As a mortgage originator, your mortgage pipeline can be a significant source of stress. Mortgage pipeline management is a top priority for a mortgage originator who is looking for their mortgages to be sold on the secondary market. Once a borrower applies for a loan, the loan enters the mortgage pipeline. It will remain there until it is sold on the secondary mortgage market.
When it comes to selling mortgages, a mortgage originator’s mortgage pipeline is inherently risky. Here’s the risk: the interest rate on that loan is locked in. No matter what happens to interest rates while the mortgage is in the mortgage pipeline, the interest rate will stay the same.
The problem here is that, as with all fixed-income securities, increases in interest rates will decrease the overall value of a mortgage investment. Decreases in interest rates, on the other hand, may leave your borrower looking for a new deal with another mortgage originator. The longer a mortgage spends in the pipeline, the greater susceptibility it has to interest rate risk, making it harder to sell.
That’s where hedging your mortgage pipeline comes in. Hedging is an investment method that, in essence, diversifies the composition of the investment in an attempt to minimize the overall risk of the investment. In mortgage hedging, this means bundling mortgages in a way that reduces the overall risk of the mortgage pool.
Once your mortgage enters the mortgage pipeline, a mortgage originator must put their trust into their secondary marketing team to hedge the risk of their pipeline. In order to do so, a secondary marketing team must use predictions, complex calculations, and modeling to most accurately predict the risk and payoff of each investment, and hedge it using a complimentary investment.
Read on for our best tips for hedging mortgages, minimizing risk, and maximizing efficiency
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Mortgage Pipeline: Set your team up for success
The success of a mortgage originator is intrinsically tied to the success of their secondary marketing team. A strong secondary marketing team can provide accurate modeling and prediction that leads to strong hedging and easily-funded loans.
Ensure that your secondary marketing team is as strong as possible by providing them the tools they need to succeed. In addition, be sure to perform regular audits of their performance. Frequent review of your teams performance will reveal their strengths and any possible shortcomings.
If you do find a gap in their performance, it’s your responsibility that you address it. Whether you need to bolster their education, provide them with more monitoring tools and market reports, or strengthen their analytic skills, it’s important that you identify those gaps so that you can close them.
Review, review, review
If you’re a high-volume mortgage originator, the composition of your mortgage pipeline is in constant flux. As new mortgages enter the pipeline and others fall out, the risk of your pipeline is always changing. That’s why it’s imperative that you constantly review and adjust your hedge positions on a regular basis.
Before executing any trades, model your resulting position. This will help ensure that your risk is at a minimum.
Stay up to date
Just as your mortgage pipeline is in a constant state of flux, as is the composition of the market. In order to make accurate predictions and wisely hedge your mortgages, it’s important that you maintain accurate and up-to-date information. This will improve the accuracy of your modeling and predictions and improve the value of your pipeline.
Provide transparent reporting
As a mortgage originator with an active pipeline, you’ve got a number of investors on the line at any given time. Transparent and accurate reporting provides your stakeholders with oversight that they’re sure to appreciate. An informed stakeholder is a happy stakeholder, and one who is more likely to trust your pipeline management and your decision-making.
Mortgage Pipeline: Employ an advisory team
Sometimes, the best solutions come from an external source. When it comes to hedging and your mortgage pipeline, enlisting the help of an advisory team can be an amazing investment for your business. Rather than starting from ground zero, employ the help of a team of experts with years of experience overseeing a wealth of different mortgage pipelines. They’re sure to be able to assist your team with knowledge that comes from experience—a type of knowledge that’s simply irreplaceable.
