What Is Mortgage Fallout?

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. Mortgage fallout refers to the percentage of loans in a mortgage o💜riginator’s pipeline that fail to close.

The mortgage fallout number is a significant indicator of the originator’s abi𒆙lity to find new prospective borrowers 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.

How Mortgage Fallout works

Mortgage originators can be individual 澳洲幸运5开奖号码历史查询:mortgage brokers, mortgage companies, or 澳洲幸运5开奖号码历史查询:mortgage bankers. They assist the prospective borrower in finding and obtai🙈ning a mortgage. Mortgage originators may not be lenders, but part of their roleಞ is to bring the prospective borrower and the potential lender together.

However, some financial institutions have 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 loan's financial details, gather the borrower's financial information, and close the loan with the customer.

Mortgage fallout is calculated based on the number of loans a lender locks in an interest rate for the borrower. Once locked in, that borrower is in the lender's pipeline. However, many loans locked in by borrowers don't end up closing. Lenders can study historical data on mortgage fallout rates within various market conditions to more accurately forecast the potential mortgage fallout rate. Mortgage fallout forecasts can change as 澳洲幸运5开奖号码历史查询:economic conditions improve or worsen. Adjusting their hedging strategy around the calculated fallout ri💮sk can help to reduce the lender's risk of loss and🐬 increase profit.

Why Mortgage Fallout Occurs

Mortgage fallout may occur for several reasons, such as a seller's inability to unload their home despite believing it will sell for X amount of money.

A loan’s terms may also 𝔉specify that the borrower can still back out of the loan once the lender locks in an interest rate. Thus, if interest rates decrease before the loan closes, the borrower may choose to back out of the loan in favor of seeking 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.

Hard Fallout vs. Soft Fallout

When a hard fallout occurs, the borrower may cancel the loan application. This could be due to a failure to underwrite the loan or when the borrower abandons their application and tries another lender, who may offer them better loan terms. According to Mortgage Capital Trading (MCT), a capital markets advisory firm, "To calculate hard fallout, find the difference between the total locked volume and the total funded volume of your mortgage pipeline. This calculation does not happen simultaneously but takes place over time as more loan data is gathered."

A soft fallout happens when the loan terms are changed, and those changes negatively impact the lender's ability to keep the loan in place. Most often, soft fallout happens when rate renegotiations occur. When a lender calculates a soft fallout, the lender usually does it "on a case-by-case basis with the percentage of total profitability detriment equaling the percentage of effect on the total pull-through of that loan," according to MCT's research.

Special Considerations

Of course, interest rates can change before the loan closes. As a result, the lender will hedge against an adverse move in in꧅terest 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 澳洲幸运5开奖号码历史查询:secondary mortgage market.

Example of Mortgage Fallout

For example, a borrower may seek a mortgage to buy a condo, believing they’ll soon sell a house they already own. The sale of that house will allow them to qualify for the loan. However, if the house doesn't sell within a certain amount of time, they may be unable to attain the mortgage because their income and assets wouldn't be sufficient to cover the monthly payments. This scenario became quite common in the wake of the 澳洲幸运5开奖号码历史查询:financial crisis of 2008.

The Bottom Line

The percentage of mortgages in an originator's pipeline that fail to close is called mortgage fallout. There are many reasons why a mortgage may fail to close, but this number is still used to measure a mortgage originator's success. For example, a mortgage originator with a high fallout rate could be considered ineffective.