A lender must balance the market’s frequent changes in interest rates over time against the need to continue issuing loans to keep their business moving forward. Understanding the factors that affect a mortgage lender’s ability to keep new loans in the pipeline involves learning the structure of the primary and secondary mortgage market. These markets, while complex, are a major reason why so many people in the U.S. can qualify for a home loan. Finding out more about how this pipeline works and what lenders are considering at any given time can help you make sense of what’s happening with your loan application if you want to buy a house and apply for a mortgage.
Definition and Examples of Mortgage Pipelines
Mortgage pipelines actually refer to a few different “pools” of potential loans. How many loans are in each of these pools affects how a mortgage lender proceeds with their work. “There is a lead pipeline, an active-loan pipeline, or a closed-loan pipeline—it’s the entire cross-section of loans at various stages of the mortgage loan life cycle. The mortgage pipeline is all of the loans that loan officers are actively working on at any point in time,” Tabitha Mazzara, director of operations at MBANC, told The Balance via email. The locked pipeline contains mortgages that, as Mazzara said, have proceeded to the point where disclosures, or “the forms that provide all details about the mortgage loan terms, payments, and costs,” are signed. At this point, unless interest rates seem poised to fall soon, many borrowers will accept an interest rate lock for 30 to 60 days, giving them time to find a home to buy and to proceed to closing without worrying about changes to their rate.
Alternate name: active-loan pipeline, locked pipeline
Here’s a simplified example of the locked-mortgage pipeline: Three borrowers all qualify for loans on the same day and the lender offers them each a 4.5% annual percentage rate (APR) mortgage, for which each borrower accepts a 60-day lock while they finalize a home purchase. These three loans aren’t completed and funded, but the mortgage lender must keep them in mind as future borrowers are chosen because, at some point, it will need to be able to issue the loans at these terms to the borrowers unless they officially decline the loan. If interest rates fall to 3.5% tomorrow, the lender stands to benefit from the higher locked rate, but if rates rise to 5%, the lender must realize it has lower-interest-rate loans in the pipeline and must keep this in mind as it offers other loans.
How the Mortgage Pipeline Works
Understanding the importance of the mortgage pipeline starts with a basic observation that no lenders have infinite money to dole out to qualified borrowers. At any given time, lenders must make their capital work for them, so even a very creditworthy borrower could approach them and be turned away because the lender has too many loans outstanding. This problem has been mitigated by something called the secondary mortgage market. Borrowers operate in the primary mortgage market, where a lender directly offers them a loan, which they accept and begin to pay back. This loan, however, can be sold on the secondary market. Government-sponsored enterprises Fannie Mae and Freddie Mac buy many home loans, for instance, and bundle them into an investment product called mortgage-backed securities. Like stocks or bonds, these are investable securities that deliver a steady return based on the interest charged on the loans. These securities are considered a safe investment because of Fannie Mae and Freddie Mac’s strict underwriting guidelines that evaluate the credit quality of the loans it guarantees, so big institutional investors like retirement funds want them as part of their portfolios. All this to say that a primary lender doesn’t have to worry as much about running out of money to lend because it can make loans and then immediately sell them to the secondary market. This again frees up lending power. Still, even if a lender sell loans quickly after issuing them, it doesn’t want to get stuck with more loans pending than it has money available for, or with too much cash and not enough loans moving through the process. This balance is a big part of why mortgage pipelines are a key metric. One additional source of complexity for the mortgage pipeline arises when interest-rate-locked loans fail to originate, or be finalized, for whatever reason. Lenders want to understand the circumstances and frequency of this occurrence, which they call “fallout,” to be able to offer an appropriate amount of loans.
What the Mortgage Pipeline Means for Your Application
Data drawn from the mortgage pipeline changes a lot of things for mortgage lenders. If lenders were seeing a huge surge in applications for mortgages in their pipelines, for instance, that could be one of many indicators that interest rates will be rising to keep up with increased demand. The mortgage pipeline also gets more important when the overall economy is in flux. “During periods of volatility, lenders have to be careful about the rates they are quoting, because they may be changing rapidly,” Mazzara said. Keep this in mind if there are delays in your home mortgage loan. There can be challenges behind the scenes that affect a given lender’s ability to extend you a mortgage that don’t directly relate to you and your qualifications. It also explains why you have to get a new interest-rate quote after your lock expires if you haven’t bought a house by that point; it’s just too risky for most lenders to extend locks indefinitely.
