Mortgage companies accept and must manage price risk when originating mortgages and selling loans to the secondary market. This white paper introduces key concepts in pipeline risk management, focusing on pull-through risk and the financial exposure lenders assume during the application and mortgage origination process. Using representative examples, it breaks down the risks assumed and explains how lenders mitigate this risk. The paper demonstrates how mortgage hedging software—like Milliman’s MS2 platform—enables lenders to manage their pipeline risk using various financial instruments to protect margins. This guide is a valuable foundation for any hedging lender or lenders evaluating hedge strategies.

Key questions

• What’s the role of a mortgage company’s secondary markets department? We explain how this unit manages the financial risks associated with originating, selling, and servicing mortgages, while also preserving capital.
• What does the mortgage pipeline include? We explore the inventory of mortgage applications—from submission to approval—and the locking of loans.
• What is pull-through risk? We define this risk and show how differences between actual and expected pull-through rates can affect margins, with an example that highlights some of the risks associated with selling locks forward in the to-be-announced (TBA) securities market and the importance of accurate pull-through estimates.
• How are mortgages priced? We examine how originators assume interest rate risk and what factors influence pricing.
• How can a pipeline be hedged? We outline the use of TBAs in common hedging scenarios and walk through three examples.
• How can cloud-based software help mortgage companies manage their financial risk? We describe how Milliman’s Mortgage Secondary Market Solutions (MS2) helps lenders manage risk using TBAs, interest rate futures, and derivatives—streamlining trading and calculations for mortgage originators.