Mortgage Fallout: What It is, How it Works, Example

What Is Mortgage Fallout?

A mortgage is a loan provided by a financial institution to purchase a home. A mortgage originator helps find prospective borrowers for lending institutions. Mortgage fallout refers to the percentage of loans in an originator’s pipeline that fail to close.

The mortgage fallout number is an indicator of the originator’s ability to find new borrowers. Originators need to track and forecast the pipeline of new mortgages. The mortgage fallout rate shows the percentage of the pipeline that might not close.

Key Takeaways

• Mortgage fallout refers to the percentage of loans in an originator’s pipeline that fails to close.
• Mortgage fallout may occur for various reasons, including a borrower’s inability to sell their home.
• The mortgage fallout number is a significant indicator of the originator’s efficiency.
• Mortgage originators forecast their pipeline of new mortgages.
• The fallout rate shows the percentage of the pipeline that might not close.

Understanding Mortgage Fallout

Mortgage originators can be mortgage brokers, companies, or bankers. They assist borrowers in obtaining a mortgage. Some financial institutions separate originators and lenders into different divisions. Originators prospect for new loans and pass them to lenders who close the loan with the customer.

Mortgage fallout is calculated from the number of loans a lender locks in an interest rate for. Many locked-in loans do not end up closing. Lenders study historical data on mortgage fallout rates to forecast more accurately. Changes in interest rates impact the fallout rate, as lower rates spur home buying and higher rates decrease demand for mortgages.

Why Mortgage Fallout Occurs

Mortgage fallout can occur if a seller is unable to unload their home or if a borrower backs out of a loan due to changing interest rates.

Hard Fallout vs. Soft Fallout

Hard fallout occurs when a borrower cancels the loan application. Soft fallout happens when loan terms change and impact the lender’s ability to keep the loan.

Special Considerations

Interest rate changes before the loan closes can affect the lender’s risk. The lender can hedge against adverse rate moves by booking offsetting transactions.

The hedge remains until the mortgage closes. After closing, the lender can keep the loan or sell it in the secondary 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. If the house does not sell within a certain time, they may be unable to attain the mortgage due to insufficient income and assets. This scenario became common after the financial crisis of 2008.

What Is Fallout Risk?

Fallout risk occurs when mortgage loan terms are drawn up but a sale isn’t finalized. The risk is that the sale will fall through and the loan will not be issued.

What Is Mortgage Forbearance?

Mortgage forbearance allows borrowers to skip or make lower payments for a set period due to financial hardship.

What Is Prepayment Risk?

Prepayment risk occurs when a borrower pays off the mortgage earlier than the full terms. Lenders may charge a penalty fee for early payment.

What Is a Hedged Loan?

A hedged loan doesn’t exist. Hedging is a risk management strategy used by lenders to mitigate potential losses.

What Is the Pull-Through Rate?

The pull-through rate allows loan originators to review and improve their mortgage process. It assesses customers’ profiles, customer service quality, competitors’ interest rates, and loan quality. Lenders calculate the pull-through rate by dividing the number of approved loans by the number of applications in the same time frame.