Rate Lock Pipeline Hedging for Mortgage Loan Officers

Most loan officers think about rate locks from the borrower's perspective: lock now or float? But behind the scenes, the lender is managing a hedge against rate risk across the entire pipeline. Understanding that process makes you a better lock advisor.

How Lenders Hedge the Pipeline

When a lender commits to a borrower's rate, it has locked in a delivery obligation. To offset the risk that rates move before the loan closes and the lender sells it into the secondary market, the lender uses mandatory delivery commitments or best-efforts commitments with agency buyers. It also uses mortgage-backed security (MBS) short positions in the to-be-announced (TBA) market to hedge float risk. The size and composition of the hedge changes daily based on locks taken, expirations, and estimated fallout rates.

What Fallout Costs the Lender

• ✦When a locked loan does not close (fallout), the lender must unwind the hedge at market prices
• ✦If rates fell since the lock, the hedge loses value and the lender absorbs the loss
• ✦High fallout rates on a pipeline increase hedging costs for the lender, which eventually gets passed to LOs through worse pricing or tighter lock policies
• ✦Lenders track individual LO fallout rates; LOs with persistently high fallout may face pricing penalties or lock restrictions

What This Means for Lock Advice

Lock a loan only when you have high confidence it will close. Float advisory is most valuable when the borrower has time and the rate environment favors patience; it is least valuable when the borrower has a purchase deadline. Extending a lock costs the lender money and those costs often pass to the borrower as extension fees, typically 0.125% to 0.375% per 15-day extension depending on market volatility. Locking accurately benefits both the borrower and your pricing relationship with the lender.