What Is Mortgage Fallout?
Mortgage fallout refers to the percentage of loans in a mortgage originator’s pipeline that fails to close. A mortgage is a loan that a financial institution provides a borrower to purchase a home. A mortgage originator helps to find prospective mortgage borrowers for lending institutions.
The mortgage fallout number is considered a significant indicator of the originator’s ability to find new prospective borrowers that are looking to buy a home. A mortgage originator needs to track, and forecast the pipeline of new mortgages. The mortgage fallout rate is helpful since it shows what percentage of the pipeline might not close.
- Mortgage fallout refers to the percentage of loans in a mortgage originator’s pipeline that fails to close.
- The mortgage fallout number is considered a significant indicator of the originator’s efficiency.
- Mortgage originators forecast their pipeline of new mortgages and the fallout rate shows the percentage of the pipeline that might not close.
Understanding Mortgage Fallout
Mortgage originators can be individual mortgage brokers, mortgage companies, or mortgage bankers. They assist the prospective borrower in finding and obtaining a mortgage. Mortgage originators may not be lenders, but part of their role is to bring the prospective borrower and the potential lender together.
However, some financial institutions have both mortgage originators and lenders within separate divisions or departments. The originators might prospect for new loans, which are then passed on to the lenders who calculate the financial details of the loan, gather the financial information from the borrower, and close the loan with the customer.
Mortgage fallout is calculated based on the number of loans for which a lender locks in an interest rate for the borrower. Once locked in, that borrower is in the lender’s pipeline.
Of course, interest rates can change before the loan closes. As a result, the lender will hedge against an adverse move in interest rates by booking an offsetting transaction that benefits the lender if interest rates rise before the loan closing. The hedge remains in place until the mortgage closes, which could be 20 to 45 days after the loan application. Once the mortgage closes, the lender can keep the loan on its books and get paid the principal and interest payments from the borrower, or the lender can sell the loan to another financial institution in the secondary mortgage market.
However, many loans locked in by borrowers do not end up closing. Lenders can study historical data on mortgage fallout rates within various market conditions in order to more accurately forecast the potential mortgage fallout rate. Mortgage fallout forecasts can change as economic conditions improve or worsen.
The mortgage fallout rate is also impacted by changes in interest rates since lower rates tend to spur home buying, and higher rates tend to lead to lower demand for mortgages. Adjusting their hedging strategy around the calculated fallout risk can help to reduce the lender's risk of loss and increase profit.
Why Mortgage Fallout Occurs
Mortgage fallout may occur for a number of reasons. For example, a borrower may seek a mortgage to buy a condo, believing that they’ll soon sell a house that they already own. The sale of that house will allow them to qualify for the loan. However, if the house does not sell within a certain amount of time, they may be unable to attain the mortgage because their income and assets would not be sufficient to cover the monthly payments. This scenario became quite common in the wake of the financial crisis of 2008.
A loan’s terms may also specify that once the lender locks in an interest rate, the borrower still has the ability to back out of the loan. Thus, if interest rates decrease before the loan closes, the borrower may choose to back out of the loan in favor of seeking out a loan with a lower interest rate. However, if interest rates rise before the loan closes, the borrower will likely stick with the lender, as long as they are approved.