What risk involves a situation where closed loans fall in value before they are sold?

Pipeline risk specifically refers to the risk that the value of loans or mortgages in the pipeline, which are loans that have been closed but not yet sold, may decrease before they are sold to investors. This scenario is particularly relevant in fluctuating interest rate environments where market conditions can lead to changes in the perceived value of loans. If interest rates rise, for example, the market value of previously closed loans can decline since they might be offering lower returns compared to new loans issued at higher rates.

In essence, pipeline risk captures the uncertainty and potential financial loss associated with the timing of selling these loans, making it a crucial concern for lenders and investors in the mortgage market. Understanding this concept helps real estate professionals navigate market volatility effectively, ensuring they manage their loan portfolios wisely to mitigate potential losses from rapid changes in loan value.