Mortgage Pipeline Definition

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Mortgage Pipeline Definition

What Is a Mortgage Pipeline?

Mortgage loans that are locked in with a mortgage originator by buyers, mortgage brokers, or other lenders are referred to as mortgage pipelines. From the moment a loan is locked until it falls out, is sold into the secondary mortgage market, or is added to the originator’s loan portfolio, it remains in the originator’s pipeline. Mortgages under contract are protected from changes in interest rates.

Key Takeaways

  • The backlog of mortgage applications with locked-in interest rates but still awaiting approval is known as a mortgage pipeline.
  • Rates are locked, so changes in market rates between the time a loan application is submitted and one is approved expose banks to interest rate risk.
  • Analysts may better understand future homeowner borrowing by carefully examining mortgage pipelines.

Understanding Mortgage Pipelines

The first party to participate in the secondary mortgage market is often a mortgage originator. Retail banks, brokers, and mortgage bankers may be among them. The secondary marketing division of the mortgage originator is in charge of managing the pipeline. The pipeline, as previously said, comprises of mortgage applications that have had their interest rates locked in but have not yet been approved.

The “To Be Announced” market, also known as the forward mortgage-backed securities pass-through market, futures contracts, and over-the-counter mortgage options are often used to hedge loans in the pipeline. Spread and fallout risk are included while hedging a mortgage pipeline.

Hedging a pipeline of mortgages entails a spread and fallout risk.

Mortgage pipelines are often run and set up such that they maximize the profit margin built into the loan when the interest rate was locked in. A mortgage pipeline may have a direct impact on a mortgage broker’s revenue since their compensation may be depending on how profitable the transactions they broker are. By creating referral networks with real estate agents, bankers, lawyers, and accountants who may point potential customers in their direction, mortgage brokers may hope to increase the volume of business coming into their pipelines.

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However, there is a presumption that at least a portion of the prospective loans in a mortgage pipeline won’t be financed and instead turn into mortgages that may be sold. The less probable the borrower is to look for finance elsewhere, the farther along the application process is.

Special Considerations

Third-party specialists that act as the secondary marketing manager and are especially focused on the risk management side of the company may be in charge of overseeing a mortgage pipeline. Regular review of the loan assets in the pipeline and the use of hedging instruments to track value fluctuations might be part of this.

Establishing the actual market value of the loans that are in the pipeline is one of the tasks for such managers. This contributes to the development of a strategy for hedging transactions, which sell loans via forward sales in order to preserve the value of the assets in the pipeline. The management determines which loans are most vulnerable to fluctuations in interest rates and then selects loans that are similarly correlated to those market changes. When interest rates rise, some mortgages may be sold to offset value drops that can happen to loans that are kept in the pipeline by increasing the value of such transactions. Equilibrating “long” and “short” positions on assets is analogous to doing this.

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