The business of consumer banks relies on mortgage lending to maintain revenue and a competitive edge. As a means of freeing liquidity for loans, organizations sell a variety of mortgages to purchasing agents in ways that present them with similar mortgages for sale. These actions are critical to the management of hedge mortgage pipelines and require skilled management to maintain profitability. Although the process of hedging is complex, in this article, we break down the four basic guidelines of the process so that financial managers are able to collaborate with investment advisors effectively.
1. The importance of smart pipeline management
Unfortunately, institutions are often dumped with loan commitments that increase the risk of pipeline depletion over time. The rate that the borrower locks in does not account for price fluctuations, and this can cause risks to occur anywhere between the time of commitment to the time that the loan is sold. To avoid these risks, adequate pipeline management is needed. Skilled originators will know how to implement the right management strategies to reduce and, ideally, prevent the risks associated with pipeline fallout. The following paragraphs describe proper pipeline management for mortgage lenders and their secondary sales.
2. Using forward sales commitment
To safeguard the loan’s future status, forward sales commitment is integrated to preserve the loan value. Officials who originate the mortgage will use mandatory commitments that state determined dollar amounts for mortgage loans that are guaranteed by a certain date and at a firm given price. Should the originator have problems following through with hedging, an agent will charge a fee to pair off the total amount. By using these methods, prices for loans include additional markup that preserves the stability of loan delivery in the future.
3. Tracking the pipeline
When loans can’t close due to lender pipeline fallout, it is still possible for the pipeline to regain and even earn more profitability. The officials responsible for hedging the pipeline can gain profit by keeping active records of the pipeline and how it is progressing over time. Some ways to track the pipeline include managing data, listing projections for potential fallout, hedge fund advertising, and calculating the total amount of the mortgage hedge. Like anything else, the proper organization and active presence towards the progress of the pipeline will influence how successful the end results are. You need to ensure that everyone involved in the process is aware of their responsibilities and is diligently involved for things to commence productively.
4. Be selective about firms you work with
Although hedging can benefit the amount that is earned and re-introduced into the pipeline, the efforts that go into controlling risks will make or break the success of the cost preservation. Remember to partner with firms that reflect the kind of experience required for capital markets and the analysis that goes along with it. Integrating the right hedging strategy requires the assistance of experts who understand how to incorporate process evaluations and projections related to the status of the pipeline. Read up on the reviews and experiences others have had with partners and firms that you are looking at before you decide to work with a particular financial institution.
The bottom line
The credibility of the borrower and the mortgage originator are both at stake should pipeline fallout occur. Be sure that whoever you work with understands that you are both liable so that you can feel secure in the preservation of your loan and its delivery. The dynamic you have with the firm is as important as the loan.