a high price. To create a hedging program, originators must:
- Maintain models and keep accurate data
- Estimate probability of pipeline fallout with relevant software
- Calculate the hedge dollar amount, which can be used by originators to protect themselves
Evaluate the Value of Your Pipeline
There are many websites out there that can help loan originators manage pipeline risk, but oftentimes the best software is a mortgage pricing engine, which allows originators to evaluate the current value of their pipeline and optimize it for profits at the time of sale.
Don’t Float the Pipeline
Floating your pipeline makes it difficult to meet the contracted rate because rates change. It can also cause delays and dissatisfied clients.
Avoid Bad Loans
All originators need to know what level of risk they are comfortable with. However, a bad loan is typically more work than a good loan, so it’s important to understand what you are willing to take on and avoid any bad loans.
Understand Your Own Policies and Documents
You’ll need to understand how to organize your deal and which paperwork is acceptable. Your loan package needs to be clear and comprehensive. If a borrower decides to go with another lender, make sure that you understand the proper process for dealing with it. However, the best way to deal with it is to find ways to optimize your mortgage pipeline to minimize the risk of this happening.
Final thoughts
Whether you’re a mortgage broker, lender, or bank, you’ll need to manage your mortgage pipeline risk to prevent losing a sale if the borrower chooses to work with another lender. These tips can help you review your pipeline to determine issues that could prevent you from boosting your profits and ensuring organization.