more. Why is one company so successful at running a wholesale platform and There are a number of another at a direct response platform? conflicting theories Why can one company be concentrated on what makes a in purchase transactions while another company successful is solely focused on refinances? Each when they enter into, of these pipelines will react differentor have been, operat- ly to market movement. Even within ing in a hedging environment. Some similar models, the ability to accuratepeople like to express a very deep ly report data in real-time, along with understanding of the secondary market the allocation of stages, risk factors, and how it correlated to their pipeline etc. can make or break performance and performance, while others feel it is levels. Also, it’s not only business truly dependent on the model that is models and data review and integrity being used to manage risk and execute that influence the results of a hedging a price. While these two ideas are very platform. Lock desk policies, manageimportant, truly successful hedging is a ment, level of flexibility, and tolerresult of balancing the two. This success ance to change margins based on maris dependent on some mortgage and ket activity are critical pieces of the market fundamentals as well. equation, as are other intangible items Breaking it down into its simplest (confidence in sales updates, operation form, the mortgage industry is based on capacity and efficiency, warehouse liqa series of assumptions and historical uidity, investor turn times, etc.). A behaviors that are tied to market move- pipeline is a living thing that continues ments. The best-efforts market is based to evolve as the market changes. It’s on a fall-out model that assumes a cer- not just the risk model or keeping an tain amount of activity based on rate eye on the mortgage-backed securities movements: Up, down or flat during (MBS) market that influences performthe lock period. The lack of a true finan- ance, but the overall management of cial commitment to deliver makes this the pipeline, data and internal decimarket the most expensive sion-making as well. and assumptive. The Another key compomandatory market is nent in understand“Breaking it down based on its name. ing your pipeline is into its simplest form, It consists of a conunderstanding tractual and the stages it the mortgage industry is financial reward undergoes. Most and your comhedging models based on a series of mitment to make assumpassumptions and historical tions that are deliver loans at the contracted based on stages behaviors that are levels regardless or milestones. of rate movement. The theory states tied to market It also comes with a that the earlier the penalty if you fall short stage, the less likely movements.” and do not meet your conthat loan is going to actualtracted delivery levels. The ability ly close. The later in the process, to fulfill delivery amounts in a timely the more likely that loan is going to fashion pays a premium as your coun- close. Even this thought process can terparties are covered via actual loan vary. Some firms can lock at applicasales or in cash (i.e. pair-off). This prac- tion, some at loan approval, some at tice is usually handled by firms commit- clear to close, and others at anytime ting to a lower amount than their actu- in between. In the age of quality conal pipeline, so there is a built-in vari- trol (QC) and loan origination software ance for fallout and market movement. (LOS) updates, new stages can be creThis is not actually a true hedging ated or have their definitions process, but rather, just making a small- changed. How can you possibly use a er bet of pipeline reaction. The ability standard model to assume these to properly understand your pipeline actions when you have so much variand how it reacts to rate movement is ance? The stages of the pipeline must truly what makes a successful model. be understood, monitored and clearly To truly understand that statement, defined in relation to your lock you need to break it down into a few process and policies. sections. When discussing pipelines, there are a number of terms often referUnderstand your pipeline enced time and time again: converYour pipeline is just that, pieces of sion, pull-through, and fall-out. Their aggregated data that only you can true relevance is to determine how understand. It is a fluid collection of active your company is in understandloans with varying data points that are ing and flushing out the open ever-changing. Origination platform, pipeline. If a company sits back and loan officer, office, region, office, rela- waits for the pipeline to respond, it is tionship, marketing sources, manage- taking a chance and the cost of hedgment oversight and their concentration ing can be costly and inefficient. Being within your pipeline all have an effect a banker provides you with some very on your pipeline. Many look at the valuable tools that can help in affectpipeline in aggregate and expect it to continued on page 38 react as others do. I could not disagree By Frank Fiore
OCTOBER 2012
UTAH MORTGAGE PROFESSIONAL MAGAZINE
NationalMortgageProfessional.com
8
Pipeline Management in a Hedging Environment: More Art Than Science