Capital Markets Examiner School, Providence, RI

Pipeline Risks/Mitigates

Primary Risks

 Fallout risk (loan doesn’t close)  Interest rate risk  Operational risk  Conformance with investor’s underwriting standards

Mitigates

 IRR hedging  Best efforts basis vs. structured future commitment to sell (certain volume/rate/maturity, etc.)

Warehouse

 Once pipeline production has become a warehoused asset, all risks, including IRR escalate. (Loan is now funded)

 Originators that aggregate loans for securitization must warehouse the loans from the date of loan closing until the mortgage bonds are sold.

 This warehousing period introduces certain risks, including changes to value as a result of market movements in interest rates and/or credit spreads.

 This is the point in which bank risk management practices should be reviewed and evaluated for reasonableness given the multiple types of risk.