BY ALEC HOLLIS
Risk management and profitability strategies have become a major area of concern for mortgage lenders today, thanks to the current competitiveness in this market.As a result, it’s important for credit unions that offer home loans to have a strong focus on mortgage pipeline management. The pipeline is made up of mortgage loan commitments and, when managed effectively, it presents an opportunity to enhance return and profitability through risk reduction and cost savings.
Because larger mortgage originators are more likely to have a significant portfolio of loan commitments (e.g., explicit agreements to lend money to a borrower), they may have significant exposure to a change in pricing between the times of initial commitment and when the loan is sold to the agencies.Generally, mortgage loan commitments are viewed as firm for the banker but flexible for the borrower, meaning the borrower is under no obligation and has the right to borrow from another lender.
Good mortgage pipeline management is a core element of the mortgage banking business. As Figure 1 shows, the mortgage banking process involves generating new business, managing the commitment pipeline and potentially continuing to service loans.When a credit union originates a mortgage loan, it creates two commodities: a loan and the right to service that loan. Typically, financial institutions use one of two strategies to manage their mortgage pipelines: a forward sale commitment or hedging the pipeline in the securitized market.