3 Steps For Hedging Mortgage Pipeline Risk
Mortgage lending is a complex world and only those who really understand the industry can succeed in what is fast becoming a competitive market. As with any form of borrowing,mortgage lending and loan sale delivery can involve some risk.
As a big part of what credit unions do and also something that banks get involved in while serving a purpose in the world of loans and real estate, many companies end up selling various loans to buyers that are government sponsored institutions. Here’s the thing, the mortgage pipeline is the period between the loan getting put on the books and the sale to the buyer entity, and there is at times, risk involved due to fluctuations in rates etc. What can be done to protect the investment and manage the pipeline?
In mortgage terms, one should hedge the mortgage pipeline. Why?
1. Why is hedging the mortgage pipeline necessary?
You want to hedge the mortgage pipeline to make sure that risks are minimized, and that the sale is profitable. Hedging the pipeline counteracts the risk of the rate fluctuations and can also lead to higher returns, based on a variety of factors. While the process is confusing, as it’s built around complex processes and unique models, it essentially allows lenders to hold the loan longer and have more flexibility. As you can imagine, this isn’t the easiest thing to do or understand, so choosing a mortgage advisor who can help you through the process is important.
2. Where is the risk?
Hedging mortgage pipeline risk is absolutely necessary when a lender offers a potential homebuyer a loan, then the rate is locked by the borrower, and gets entered into the mortgage lenders pipeline. That may seem all well and good, but…what if rates fall? The borrower will then be able to look for another lender with no problem. The issue for the lender here is that the mortgage loan is a firm commitment on their side so they could end up with numerous loans with a lot of risk due to fluctuations with prices and pipeline fallout, during the time between the commitment and the sale. So, loan sale delivery is definitely not a process that is without risks.
3. So what do you need to do?
As mentioned above, hedging the mortgage pipeline needs to be done, and a successful program will include important details like the right model software, as well as real estate data that is accurate. It needs to be reliable for monitoring and trading. Estimation of the fallout risks is also necessary, as is a pull-through ratio. This has to do with interest rates and the time of closing, so there’s a lot to factor and plan for.
Hedge programs help to protect against any loss that has to do with the loan sale and helps to avoid risk should there be a decline in prices and rates. If you are a financial/mortgage guru with experience in managing this amount of data and processes, you could roll with the punches and make it happen. If not, working with a firm that has expertise in this kind of analysis and market could be your best bet.
Whether you’re an emerging startup or a business in the mortgage industry for years, knowing how to hedge a mortgage pipeline is essential. Hedging a mortgage pipeline is key to avoiding the risks involved with buying and selling loans and the various mortgage assets and movement that happens in the industry. It’s complex and when not done right can result in financial loss. Fortunately, there are a variety of programs in place to help offset risks, and professional advisors who can help make it easier for you to achieve.
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