What is the consequence of pipeline risk in mortgage banking?

In mortgage banking, pipeline risk refers to the potential losses that can occur during the period between when a loan is approved and when it is closed or sold on the secondary market. The consequence of this risk is primarily manifested in the form of decreased loan value before sale.

When the market conditions change, such as fluctuations in interest rates or secondary market demand, the value of loans in the pipeline may decrease. If interest rates rise, for example, the attractiveness of previously locked-in loan rates diminishes, which can lead to a reduced value of those loans when sold. This can negatively impact the profitability of the mortgage lender and may cause financial losses.

Pipeline risk primarily concerns the timeline from loan approval to sale. In this scenario, protecting the value of loans while they are in the pipeline becomes crucial for mortgage bankers to maintain their operational viability and profitability. This emphasizes the importance of effective risk management strategies to mitigate potential losses from fluctuations in the market.