Mortgage Pipeline
What Is a Mortgage Pipeline?
A mortgage pipeline alludes to mortgage loans that are locked in with a mortgage originator by borrowers, mortgage brokers, or other lenders. A loan stays in a originator's pipeline from the time it is locked until it drops out, is sold into the secondary mortgage market, or is put into the originator's loan portfolio. Mortgages in the pipeline are hedged against interest rate developments.
Understanding Mortgage Pipelines
A mortgage originator is generally the primary entity that is involved in the secondary mortgage market. They can include retail banks, brokers, and mortgage bankers. The mortgage originator's pipeline is managed by its secondary marketing department. As verified over, the pipeline comprises of mortgage applications that have a locked-in interest rate yet aren't yet approved.
The loans in the pipeline are regularly hedged using the "To Be Announced" market — or the forward mortgage-backed security pass-through market — fates contracts, and over-the-counter mortgage options. Hedging a mortgage pipeline involves spread and fallout risk.
There is a risk of spread and fallout by hedging a mortgage pipeline.
Mortgage pipelines are normally managed and structured so as to realize the profit margin that was ingrained in the mortgage when the interest rate was locked in. A mortgage pipeline can directly influence the income of a mortgage broker, who might be paid on commission that depends on the benefit of the arrangements they broker. Mortgage brokers might aim to build up their pipelines by developing reference networks that can include real estate agents, bankers, lawyers, and accountants who can direct new clients their way.
There is an assumption, however, that at any rate a portion of the potential loans in a mortgage pipeline won't be funded and become mortgages that can be sold. The farther along the application cycle is, the more uncertain the borrower will look for financing somewhere else.
Special Considerations
Oversight of a mortgage pipeline could include third-party specialists who act as the secondary marketing manager, particularly centered around the risk management part of the business. This can include customary analysis of the loan assets in the pipeline along with hedge instruments to measure value changes.
Part of the task for such managers is to lay out the real market value of the loans in the pipeline. This assists form a strategy for hedge transactions, which with aiming to safeguard the value of the assets in the pipeline by selling loans through forward sales. The manager evaluates which loans address the most exposure to interest rate changes, then pick loans that have a matching correlation to those market changes. By selling certain mortgages when interest rates increase, those transactions become more important and offset declines in value that might happen with the loans that are retained in the pipeline. This is comparable to balancing "short" and "long" positions on assets.
Features
- A mortgage pipeline is the backlog of mortgage applications that are as yet waiting to be approved, yet that have interest rate locks.
- Since rates are locked, vacillations in prevailing rates during the period among application and loan endorsement opens banks to interest rate risk.
- Scrutinizing mortgage pipelines can assist analysts with understanding future homeowner borrowing.
