Mortgage Pipeline

A mortgage pipeline refers to mortgage loans that have been locked in with a mortgage originator by borrowers, mortgage brokers or other lenders. A loan will stay in an originator's pipeline from the time it is locked until it falls 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 movements.

A mortgage originator's pipeline is managed by its secondary marketing department. Mortgages in the pipeline are typically hedged using the "To Be Announced" market (or the forward mortgage-backed security pass-through market), futures contracts, and over-the-counter mortgage options. Hedging a mortgage pipeline involves spread and fallout risk.

There is an assumption that at least some of the potential loans in a mortgage pipeline will not be funded and become mortgages that can be sold. The farther along the application process is, the less likely the borrower is to seek financing elsewhere.

Mortgage pipelines are usually managed and structured in such a way to realize the profit margin that was ingrained in the mortgage when the interest rate was locked in. A mortgage pipeline can directly affect the income of a mortgage broker, who may be paid on commission that is based on the lucrativeness of the deals they bring in. Mortgage brokers might aim to build up their pipelines by developing referral networks that can include real estate agents, bankers, attorneys, and accountants who can direct new clients their way.

Supervision of a mortgage pipeline could include third-party experts, serving as the secondary marketing manager, particularly focused on the risk management aspect of the business. This can include regular analysis of the loan assets in the pipeline as well as hedge instruments to measure value changes.

Part of the task for such managers is to establish the real market value of the loans in the pipeline. This will help form a strategy for hedge transactions, which will aim to protect the value of the assets in the pipeline by selling loans through forward sales. The manager will assess which loans represent the most exposure to interest rate changes and then choose loans that have a matching correlation to those market changes. By selling certain mortgages when interest rates increase, those transactions will be more valuable and offset declines in value that may occur with the loans that are retained in the pipeline. This is comparable to balancing “short” and “long” positions on assets.